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The World’s Gold is Migrating from West to East-Special Report for Navellier Gold
For gold investors, 2013 will go down in the history for two reasons. One reason is well known; the other is lesser known but more important. First, gold will have its first declining year of the new century. After 12 straight rising years, gold will likely close down in price during 2013 for the first full year since 2000.
New York’s major exchange-traded funds (ETFs) are required to have enough physical gold to back up the shares in their ETFs. From 2005 to 2011, those purchases have been one major reason why gold has risen so far, so fast since 2005. By the same token, the recent sale of gold ETF shares have freed up fund managers to sell 800 tons of gold from their warehouses. In the middle eight months of 2013, March to October, New York unloaded an average 100 tons per month, while China imported 111 tons per month.
In October, China posted its sixth straight month of more than 100 tons of gold imports through Hong Kong – China’s main port of entry for foreign gold. October marked the second-highest level of net gold imports, nearly topping the record, set last March. According to the World Gold Council, China has imported 973 tons of gold through Hong Kong, its main port of entry, in the first 10 months of 2013.
China is also the world’s #1 gold producer. Through October 2013, China produced 430 tons of gold. Nearly all of that gold stays within China. In addition to that, and the 100 tons of gold imports through Hong Kong, China also imports smaller amounts of gold through Shanghai and Beijing, for the official government purchases of gold for China’s foreign reserves (which remain a closely-guarded state secret).
China’s gold buying surged in the spring of 2013, since China (and most other Asians) buyers tend to be cost-conscious consumers. Unlike New York’s momentum crowd, Asians tend to buy more gold when the price is down. The result is a very real exodus of U.S. gold bars – flying across the Pacific Ocean.
India is the Asian Exception – A Nation that Now Punishes its Gold Investors
India has been the exception to the Asian rule this year, mostly because India’s government has erected all kinds of trade barriers and regulations to tax (punish) India’s gold market. India is trying to solve its balance of trade deficit on the back of small-town gold dealers, who must pay an average 10% import tax on gold. Prior to 2013, India was the world’s #1 gold-buying nation. They will trail China in 2013.
For that reason, India’s fall holiday season has not boosted the gold market this time around. Indian gold demand during the recent holiday season was down by about 50% from last year, when the punitive taxes were first introduced. As of January 2013, India’s gold import tax was just 2%. Then, it was raised to a punitive 10%, on average. Also, gold importers are required to re-export at least 20% of the gold they bring into India, which is a money-losing proposition for them. As a result, one director of a major jewelry chain in India said that “Diwali season was a disaster. I have never seen such a bad festival sales in 20 years.” He also said that his dealers who wanted to buy gold couldn’t find enough gold supply.
The gold shortage in India, imposed by the government’s punitive and confusing new restrictions, has lifted the premium on retail gold to over 10%, or about $130 an ounce. As a result, one dealer said that people are turning to silver, the “poor man’s gold.” Since the people of India still believe that they should buy precious metals on their “auspicious” fall holidays, they are turning to the more affordable silver.
Governments seldom realize the “unintended consequences” of the laws they pass. By punishing gold, the Indian government inadvertently pushed India back to silver. While gold imports are down sharply, India is on pace to double its silver demand from 2012 and set a new record high in demand by the end of the year. Through September 30, India has imported 4,000 tons of silver, within sight of the record high 5,000 tons, set in 2008. The Bombay Bullion Association director, Harmesh Arora, says that India’s investors are “taking advantage of lower prices and the lack of restrictions on silver imports as of now.”
Demand in the Middle East is Rising
India’s loss is the Middle East’s gain. The Noor Islamic Bank in Dubai has become the first Middle Eastern bank offering gold bullion coins in full ounce, half, quarter and tenth-ounce sizes, all in .9999 purity. The coins are minted by a Swiss refiner, Argor-Heraus, one of the world’s largest processors of physical gold. This new coin program meets the rising need for physical gold in a more portable form.
Dubai, the rising Middle Eastern financial giant, will soon launch a new spot gold contract on the Dubai Gold and Commodities Exchange. The exchange’s CEO Gary Anderson said that gold demand is up eight-fold in the region over the last six to 10 years. Dubai now accounts for about 25% of gold bullion demand, and that share will likely rise next year, if Indian gold demand continues to suffer. The new Dubai gold contract is scheduled to make its debut in the second quarter of 2014. In 2013, Dubai will account for about $90 billion in gold trading, a 28% increase over 2012. In essence, Dubai will be able to “steal” market share from India, since Dubai will not punish its gold buyers with high taxes or tariffs.
Turkey is also importing dramatically more gold in 2013. Turkey’s total gold imports more than tripled in October, rising from 4.8 tons in September to 15.6 tons in October. Year-to-date, Turkey’s gold imports are more than double the pace of 2012 and triple the pace of 2011. This year, Turkey is on pace to import over $13 billion in gold. Meanwhile, exports have fallen from $13.3 billion last year to $4.2 billion this year, so Turkey is keeping more of its gold at home, due to rising demand in Istanbul.
Physical Demand is Also Growing in the U.S.
In America, despite the unloading of gold ETFs, the U.S. Mint says that their U.S. American Eagle gold coin sales surpassed 2012′s full-year demand after only 10 months. In October, when the government was partially closed for the first half of the month, the U.S. Mint was open for business. It sold 48,500 ounces of American Eagle gold coins, 273% more than the 13,000 gold ounces sold in September. The silver Eagle coin sales also rose to 39,175,000 units this year, near the annual peak of 39,868,500 in 2011.
Coins are performing better than ETFs because of gold’s fundamental attraction as a physical metal and as competition with low-yielding cash in the bank, Treasury bills or money market funds. The same is true around the world. The rising middle classes of Asia like riches they can handle. In China, sales of luxury goods (like Rolex watches, Louis Vuitton bags or Chanel perfume) rose 41% from 2009 to 2012, according to Credit Lyonnais Securities Asia (CLSA). CLSA reported that gold jewelry sales grew three times faster than other luxury items from 2009 to 2012 – rising 115% in Hong Kong and 172% in China.
The World Gold Council reported that gold jewelry demand was higher in the third quarter than in any quarter since 2010. Physical demand was far stronger for the first nine months of 2013 than for first nine months of 2012. Demand for gold jewelry in Hong Kong and China were 40% and 35%, respectively, above the levels set during the same nine months of 2012. So far this year, the East (primarily China) has purchased five time as many ounces of gold bars, coins and jewelry as all the nations in the West.
Jewelry demand is becoming more bullion-oriented, rather than being bought just for decorative or festive purposes. In China, jewelry buyers now demand 24-karat gold jewelry (which is generally .9995 fine) or .9999 (“four nines” fine) gold bars. By contrast, the less popular 14-karat gold contains only 58% gold.
The Leveraged New York Gold Market Could be a “Trigger” for Gold’s Recovery
In America, before the invention of gold ETFs, gold traders primarily dealt with futures contracts on the New York Commodity Exchange (COMEX). Most such contracts are traded on margin, so COMEX only holds one ounce of gold for each 55 ounces of open contracts in gold. That’s why New York paper gold trading can influence the global price so dramatically. But if a big buyer came into the New York gold market, relentlessly buying gold futures, the shortages of warehouse gold could cause a wave of panic buying and a dramatically higher price of gold. In leveraged markets, momentum is the driving force.
Chris Powell of the Gold Anti-Trust Action (GATA) Committee says that “paper gold” can manipulate the physical market because of its huge size and leverage. He says “gold has been ‘printed’ practically to infinity.” The Reserve Bank of India estimates there are 92 paper ounces of gold in global markets for each physical ounce. A leading U.S.-based gold expert, Jeffrey Christian of CPM Group, has testified to the U.S. Commodity Futures Trading Commission (CFTC) that the ratio may be as high as 100 to 1.
This “rigged” market is the main reason why gold’s price is temporarily down, but this “rigging” can backfire, as it did in previous gold bull markets, when demand overwhelmed the market “fixers.” If a large number of investors realized that as much as 90% of the world’s paper investment gold, supposedly being held in trust, “may not exist,” Powell says, then “gold will rise to multiples of its current price.”
Right now, it’s a lonely position to be a gold bug on Wall Street. We don’t know about specific positions in major hedge funds until 45 days after a quarter ends, when hedge fund managers have to disclose their quarter-ending positions to regulators, but as of the latest quarterly reporting deadline (November 15), the most famous mainstream hedge fund manager in the gold camp – John Paulson – is still holding on to his remaining 10.23 million shares of the SPDR Gold Trust (GLD), meaning that he is still the largest single shareholder in the largest gold ETF. His November filing shows “no change” in his gold position.
Meanwhile, another famous hedge fund manager, George Soros, disclosed that he bought shares in the super-depressed gold mining sector. Last quarter, Soros Fund Management bought 1.1 million shares of Market Vectors Gold Miners ETF after selling all of its shares in the same ETF during the second quarter.
The rest of the financial world seems to be down on gold, with analysts predicting lower gold prices in 2014. But most of these same analysts have been predicting lower gold prices in each of the 12 years from 2001 to 2012, when gold rose each year, so why should they be right about lower gold prices now?
At Navellier Gold, we welcome this brief respite of low and affordable prices, since it allows investors to build a significant position in real gold, at low transaction costs, before gold’s next bull market surge.