In The Lead – As A Matter Of Facts (And Figures)…


Precious Metals CommentaryGold prices opened modestly higher this morning as market participants were seen closely tracking the latest Greek saga developments and various EU statements regarding the fate of the same.

The overnight rally ran out of momentum near the $1,735 level and book-squaring ahead of the weekend might keep further advances in check unless something meaningful (and market-positive) comes out in the news today. Spot bullion was indicated at $1,732 and showed a $3+ gain while silver was unchanged at $33.52 per ounce.

Platinum and palladium made some upside progress as well, with the former advancing $9 to the $1,631 bid level and the latter climbing $2 to $694 on the bid-side. Rhodium continued a tad lower at $1,450 per ounce. Strikes in South Africa’s platinum sector turned violent on Thursday and one miner died from injuries sustained in a beating. Thus far, more than 60,000 ounces of platinum production has been lost in the wake of the most recent labor action against Implats. In the background, the US dollar market time at 79.29 on the trade-weighted index (down 0.11) and the euro was trading at $1.317 against it.

The metals’ complex continues to trade in the "atypical" fashion that Commerzbank analysts see it in and gold shows a preponderance of risk asset trading patterns as opposed to safe-haven ones. It is as yet unclear whether Monday’ EU finance ministerial meeting and the hoped-for approval of Greece’s second bailout tranche will change any of the above. Over on the physical side of the market (much more on that whole supply and demand dynamic follows below) there are concerns that Indian gold demand might run into a bit of trouble this year, not only on account of continuing high prices, but owing to…the calendar. Simply put, there are fewer so-called "auspicious" days in the 2012 Hindu calendar on which to go out and scoop up some yellow metal.

Based on the latest metrics from the US, the country has climbed out from the deflationary patterns that were manifest in earlier reporting periods. Underlying inflation climbed at the fastest rate in four months in January. CPI climbed 0.2% and core CPI was up by the same amount. Albeit the figures were lower than what economists had anticipated, the news is construed as positive. Yesterday’s initial jobless claims report showed the fewest Americans applying for unemployment benefits in four years — about the time when the recession was beginning to hit.

The more the US economy continues to show metrics such as the above, the less traction the various newsletter assurances of an impending QE3 courtesy of the Fed will get. In fact, the Fed’s own policy makers are shrinking in terms of the number of them that would have the US central bank go out and buy more assets in order to further bolster the economy. The Fed’s most recently released meeting minutes show only a minority of FOMC team members still leaning towards a QE3 package. Moreover, at least as far as Richmond Fed President Jeffrey Lacker is concerned, a "preemptive tightening" could be in the cards prior to 2014 if inflation expectations are to be smothered in a timely fashion by the Fed.

It is once again tally time in the area of the fundamental components of gold supply and demand. The past year has presented a somewhat fractured picture in such metrics despite (or perhaps owing to) record prices having been achieved in the cash price of the yellow metal. The World Gold Council characterized 2011 as "a year of two halves." There is likely to be a plethora of articles to be published attempting to convince us that all is well in terms of supply and demand in the gold market. A closer look at some of the components we are about to lay out for you here might result in a slightly…different set of conclusions by readers to whom such metrics do matter, as they indicate potential problems in this market.

Let’s start with the supply of gold. According to the latest World Gold Council Thomson/Reuters GFMS — computed supply/demand tables (contained in the latest Gold Demand Trends publication), the world’s mines produced 2,708.6 tonnes of the metal in 2010, and then managed to mine 4% more gold last year, raising the total output to 2,821.7 tonnes. Similar year-to-year gains (on the order of 5% and 7%) were also noted in 2009 and 2010. Year-on-year increases from gold mines have now been with us for a while and have been achieved amid continuing declarations of ‘peak gold’ by certain mining firm executives.

It is worth noting that gold miners have apparently rediscovered the long-forgotten practice of hedging and thus added a small amount of gold (12.2 tonnes) to the metal’s total supply last year, for the first time in a decade. De-hedging had been a meaningful contributing factor to the gains in the price of gold, possibly to the tune of some $400 per ounce. Now, the gold market has apparently just lost this hitherto very important price support agent. The trend towards mines hedging once again, if it takes hold, could become a gold price game-changing agent as we move forward.

Another important source of supply to the gold market normally comes from scrap recycling. Flows of scrap gold had shown a 27% increase in 2009 (to nearly 1,700 tonnes) amid rising gold prices. The tally for 2010 and 2011 shows 1,640.7 and 1,611.9 tonnes of secondary gold flowing into the market. Such tonnages remain at roughly 68% higher than the levels they were at in 2007 and they also remain within striking distance (50 to 80 tonnes shy that is) of all-time records for each of these past three years.

The largest component of gold demand, historically, has been jewellery fabrication. Unfortunately, world fabrication demand in this niche fell to a 23-year low in 2009 and it has recovered very little since then. The sector consumed 2,016.8 tonnes in 2010 but then fell by 3% last year to a total offtake of 1,962.9 tonnes. Demand for gold in the technology sector fell as well last year, but only by a very modest 3 tonnes. Price sensitivity continues to hamper global jewellery demand. Indeed, 2010’s and 2011’s circa 63 million ounce gold offtakes for jewellery were still the second and third lowest in nearly two and a half decades.

An oft-cited component of global gold demand remains India. Well, last year was not a very good year for Indian gold demand. Overall jewellery and investment demand in that country declined by 7%. A closer look at the component figures reveals that Indian investment demand was down by a not insignificant 38% year-on-year in Q4 (to 70 tonnes) even though the full-year picture revealed a 5% gain in gold bar and coin demand.

India’s jewellery demand was down 44% in Q4 (to 103 tonnes) and it was also down 14% on the year, totaling 567.4 tonnes. China’s Q4 jewellery demand was relatively flat vis-a-vis 2010 figures and it came in at 131.4 tonnes. Its annual jewellery demand was up 13% however and it amounted to 510.9 tonnes. Chinese investment demand declined 3% in Q4 (to 59.5 tonnes), mirroring the slackening demand in investment seen in India.

We now turn to the area of investment demand where the picture becomes even more fragmented for last year. The take-away figure in this space is the net 7% (at this point still a provisional figure) decline in investment demand tonnage for the full year (down to 1,567.6 tonnes from 1,680.7 tonnes in 2010). For example, while bar and coin demand appeared fairly robust, ETF demand certainly was not. There were notable declines in investment demand levels witnessed in the USA (!) as well as in Japan and Egypt.

Japanese investors continued to sell their bullion into gold’s price strength — some 45 tonnes were let go of in 2011 and that has now amounted to twelve consecutive quarters’ worth of selling of gold in Japan.

USA-based investment demand was down by 13 tonnes or 25% in 2011 and it was down 29% in value terms — $1 billion fewer dollars’ worth were hoarded by American investors despite the urgings coming from the Glenn Beck (and similar) doomsday camps about the US dollar and the US economy. The fourth quarter of the year witnessed a 43% contraction in American gold investment demand. Only 18.3 tonnes were diverted into that niche in the trimester. This took place at a time when gold-oriented newsletters were still drumming the scary beats of "coin shortages" and "buy now, beat the rush!" to their readers.

As we noted numerous times, the demand for gold by ETFs has been one of the other principal contributing factors to rising gold prices. Back in 2009 the niche ‘consumed’ 617 tonnes of the yellow metal. However, in 2010 that sector only took 367.7 tonnes off the market despite the still-rolling global crisis and still-increasing price of gold. Last year the picture in the ETF space darkened considerably; only 154 tonnes (58% less) were absorbed by such investment vehicles all year. Again, this was a reality despite the aggravating situation in Europe and despite the fresh records that gold touched in September.

In fact, last year’s ETF gold demand stands at the lowest annual level since these vehicles were launched late in 2004. The price of gold itself underwent quite a roller-coaster ride in 2011 and its near 30% gains manifest at one point ended in the single digits (8%) by year’s end. Since last August, the volume of ETF trading has gained pace, signaling a possibly shifting investor sentiment. Many ETF speculators still hold large positions, but recent price drops and rising volatility have eroded a portion of the belief that gold is always a "safe haven" investment, and that kind of perception has been prompting greater selling.

In Q4 of 2011 Paulson & Co. cut its stake in the SPDR Gold Trust by 15% ($600 million or more than 10.25 tonnes were disposed of) while Touradji Capital Management sold its entire position in that ETF. This is not to say that there were no gold ETF buyers out there. For one, Mr. Soros (who had labeled gold as the ‘ultimate bubble’ bought about $13 million worth of bullion during the final trimester of 2011. Still, the high-profile sellers cannot be ignored at this juncture. ETFs have now proven that they are no longer a one-way accumulation vehicle and that it is a fallacy to have assumed that gold holders never sell their positions.

For a firm like Paulson & Co. it clearly made sense to sell some gold into price strength, especially given the souring bets it had made on, for example, BAC (Bank of America). Here was a classic example of mobilizing one’s gold in order to mitigate damage issuing from the equities’ side of the portfolio. This is what holding gold as ‘insurance’ really means. Individual investors might take note. We mentioned such allocation and damage-control strategies in our recently held webinar. We shall now await the upcoming release of the CPM Group New York’s gold yearbook to learn to what extent the above supply demand fundamentals are corroborated by the other source of such type of information in the industry.

Have a pleasant weekend,

Jon Nadler
Senior Metals Analyst — Kitco Metals

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication. and

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