Why Increased Western Gold Demand Could Lead To A Gold Supply Shortage

Gold’s big news story of 2013 was undoubtedly the price drop, followed by the huge gold ETF outflows.

It seems that the tide is turning now, both for the gold price and the ETF gold holdings. There is a good reason to believe that the new appetite for gold ETF’s is fundamentally much more important than a rising gold price. This article makes the case for that.

After the steep gold price drop in April 2013, we discussed the mass exodus of gold holdings in the GLD ETF (see this article):

  • GLD holdings in the first week of January 2013: 43,149,400.96 ounces [1342,96 tonnes]
  • GLD holdings today: 33,386,040.80 ounces [1038,42 tonnes]

In addition, we wrote in the same article: “The difference of 10 million ounces of physical gold represents 302 tonnes. To put that figure into perspective, it is 30 times larger than the gold holdings of Cyprus; it would be the 18th largest gold holding in the world, comparable with the ones of Saudi Arabia and the UK.”

Fast forward to 2014, where do we stand with the gold holdings in the GLD ETF? According to this Mineweb article, the GLD ETF gold holdings were 793.16 tonnes on Jan 31st 2014  and they increased to 803.7 tonnes on Feb 27th 2014.  The author adds to it: “Between the beginning of January 2013 and the beginning of February 2014, this single ETF had shed a massive 557 tonnes of gold as investors deserted it in droves, supposedly in favour of the seemingly ever rising general equity markets.”

The blue line on the following chart represents the GLD gold holdings (chart courtesy Goldchartsrus, the most comprehensive gold chart center on the internet).

GLD_gold_holdings_march_2014

Why is the break of this downtrend so important? The key lies in this question we asked in the same article we wrote a year ago:

The point is not the sale of the gold … The key question is who has been buying these gigantic amounts of physical gold? The gold is not being consumed, so it is in some hands right now. Which ones? We asked the question a couple of weeks ago, but it seems no clear answer exists at this point.

We have the answer to that question meantime.

The mainstream media has focused wrongly on the gold outflows. That made up for interesting headlines, but it was not the most relevant part of the story. The most crucial point was related to the buying. It is clear, meantime, that the physical gold has been flowing to Asia (primarily China) through Switzerland (where refiners have been working overtime since May 2013, melting down the large wholesale bars into smaller pieces for smaller investors and retailers in China).

All this implies that the gold that exited the ETF’s is in strong hands now. It is as sure as a fact that those gold owners will keep their metal in the years to come.

From where will the gold ETF source their gold once the ETF demand turns higher again? It is clear that a supply shortage is a very likely outcome of renewed interest in gold ETF’s. We know that newly mined gold is very limited compared to the existing above the ground gold, so it cannot meet Chinese and Western demand. In fact, above the ground gold IS the supply. So what happens if the appetite for gold in Asia remains strong, if those existing gold owners do not supply their gold to the market, and Western demand increases again? A likely outcome is that a supply shortage develops on top of an increasing demand, reinforcing the uptrend.

Do you hold your gold?

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