Gold flows and their huge potential market impact

The continuing flow of gold from West to East alone could see serious shortages of physical metal develop in the West and this, together with other potentially positive factors could have a huge impact on the market.

Maybe we are building too much reliance on this, but it does seem that the rundown in stocks of physical gold in the West and the build-up, for the most part, into stronger hands in the East, has to led to a severe supply imbalance in the availability of gold bullion. If this flow continues at anything like the current rate – and there’s no evidence yet that it is slowing significantly – then the ensuing short squeeze on physical gold could be devastating for that part of the gold trade which is heavily short gold.

Chinese demand alone seems to be running at somewhere close to the global total of newly mined gold. Gold which can be sourced from the big gold ETFs, assuming there are still any willing sellers, has diminished drastically and there is little doubt that much of what remains after the big sell-offs of the past two years is firmly held. And it can only be a matter of time before the really big players – Soros, Paulson et al – start accumulating big holdings again, if indeed they are not already doing so, as the trend towards diminishing Western stockpiles becomes more and more apparent.

Mints producing gold coins and other forms of investment gold are working overtime to satisfy demand, as are the Swiss refiners involved in remelting good delivery bars (specifications according to the LBMA of between 10.9 and 13.4 kilograms) down to the smaller sized units that are the preferred products for the Middle Eastern and Eastern gold trade. 

COMEX registered gold stocks – i.e. that which is available for delivery – are at virtually all-time lows – and falling. JPMorgan withdrew a massive 321,500 ounces from its vaults last week, which equals its biggest withdrawal of physical gold ever, leaving it with only some 70,000 registered gold ounces (2.2 tonnes) remaining.

All this cannot continue indefinitely without a major upwards impact on the price of gold bullion. And at the rate of current gold flows this has to come sooner rather than later despite the machinations of the paper gold merchants and high frequency trading. Once there is little or no physical gold to back the paper, the paper has to become worthless – or that would seem to be the logic.

However, the gold price does not necessarily follow logic all the time as gold investors will be all too aware, but this huge supply/demand imbalance for physical metal has to strike home at some time and that would seem to be likely to happen sooner rather than later as the current flow trend continues. And this is despite the almost unanimously bearish projections of the mainstream gold market analysts working for institutions which may have a vested interest in keeping the gold price within bounds.

The disparities could even accelerate should India relax its draconian, and unpopular, gold import restrictions ahead of this year’s elections and the gold ETFs start to see inflows rather than outflows. Interesting times for the gold market!

iPad Version: Picture – Wiener Philharmoniker gold coins are pictured at the Ginza Tanaka store in Tokyo: REUTERS/Yuriko Nakao

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