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What a Difference a Year Makes…in Gold
A year ago last week, the international price of gold fell by over $200 in four trading days, the result of an apparent “bear raid” on Wall Street. It took place during the weekend before America’s tax deadline date, from Friday, April 12 to Monday April 15, 2013. A year later, we can begin to piece the story together:
On the morning of Wednesday, April 10, 2013, the first London price setting for gold was over $1581 per ounce. The afternoon setting was $1575. While well below gold’s intra-day peak of around $1920 in early September of 2011, gold had held up remarkably well in the previous 18 months. But two major investment banks on two continents turned against gold that week. First, France’s Societe Generale wrote a report called “The End of the Gold Era”, saying that “gold may have had its last hurrah,” predicting a drop to $1375. Then, on April 10, Goldman Sachs turned bearish on gold, counseling its clients to sell gold – or even sell it short. That precipitated an avalanche of sell orders from the leading gold ETFs.
According to research from IndexUniverse, investors took over $1 billion out of the leading gold ETF on Friday, April 12, and another $188 million on Monday, April 15. Investors pulled out another $563 million on Tuesday, April 16. That’s over $1.75 billion (1.25 million ounces, or 39 tonnes) in three days.
On Tuesday, April 16, the morning London price setting fell to $1378, down $200 in four trading days.
Another important reversal took place on that same day. The physical gold buying world awoke out of its nightmare, realizing that this price collapse represented an unexpected buying opportunity. On Tuesday, April 16, sales of American Gold Eagle coins hit 33,000 ounces, the highest one-day total of the year. Sales for the month of April, although it was barely half over by then, had surpassed the monthly totals of both March and February. In two days, the Mint set a year-to-date weekly record for gold coin demand. The Mint sold 147,000 gold ounces in April (through April 17) vs. 20,000 ounces in all of April, 2012.
The same trend erupted in the rest of the world. The Wall Street Journal pictured a dangerously dense crowd of buyers at a jewelry shop in Bangkok, with a caption: “Gold shops from Tokyo to Dubai have witnessed frantic buying of [gold] coins, alongside other items such as gold wedding bracelets. The surge has been triggered by cheaper prices.” The Perth Mint said “The phones have been ringing off the hook.”
The battle was engaged – paper gold sellers (centered in New York) vs. physical gold buyers (dominated by China). That battle raged for the rest of 2013 and early 2014. Here’s how that battle has fared so far:
A Short Summary of the Gold Investment “War of 2013″
The World Gold Council’s (WGC) “Gold Demand Trends” for 2013 was published (ironically) on April 15, 2014, the one-year anniversary of the 2013 bear raid. In that report, the WCG says that the physical demand for gold in 2013 marked the largest-ever year-over-year increase since the WCG began keeping records. However, gold prices tended down because the paper sellers sold more than the rest of the world was able to buy. The gold ETFs unloaded 808 metric tonnes of gold in 2013, according to the WCG.
The WCG added that “no review of 2013 would be complete without a mention of the unprecedented flow of gold from western vaults to eastern markets, via refiners in North America, Switzerland, and Dubai. These shifts resulted in the shipment and transformation – on an epic scale – of 400 ounce London Good Delivery (LGD) bars into smaller denominations more suitable for consumers’ pockets.”
While New York paper gold vs. Chinese physical demand was the heavyweight battle of the year, an interesting story was developing in the undercard. While demand in India – once the #1 source of gold demand – remained sporadic, due to punitive laws on the import of gold, a new gold trading colossus arose in Dubai. Last year, Dubai emerged as the world’s #1 trading center for gold. Almost 40% of the world’s physical gold trade came through Dubai last year, and the value of the gold traded there grew to $75 billion, vs. just $6 billion in 2003, as India’s previously vibrant gold market has migrated to Dubai.
The WCG report added that China’s middle class will likely grow by another 200 million people by 2020, raising the middle class to 500 million, more than a third of their population. The WCG also said that private sector demand will rise by about 20% from 1,132 tonnes in 2013 to at least 1,350 tonnes in 2017.
The WCG report listed the reasons for that increase as “China’s deep-seated cultural affinity for gold, increasing affluence and a supportive State,” plus deregulation and more free trade zones for gold dealers.
Meanwhile, the Wall Street Journal Says China is “Losing its Taste for Gold”
This WCG report sounds pretty positive, but The Wall Street Journal looked at the same WCG report and headlined the story: “China is Losing its Voracious Taste for Gold: Demand for Yellow Metal Expected to Remain Flat in 2014, Posing Threat to Rebounding Prices After Big Drop Last Year.”
This is how the Wall Street Journal pictured the WGC’s analysis of Chinese demand in 2013 vs. 2014:
Source: The Wall Street Journal
This series of charts did not appear in the print version of the Journal. The charts appeared on the online version of the April 15 article. Notice that they called an increase from 1132 tonnes of demand in 2013 to 1187 tonnes in 2014 (a gain of almost 5%) as a “flat” year. Rather than saying China is “losing its taste for gold,” the article could have been headlined, “China to Increase its Record High Demand another 5% in 2014.” Obviously, a country that buys 1187 tonnes of gold a year is not “losing its taste for gold.”
Despite its negative headline, the Journal printed all of the WCG’s positive projections of gold demand in the middle of the article, saying: “In the longer term, the World Gold Council estimates that China’s appetite will rev up again. Chinese gold demand, excluding factory stockpiles, will increase 19% by 2017 to 1350 tonnes from 1132 in 2013, according to the report. As China’s economy continues expand and citizens become more affluent, more of them will purchase gold jewelry or bullion for the first time….”
There is a widespread misconception that Asians and other gold buyers are whipsawed by trends. They are not like Western investors. China (and most of the rest of the world) has had an affinity for gold over 4000 years of recorded history. The people of China lived through centuries of grinding poverty and are only now developing a middle class of 300 million people (soon to grow to 500 million). Since 2004, the Chinese government has finally made gold ownership convenient for its citizens. Is it believable that the massive Chinese middle class has now suddenly “lost its taste” for mankind’s greatest symbol of wealth?
Albert Cheng, managing director of the Far East at the WGC says “the mentality of the Chinese buyer” is different than the Western trader. The Chinese buyer, he says, is more of a ‘bargain hunter’ than a ‘momentum buyer.’ “They want to buy to protect themselves from rainy days.” He also says that 40% of Chinese jewelry consumption is related to weddings, adding that “Once the gold investor in China buys gold, it becomes sticky; it is not as tradable as we see in the U.S. It is long-term.” China is the world’s #1 gold jewelry market, accounting for 30% of global demand. That market tripled in the last decade and is expected to grow from 669 tonnes of demand in 2013 to 780 tonnes by 2017, according to the WCG.
The good news for gold investors is that the massive sale of “paper gold” ETFs in 2013 was likely a one-off event. There are still a few loyal gold bugs on Wall Street, but the vast majority of momentum traders already unloaded their gold ETFs, while most physical gold buyers are “strong hands” who seldom sell. In our view, smart investors will continue to use any dips in the gold price to add to their gold holdings.