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Looking at
the graphic below, without knowing what it is, does it cause you any concern?
 
What if I
told you that the arrows into Hong Kong represent a majority of the
world’s flow of money?
Does it cause you concern now?
Honestly, it
doesn’t overly concern us because we hold money. But before you
dismiss us as being pretentious, we simply mean that we own physical gold and
gold mining shares.
What concerns
us is that some of you may not… read on.
UK Gold
Exports
This week an
article published by the Financial Times of London reported that this
year’s UK gold exports to Switzerland have increased nearly 10 times
when compared to the same period last year.
Through the
first six months of 2013, the UK has sent 798 tonnes
of gold to Swiss refineries in comparison to 83 tonnes
for the first six months of 2012. In the month of May alone, 240 tonnes were exported.
798
tonnes is a lot of gold!
To put this
figure in perspective, it is equivalent to almost 30% of global annual mined
supply. By an alternative measure, this figure represents 8% of the
estimated 10,000 tonnes of private and official
gold rumored to be held in London vaults, which includes the Bank of England
(BoE).
Since this is
such an extraordinary occurrence, it’s worth repeating … In the first
6 months of this year, London, the traditional center of the global gold
market, has sent the equivalent of 30% of global annual mined supply to
Switzerland.
Since the UK
does not mine any substantial amount of gold, and since the BoE only has
about 300 tonnes held as monetary reserves on
behalf of the British treasury, the exported gold must be coming from another
source.
In several of
our recent weekly commentaries, we have suggested that one of the sources of
gold feeding historical physical demand around the world is ETF inventories
held in London. An attention grabbing 650 tonnes
of ETF gold has been sold this year.
We have also
commented on the fact that according to information released by the BoE
itself, a staggering amount of 1,300 tonnes has
disappeared from their reporting between February and June of this
year. This, of course, suggests the gold has left their vaults.
When taken
together, these three factoids provide strong evidence that an unprecedented
volume of gold is on the move from London and now we know where a significant
portion is headed.
Swiss
Watches, Swiss Chocolate, Swiss Banks, and Oh Yeah…
Swiss Refineries
Most of these
gold exports are being sent to Swiss refineries.
Four of the
world’s largest and most prestigious gold refiners, Metalor,
Pamp, Argor-Heraeus, and Valcambi, are located there. Further, it is
estimated that Swiss refineries process 70% of the world’s gold
supply. There are also unconfirmed reports that these refineries are
working around the clock at full capacity to handle the enormous gold flow.
As you are
likely aware, the “Swiss Made” brand is well known for quality and
precision; spanning many products, industries and generations.
Of course the
Swiss also have a reputation for secure bank vaults and the efficient
transportation of valuables that go in them. Due to the above traits,
it’s no coincidence that the Swiss also have a long history with gold
and the gold market.
On this
basis, there are three likely reasons why gold from UK vaults is being sent
to Switzerland.
The main
reason is that Swiss refineries are the only ones in the world that have the
capacity to transform the massive volume of standardized and
globally recognized London Good Delivery 400-ounce bars into the smaller
bullion products, such as the 1-kilo bar (32.15 ounces), that Asian buyers
prefer.
The last two
reasons we and other market observers have commented on many times.
First, there is unprecedented demand coming from Asia and buyers want the
gold recast in a size, style and brand that is distinctly Asian.
Second, gold owners are rapidly losing faith in the London gold market.
There are widespread
rumors, and a growing body of evidence, of impropriety in the London
vaults. As a result, many wealthy individuals, institutions, and
governments who have traditionally found it beneficial to maintain their gold
holdings in the massive London gold market, are heading for the exits.
They are
transferring their gold holdings out of London and into private vaults that
have no exposure to the paper gold financial system (i.e. ETF’s, the
futures market, and bullion bank gold leasing operations).
This is the
same gold financial system where it is estimated that paper claims on gold
ounces outnumber available physical ounces anywhere between 40 and 100, to 1.
The
dishoarding by ETF’s, discrepancies in the BoE books regarding their
gold holdings, and now EU reported gold export volumes from the UK to
Switzerland represent strong evidence that London gold is on the move.
So Dude,
Where’s All the Gold Going?
“Dude,
it’s going to Hong Kong.”
Being curious
gold market observers, we decided to do a little digging to find out where
the Swiss refiners were sending this newly transformed gold supply.
On a hunch,
we analyzed the import data tracked by the Hong Kong Census & Statistics
Department and found that 375 tonnes of gold has
been imported from Switzerland over the first 6 months of this year.
We also
discovered that the UK has sent another 59 tonnes
directly to Hong Kong over the same period. If we combine these two
amounts, the total gold outflow arriving from the UK is 434 tonnes.
Intrigued, we
kept digging and found that Hong Kong, again in the first 6 months of this
year, has imported another 238 tonnes from 3 of the
world’s largest gold producers, Australia (#2), the U.S. (#3), and
South Africa (#5). These countries exported 81, 84, and 73 tonnes of gold to Hong Kong respectively.
Let’s
put this into perspective. If you were to annualize these figures and then
compare them to each countries annual production, their combined exports to
Hong Kong are equivalent to a whopping 73% of their cumulative annual production!
Concluding
our investigation, we found that 22 other countries have exported an
aggregate 135 tonnes to Hong Kong.
A tally of
the above exports shows that a staggering 807 tonnes
of gold has been imported into Hong Kong in the first 6 months of this year.
This is an extraordinary number and when annualized, represents roughly 65%
of global annual mine supply.
Since a
picture is worth a thousand words, we present a pie chart showing the
breakdown of where Hong Kong gold imports came from during the first 6 months
of the year and their respective percentages of the total.
As you
contemplate these figures, please don’t be alarmed by the loud sucking
sound coming from the faraway East, as gold goes whooshing by overhead.
Icing on the
Cake
Everyone
likes icing!
China is the
#1 gold producer in the world and keeps 100% of its annual
estimated production of 400 tonnes.
Therefore, the top 4 gold producing countries, on a combined basis, are
sending a weighted average 83% of their annual production to China!
Here we must
mention a quick note about imports and exports of gold between Hong Kong and
the mainland. It’s easy to forget that, for all practical intents
and purposes, Hong Kong is in China, and therefore Hong Kong is China.
As the figures above demonstrate, the city of Hong Kong is also the gold
gateway into the mainland.
With this in
mind, note that Hong Kong shipped 91%, or 736 tonnes,
of its total gold exports for the first 6 months of the year, to the
mainland. This lends fairly strong support to the whole Hong Kong is
China theme.
At the risk
of confusing our readers, its
important to note that the mainland shipped 218 tonnes
in the other direction to Hong Kong. If you annualize this figure (e.g.
436 tonnes), it approximates the estimated annual
mine production of China.
However,
since Hong Kong is sending 91% of every ounce that is imported (including
what comes in from the mainland) to mainland China, it is very likely that
this 218 tonnes is arriving for refining, vault
storage, or a combination of both.
This is
because like Switzerland, Hong Kong has state of the art refining capacity
and significant vault storage facilities.
The
Conclusion…
We have been
fortunate this week to uncover a few more pieces of the gold demand puzzle.
In previous
Weeklies, we have established, along with many other astute market observers
that physical gold is in strong demand. Further, a significant chunk of
that demand is coming from Asia.
In our above
discussion, we have provided additional compelling evidence that physical
gold is not simply changing ownership but is being physically shipped to
China.
In last
week’s commentary, we wrote about tectonic shifts were taking place in
the gold market and how they would render its landscape permanently
altered.
This
week’s discussion provides powerful insight into a core aspect of this new
gold market landscape.
The new
reality, which it would behoove gold market participants to wrap their
collective heads around, is that China is the world’s biggest producer
and consumer of gold. Therefore, they will be the primary movers and shakers
in the gold market going forward.
Highlighting
this point, the Shanghai Gold Exchange has recently commented that its goal
is to be the largest gold exchange in the world. Given the physical
activity discussed above, this is not an idle boast.
The mainstream
press ignores or clouds the new realities unfolding in the gold market, but
sober-minded investors can’t afford to.
In our view,
these gold market dynamics, along with others, can only lead to a favorable
outcome for the gold price in the medium to long-term. Also, if the
last month and a half is any indicator of what’s to come, gold is
likely in for a strong 2nd half performance! Hope springs eternal.
P.S.
With this
favorable gold price set-up, the shares of our beloved gold miners are poised
to experience significant appreciation. Therefore, shrewd investors would be
well advised to accumulate the shares of the stronger miners now.
With that
said, please find our Gold Miners Comparative Analysis Table below, which
provides many important metrics critical to evaluating and comparing gold
mining companies. Its purpose is to help discerning investors separate
the wheat from the chaff.
That’s
it for this week. Thanks for reading!
Regards,
RJ Wilcox
Jeremy@goldminersreport.com
www.goldminersreport.com
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