Latest gold supply & demand data, reviewed for 2009 at a price of $1,000 or more...
AS THE QUANTITY of gold held in trust by the Barclays Gold Trust and the World Gold Council-sponsored gold Exchange Traded Funds across the globe grew larger than the gold holdings of Switzerland this week, it's time to look at the dramatic shape of the likely Supply/Demand formula for 2009, writes Julian Phillips of the GoldForecaster.com.
Since the end of 2008 the gold market has changed shape and it promises to be a structural change should what we see now continue. Just how much gold is being absorbed at the moment from what sales and purchases? To understand this fully, we have studied the last reported figures from the World Gold Council, the marketing body funded by the world's major gold producers.
2009 Gold Supply & Demand
If, in 2009, one projects an average price above $1,000 then jewelry demand should be around 47% lower than in 2008 at 1,199.4 tonnes. We also see industrial demand falling 20% in line with the current recession, down to at 349.6 tonnes. Investment demand for Gold Bars and coins we see rising by at least 40% to 702.8 tonnes, while the really big change comes from Gold ETFs and the like, with new annual demand rising between 677.6 and 1,355.2 tonnes.
Net producer hedging by Gold Mining companies (which we'll explain in a moment) we see no higher than 150.0 tonnes, while new central bank purchases, led by Russia, GoldForecaster.com puts at 414.0 tonnes.
Overall, that makes for total projected demand – if the Gold Price rises above $1,000 an ounce throughout 2009 – somewhere between 3,493 and 4,171 tonnes.
Gold supply, in contrast, could see new mine supply fall sharply, down to 1,930.4 tonnes, as central bank gold sales drift down to just 150 tonnes. Scrap metal supply (meaning old jewelry, recycled for the bullion market) is sure to rise, perhaps reaching 1,413 tonnes. So overall, that would make projected total supply of 3,493 tonnes for this year.
Gold Supply & Demand: Jewelry Suffers
First, you'll note the potential shortfall. There must a trimming of demand for projected supply to satisfy demand. The supply itself can only rise through increased scrap sales. Demand can only be reduced by higher Gold Prices and still greater drops in jewelry demand than the WGC just reported, or by investment demand being held back by runaway prices.
If India takes no imports for the rest of the year (its Feb. imports are reported at zero so far), then they will see reduced internal demand and increased internal supply of scrap metal. This is happening, but we do not believe that India will not continue to behave this way for the rest of 2009.
Yes, jewelry demand will suffer heavily as we have projected, but it's being replaced by demand for physical Gold Bullion and Gold ETF demand.
We must emphasize that demand through Gold ETF structures will dominate the gold market and could take gold to new heights well above $1,000 an ounce in 2009.
Once world No.3 producer AngloGold Ashanti has completed its de-hedging of previous forward sales – made to protect it against the falling Gold Prices of the late 1990s – then all the major gold mining companies will have de-hedged as far as they intend to, leaving only a small hedge position left to be closed. But with hedging still being used to finance new gold mines, after 2009 we do not expect de-hedging to be a demand factor of significance.
Meantime, Russia has just announced that in January it bought 34 tonnes for its gold and foreign exchange reserves, and it intends to keep on Buying Gold for its reserves, thus activating its stated policy of increasing gold reserves to 10% of total gold and foreign exchange reserves. (We have received reports that this takes their purchases above 90 tonnes in the last three months.)
More significantly this could signal a change in attitude by central banks to the gold content of their reserves and could spur buying by other central banks.
But here is the big figure that is changing the entire market. Demand from Gold ETFs – trust-fund structures that enable finance institutions otherwise barred from owning physical property to actually gain exposure to Gold Prices –has soared since the end of December 2008. The gold held by the Barclays Gold Trust and the other major exchange-traded gold funds is growing at such a pace and increasing liquidity to such an extent that major institutions are using this vehicle to hold gold for them.
In the last 9 weeks alone, the largest ETFs have added 243.94 tonnes to the hoard that "backs" the value of their shares, traded on the stock market. And if demand continued at these levels, we would expect to see them add 1,355.22 tonnes in 2009.
For the sake of conservatism, however – and applying the worst-case scenario – we will divide the potential purchases by half, arriving at a figure of 667.62 tonnes for the increase in these ETF funds in 2009.
(Please note that we do this to demonstrate the change in the market, not because we believe this will be the figure bought this year, as we have already seen 243 tonnes bought in the last two months.)
Already, the major Gold ETFs' holdings have overtaken the 1,270 tonnes still held by the state of Switzerland in its reserves, having passed Japan and China some time ago. If the growth continues at this pace, then these funds will soon rank alongside Italy, Germany and France in gold holdings – the very largest gold hoarders outside of the United States of America!
Why do governments hold so much gold? Gold is always accepted and is the ultimate means of payment. It is perceived to be an element of stability in the currency and thus the ultimate value. Now private investors are being joined by large institutions in wanting exposure to this time-honored asset class.
Identifiable investment demand from investors wanting outright ownership also shot higher again during the fourth quarter of 2008, amounting to 304 tonnes (excluding ETF-related off take). And on the other side of the ledger, central bank gold sales are likely to stop at the end of September 2009. That's when the sales that were first announced and implemented 10 years ago under the Central Bank Gold Agreement come to an end. So we would reduce expected supply by 350 tonnes per annum from this source.
Gold Supply & Demand: IMF Gold Sales?
The subject of central bank sales keeps on raising its head in the gold market. Last week saw Virtual Metals in London raise the question "Will the IMF sell its gold now that its cash flow seems to have improved enormously?"
The answer from the International Monetary Fund (IMF) itself is of course, "Yes!" But it has to be, because the bureaucratic steps for that to happen have been set in place and only a meeting of the members of the IMF can change that at a special meeting.
So far, this has not happened. For the sale of 400 tonnes of gold from the IMF to take place however, the key vote has not yet been cast. You see, the United States controls over 16% of the votes, and any resolution needs an 85% majority for such a motion to be carried. Nor can the IMF member's vote until the US Congress has voted on the proposal in Washington, deciding whether it will permit the IMF to sell gold given to it after the end of World War II by the IMF's founder members.
A vote on this subject has not even been proposed by Congress, so until that is on the agenda the likelihood of such a sale is just not there. Meanwhile it sits as a seeming threat to the Gold Price. Or does it? We think not for several reasons.
In the past, IMF gold has been sold at auction so that it can achieve the best overall price. That is the IMF's express undertaking for the benefit of its members and for the institution's long-term finances. On the otherhand, the IMF is the key global proponent of paper money, whether it is in the form of the SDR (Special Depository Receipt) or any other paper money. It will want to support that cause too. Yet it must get the best price it can for the gold it may or may not be able to sell.
So this appears to rule out the sales pattern of the Central Bank Gold Agreement, where an annual 'ceiling' is placed on the amount to be sold. Individual banks then sell in amounts easily absorbed by the open market.
If the IMF follows the maximum price route, then it is likely that a group of buyers or one individual, who offers the best price for the whole amount, will be awarded the gold. There is nothing to stop a series of auctions, however, selling say 100 tonnes per auction. This too could maximize the price for the entire amount sold at each auction.
Either way, this potential sale of 400 tonnes is unlikely to land in the "open market" but will be quickly absorbed off market and have a neutral impact on the Gold Price.
That's why we would not even add it to the supply side of the open market, negating its impact on Spot Gold.