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“I can’t remember the exact
quote but when I used to trade and Mr. Volcker was Fed chairman, he said
something like ‘gold is my enemy, I’m
always watching what gold is doing’, we need to think why he made a
statement like that. If you’re a central banker or one of the
congressmen or senators, watch what gold is doing because this is a
no-confidence vote in fiscal and dollar policy.”
–
Rick Santelli, CNBC
It seems to me that
anyone considering gold ownership would want to know if the supports in the
market that brought the price to its current level are still present, or if
they have diminished thus deflating future prospects. Though the war on
gold continues unabated judging from the anti-gold rhetoric issued by the
mainstream financial press and some of Wall Street’s largest financial
institutions, the market for physical gold stands in stark opposition –
a reminder that the metal “still clings tenaciously to men’s
hearts,” as British gold analyst Timothy Green once put it.
It should be said,
if we are to be objective about the situation, that gold’s opponents
are likely just as frustrated about the persistence of physical demand,
as the investor/owner is about the constant effort to keep the demand, and
hence the price, in check. A permanent tension results at the junction
of Wall Street and Main — and one that has been with us from the start
of gold’s secular bull market in 2003. In the end though, there
is a reason gold is saved by the world’s citizenry, and it has to do
with the persistent pull of social and economic entropy – the human
condition. We live in an imperfect world, and because it is imperfect there
will always be a market for gold.
Despite the
relentless criticism, gold continues to offer its owners what it always has
– shelter from the gathering storm and some welcome peace of mind.
That, more than any advance in the price, is why the attempts to cool demand
continue to fall on deaf ears. The best proof I can offer to support this
contention is the price itself. If the public agreed with gold’s
detractors, it would not have gone from roughly $300 per ounce in the early
2000s to $1300 today with a stop at the $1900 per ounce level in between.
There is something elemental in the gold chart that speaks for itself.
I always keep in the
back of my mind former Fed chairman Paul Volcker’s admission that
“gold is my enemy.” Rising gold demand, after all, as Rick Santelli suggests above, is essentially a vote against
the central bank’s performance and by proxy that of the financial
institutions – the public voting with its checkbook. All of which
brings me to the World
Gold Council’s annual Demand Trends analysis – a report I
always approach with more than average interest. Since the study
concentrates on world wide demand, I see it as a
report from the front on how successfully or unsuccessfully the war against
gold is proceeding. This year’s edition, released in February and
covering 2013 (sorry I didn’t get around to it sooner) affirms that
many of the trends that have been in place for the last few years remain in
place.
To wit. . .
– Overall, the
Council reports a “record breaking year” for consumer demand
– jewelry, small bars and coins (up 21% over 2012). A big chunk
of that demand came last April through June when the price dropped from
record levels inspiring a run on gold in China and India. Even the
United States, a small market for gold when compared to nations East,
experienced a huge demand increase for gold coins and in particular for the
American Gold Eagle. Overall U.S. bar and coin demand was up an “impressive
26%” and gold Eagle demand was up 29% in terms of the number of coins
sold. A surprise not often mentioned in mainstream media was the pick-up in
Japanese gold demand the result of Abenomics.
Japan’s biggest bullion retailer reported selling 37.3 metric tonnes of the metal to the retail public.
– Central
banks continued their transformation from net sellers of the metal to net
buyers. Net purchases amounted to 368.6 tonnes down
marginally from the previous year’s record 544 tonnes.
The important story in the central bank category is the continuation of the
net buyer trend that began in 2009. Prior to that the central banks
were major sellers of the metal, so the net difference is significant.
In 2005 for example, central banks sold 663 tonnes.
Russia led the buying at 77 tonnes. In the final
year of the Central Bank Gold Agreement the only seller to materialize was
Germany at 3.5 tonnes which went to a coin minting
program. The WGC report excludes strong buying activity rumored from
China’s central bank.
– Exchange
traded funds sold an astronomical 881 tonnes, but
as covered at the USAGOLD website in detail most of that gold went to China
by way of Swiss refiners. All toll, ETFs have
purchased about 2650 tonnes since 2004 with 2013
the first year they were net sellers of about one-third of their total
holdings. One wonders how the hedge funds, who reportedly have begun to buy
gold again, will react in the future to a sell signal given the strong
response from the East at the availability of metal in size.
– On the
supply side, recycled gold declined for the sixth consecutive year. Mine
supply was up modestly and mine forward selling was minimal. Overall
supply backed off about 75 tonnes from 2012.
One wonders where the physical gold market might have been without the 881 tonnes from the ETFs.
Gold ended 2013 at
$1205 per troy ounce. From there it quickly tracked higher. By
mid-March it was trading at $1370 per ounce – up almost 14% over the
year-end close. From there it retraced some of the gain amidst reports
of continuing strong global demand. To what degree last year’s
correction was overdone, remains to be seen, but one thing is sure: Demand
remains strong.
So, how goes the war
on gold?
Baseline judging
from the evidence “not very well. . .”
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