The big picture for gold's global supply-demand balance...
CENTRAL BANKS used to be steady of Gold Bullion, but switched in 2009 to being net buyers – as a group, worldwide – for the first time in two decades.
HAI: How do you see emerging-market gold demand playing out from here?
Jason Toussaint, WGC: If we look at China, most importantly, there are two segments of the market which are important to look at: domestic citizens and their affinity towards gold, and also the central bank and government reserves. Now, when we compare China's national reserves, they hold approximately 1.6% of their total reserves in Gold Bullion, as opposed to Western markets like the US and the UK, which hold anywhere between 65 and 80% of their assets in Gold Bullion.
The People's Bank of China has just made statements as recently as this month that they are taking steps to make the markets more open for gold buying domestically. We will see, most likely, increased buying by the Chinese central bank, as well as domestic investors. And I think the key there – and you've hit it on its head – there is a very historical, very strong bond or affinity towards holding gold as an asset in the Chinese marketplace.
So what we see is that when the demographic changes from somebody who's been, say, working outside the city and has accumulated some means of wealth, the first thing they want to do is accumulate gold. And that strong affinity is a huge factor for long-term gold demand. And that is also the same paradigm in India.
HAI: Does it worry you that this desire to boost gold reserves comes at a time when we've already seen a very substantial increase in the Gold Price? Adjusted for inflation, it still hasn't surpassed the peak that it hit in 1980, thirty years ago...
Jason Toussaint: Well, times have changed, obviously. And I think one point that should be made is that central banks, before 2000, when they were selling their gold, they would basically come to the market and dump gold on the market, which would destroy confidence in the Gold Price.
So, if you were an investor and you came to the market, and then let's say a central bank – the British central bank – comes out and sells X-hundred tons in the market in one day; you've just lost a lot of wealth. In late 1999, the World Gold Council was instrumental in negotiating what's called the Central Bank Gold Agreement which Western central banks agreed to.
HAI: That limited those sales, right?
Jason Toussaint: Exactly, in terms of tonnage, but then also how they liquidate that gold on the marketplace so as to not disturb the underlying market by coming with outsized orders. It's on its third renewal now.
HAI: Is there pressure among some of these European nations currently running deficits to sell gold as a means to cutting their debts?
Jason Toussaint: They could, but we're not seeing that now. In fact, net-net, central banks have moved from a fairly large sustained source of supply, coming onto the market every year, to a slight six tonnes on the demand side. So in aggregate, Western central banks are slowing their selling. And then, we also have Eastern central banks. Obviously, we've had announcements from India, China, Maldives as well, small accumulation, that we think that trend is just continuing.
We would think that central banks may stay on the demand side for a bit of time.
HAI: On the supply side, a lot of new capital investment is going into Gold Mining production globally. How does that bode for the price picture going forward?
Jason Toussaint: There's two things to look at there. One is what is the current rate of Gold Mining production. And, unfortunately, the older mines, the richest mines, if you will, in South Africa, some of those are three to four miles into the earth. And the ore grade that they are bringing to the surfaces is deteriorating. So, the amount of ounces per ton mined is slowing.
The other, more important aspect, is that gold is becoming even more scarce. It's obviously a precious asset, and it has been for thousands of years. It's becoming harder to find. So budgets, both in terms of mining itself and building new mines, is one thing. The more important factor is an explosion in exploration budgets; absolutely through the roof.
However, against that backdrop, mining, overall, is not finding new sources of gold supply. So the easy gold, if you will, has been mined off the Earth. And so it is becoming more and more precious.
One statistic I look at is, if we assume today that no further discoveries of gold are found, and we continue to mine at the rate we are mining today, we would mine all of the gold identified in 15 years.
HAI: Very informative. Thank you.
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