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Gold Demand Shoots Up in the First Quarter – and Last Wednesday!

By Gary Alexander May 21, 2015

Gold shot up from $1195 to $1215 last Wednesday morning and closed the week at $1225, its highest close since February 16.  Wednesday’s move – lasting about four hours – lifted gold out of its sub-$1200 “funk.”  What happened to take gold out of its long torpor?  The culprit seems to be you – the shopper!

Gold’s rise began around 8:45 am on May 13, right after the dismal retail sales numbers for April came out.  Economists expected a 0.2% rise after a few previous negative months, but April showed a weaker-than-expected 0% change, following a hopeful 1.1% gain in March and three previous monthly declines:

US_Retail_Sales_Table

This disappointing retail sales data helps gold because a slower economy means that the Fed won’t likely raise interest rates any time soon.  This continues to give gold an “even playing field” with cash, since neither gold nor short-term cash can offer any meaningful income. Paper money can be printed at will – via quantitative easing (QE) – while the supply of newly-mined gold remains low, since it is so difficult to find and mine in any meaningful economically-profitable quantity, so gold usually outperforms cash.

Gold Remains Strong in Euro Terms

Even though the dollar has fallen somewhat from its mid-March peak ($1.0494 to the euro), the dollar is still much stronger to the euro than it was a year ago.  In May of 2014, the euro traded at $1.39 to the dollar.  The latest reading is $1.14, for a drop of 18% in the last 12 months.   Last May, gold closed the month at 915 euros per ounce.  Last week, gold closed at 1061 euros per ounce, a gain of 16%.  In the same 12 months, the price of gold in U.S. dollar declined 3%, due entirely to the stronger U.S. dollar.

Last Thursday, the World Gold Council (WGC) produced its quarterly report on “Gold Demand Trends.”  The headline number from that report is that Germany went on a gold-buying spree in the first quarter, partly due to the weak euro making gold prices attractive, but also due to fears about the value of the euro if Greece is finally forced to exit the euro zone by June 30 – a fear that dominates Europe these days.

According to the WGC quarterly demand report, Germans bought 20% more gold coins and bars last quarter than they did in the same quarter of 2014.  From January 1 to March 31 this year, Germans bought 32.2 metric tons (amounting to over one million ounces at 32,150 Troy ounces per metric ton). Alistair Hewitt, head of market intelligence at the World Gold Council, said that this was “the strongest start in Europe for gold coins and bars that we have seen since 2011.” Hewitt’s explanation is that “German investors are fretting over the ECB, Greece, and Ukraine,” giving gold an advantage over the euro.

Another reason for German gold buying is their historical fear of hyper-inflation combined with their new fear of creeping deflation.  With interest rates now below zero in many European nations, gold enjoys more than an even playing field in Europe. Gold now has an advantage over cash in the banks of Europe.

Gold Demand also grew in India and the U.S.

The WGC says that total global gold demand fell 1% last quarter, but the component called “investment demand” rose 4%, with the most notable gains being in Germany and India.  Specifically, India’s demand growth was second only to Germany.  Indian demand rose 15% last quarter, due mostly to a relaxation in their onerous import restrictions, combined with decline in gold prices last quarter. The WGC predicts that India’s gold demand will run between 900 tons and 1000 tons this year, vs. just 842.7 tons in 2014.

In addition, U.S. demand for gold jewelry surprisingly increased.  U.S. demand is usually focused on the physical bars and coins for investors, combined with the stockpiled gold bars required by regulation when demand for the gold exchange-traded funds (ETFs) increases.  Since the ETFs mostly unloaded gold over the last two years, we’ve seen the price of gold decline in dollar terms, but any future demand in gold ETFs will have the opposite effect – of driving the price of gold up, due to leverage in these gold ETFs.

The WGC says the first quarter saw “light inflows into ETFs” as “ETFs benefited from improved Western investor attitudes towards gold; Q1 2015 was the first quarter of positive net purchases since Q4 2012.”

In the meantime, demand for physical gold in the U.S. puts a “floor” under the price of gold in dollar terms.  Last quarter, according to the WGC, U.S. gold jewelry demand increased by almost one ton (32,150 Troy ounces), which marks the third consecutive year-on-year increase in first-quarter jewelry demand.  U.S. gold jewelry demand has now increased (year-over-year) in eight of the past 10 quarters.

Central Bank Purchases Continue to Grow – for 17 Straight Quarters

The WGC report also covered another core component of gold demand – central bank purchases. They say: “Central banks and other official sector institutions remain committed buyers.” Net central bank gold purchases reached 119.4 tons in the first quarter of 2015 (an annual rate of 478 tons). Central banks have now been net gold buyers for 17 straight quarters (usually buying 100 to 150 metric tons per quarter).

Nobody knows how much gold the Chinese central bank owns.  The last time they disclosed their gold holdings was in 2009, at 1054 metric tons.  They could own 2500 tons by now, or more, but they haven’t disclosed those figures.  China’s gold import figures also remain a mystery, with conflicting numbers coming out of Hong Kong and Shanghai, the two main gold markets in China, but China remains the world’s #1 gold producer and either #1 or a close #2 (to India) in total annual gold consumption.

One nation that does not keep us guessing is Russia, which bought 77 tons in 2013 and 150 tons in 2014.  They have continued their gold buying spree in 2015.  After no gold buying in January and February, they added a million ounces (31 tons) in March, bringing its total reserves to 1,238 tons, more than the official Chinese holdings.  The 31-ton total in the first quarter works out to a 124-ton annual rate, but it’s likely that economic sanctions, a weak ruble and a recently-weak dollar will cause Russia to buy more gold.

Russian_Central_Bank_Gold_Reservers

 As this chart shows, Russia added gold for nine straight months, from April to December of 2014, but their pause in gold buying during January and February caused some gold bears to assume that demand from Moscow was beginning to dry up, but Russia’s big purchase in March quieted those critics. The 31-ton gold purchase last March was the biggest single gold purchase since September and the third highest monthly total of the last 15 years. Russia’s latest purchase sends a very bullish signal to the gold market.

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Disclaimer: The information in this letter is not intended to be personalized recommendations to buy, hold or sell investments. This should not be considered as personalized trading or investment advice to subscribers. The information, statements, views and opinions included in this publication are based on sources (both internal and external sources) considered to be reliable, but no representation or warranty, express or implied, is made as to their accuracy, completeness or correctness. Such information, statements, views and opinions are expressed as of the date of publication, are subject to change without further notice and do not constitute a solicitation for the purchase or sale of any investment referenced in the publication. Subscribers should verify all claims and do their own research before investing in any investment referenced in this publication. Investing in securities and other investments, such as options and commodities, bullion and futures is speculative and carries a high degree of risk. Subscribers may lose money trading and investing in such instruments.