|
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.
(Click the image to enlarge)
 
That’s it for this week. Thanks for reading!
Regards,
RJ Wilcox
Jeremy@goldminersreport.com
www.goldminersreport.com
|
