There You Have Gold’s Unique Feature: Price Down, Demand Up

Gold is a trading vehicle, right or wrong? Surely 99 out of 100 will answers “right” on that question; but the very few that truly understand gold answer correctly, which is “wrong.”

Who can find a financial asset that goes down in price with an exploding demand as a result? A simple comparison will make this point clear:

  • The collapsing stock market in 2008 / 2009 caused demand for shares to go up or down?
  • The ever increasing price of Treasuries (until early 2013) resulted in more or less demand for those bonds?
  • Although we don’t have a specific case in mind, but suppose the price of collectibles would come significantly down, would it result in more or less demand?

Readers get the point.

What is currently unfolding in the gold market is truly astonishing, especially in Asia. Take this quote from today’s headline on Bloomberg News:

Gold shipments to China from Hong Kong rose to a record in 2013 as bullion’s slump attracted buyers in the world’s second-largest economy. Purchases that climbed by 51 percent in December before the Lunar New Year holiday starting Jan. 31 took net imports for the year to 1,108.8 metric tons, a 33 percent gain from 2012, according to calculations by Bloomberg News based on data from the Hong Kong Census and Statistics Department. The net figure deducts flows from China into Hong Kong.

The assistant general manager at Xiamen City Commercial Bank, Song Heping, commented on this: “Increasing disposable income guaranteed healthy demand for gold in China last year, December demand is usually strong before the Chinese New Year as consumers buy gold gifts regardless of the price outlook at this time of the year.”

Meantime, as we wrote a week ago in Gold Coin Demand Exploding In Europe And China On Gold’s Price Lows, gold coin demand is exploding also in Europe and Mints can’t keep up with demand. Bloomberg reported something similar today:

Global mints are manufacturing as fast as they can after a 28 percent drop in gold prices last year, the biggest slump since 1981, attracted buyers of physical metal. The demand gains helped bullion rally for five straight weeks, the longest streak since September 2012. That won’t be enough to stem the metal’s slump according to Morgan Stanley, while Goldman Sachs Group predicts bullion will “grind lower” over 2014. 

Michael Haynes, the chief executive officer of American Precious Metals Exchange, an online bullion dealer, says that “the long-term physical buyers see these price drops as opportunities to accumulate more assets. We have witnessed some top selling days in the past few weeks.”

Things are so extreme in Asia that (a lack of) storage is becoming an issue. The largest provider of precious-metals logistics and storage, Brink’s, is adding room on top of a vault at Singapore’s Changi International Airport. Inside, “the gold bars are protected by prison-like barriers, two body scanners and 8-ton, fireproof gates.”

Also from Bloomberg (source):

Baskaran Narayanan, the general manager of Brink’s, witnesses: “We need additional capacity, so we have to take further space. There’s a surge in demand for precious metals in Asia, and one can see the focus and movement from the west to the east.” A new Brink’s vault in Singapore set to open by March will be the company’s fifth in the city state, said Narayanan, who spent two decades in the security industry. The 154-year-old company also is adding space in Hong Kong and mainland China to meet growing storage demand, said Guy Bullen, the firm’s senior vice president for the Asia-Pacific region.

So where is all the gold coming from? Mineweb‘s Lawrence Williams speculates that it is probably coming from the outflow from the biggest gold ETF, GLD, as well as the COMEX warehouses.

Any surplus of supply over demand is usually accounted for by scrap recovery, but falling gold prices will have almost certainly cut this supply source dramatically so the balance will have had to come from other sources – the most prevalent being sales out of the big gold ETFs and out of COMEX and other inventories – some even suggest from central bank leased gold. Indeed there have been some very big, out of the ordinary withdrawals from COMEX warehouses in the past week – all of which is thought to be headed east.

These are exciting times in the gold market. It is definitely not at time to be out of the market. As David Morgan says, this is the time to enter the precious metals markets.

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