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Demand for Physical Gold Up, Supply Down in First Half of 2017

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It’s easy to get caught up in what the Fed will do next, or the latest political brouhaha in Washington D.C. And of course, this stuff matters. But when it comes to gold, you should never lose sight of fundamentals.

Nothing is more fundamental than supply and demand. Based on the GFMS Gold Survey 2017 H1 Update Outlook, the fundamentals for gold are trending in a positive direction. Demand is pushing upward, while supply is falling.

Demand for physical gold rose to 1,895 tons in the first half of 2017, a 17% increase over the same period last year.

Comparing the first and second quarter of this year also reveals an upward trend. Demand climbed in Q2 2017 to 957 tons. That was up from 938 tons in Q1, a 2% increase.

Meanwhile, total supply dropped 5% in the first half of the year. Mine output was stagnant, falling by 0.2%. Production dropped precipitously in China and Australia, the world’s number one and number two producers. The amount of scrap gold also fell, helping to drive the decline in supply.

In many ways, the demand increase signals a return to normalcy after a tumultuous 2016.

After the rollercoaster ride of events for the gold market in 2016, from a jewelers’ strike to Brexit to Trump to demonetization, 2017 has avoided similar dramatic events in the first half, at least from a gold perspective with far right candidates seeing little success in a range of European countries. Indeed the first half of this year has arguably been more of a reversion to normality across much of the gold market, with neither the highs (of ETF demand) or lows (of truly pitiful Asian demand) that were recorded in the first half of 2016 being repeated.”

While the trends are positive, demand still hasn’t returned to 2015 levels. Despite falling supply, there was a market surplus of 138 tons in the first six months of this year, compared to a balanced market during the same period of 2016.

Indian demand was a big factor in pushing global demand higher. Gold imports into the country have already topped the total for all of 2016. Indian gold demand in Q2 surged by 126% year-on-year. Demand for gold in India hit the highest level in the last six quarters. India imported 272 tons of gold in Q2 2017, up from 78 tons in the same period last year.

While Indians rushed to buy gold, Americans sat on the sidelines. Investment in physical gold in the US plunged 40% year-on-year, falling to 18.5 tons.

This staggering decline was mainly driven by a generally weak investment appetite for gold combined with very low coin fabrication.”

Peter Schiff has speculated a lot of Americans who normally buy gold are Trump supporters, caught up in unwarranted optimism. They think the Republicans will be able to push through significant economic policies such as repealing Obamacare and reforming the tax code.

You have the opposite of a bubble in gold. Certainly, if you look at the United States, Americans are buying less gold now than they’ve done since the bull market began in 1999 – 2000.  Sales from the US Mint have collapsed. At SchiffGold, we just had our weakest quarter since the company has been in existence. And it’s not just my firm. It’s industry-wide. Americans are not buying gold, even though gold prices year-to-date are up more than the S&P 500. But the people who typically buy gold in America voted for Trump, and they’re no longer worried about the economy. So they’re not buying gold. They’re buying stocks instead, and I think they’re making a big mistake. They should be selling their stocks and buying even more gold.”

The price of gold has increased 8.5% since the beginning of the year. Interestingly, gold has traded in a very narrow range over the last four months, according to Bloomberg.

In the past four months, gold prices moved in a 7.6% range, the least in 10 years, while 120-day volatility is at the lowest since 2005. That’s amid unprecedented uncertainty over US President Donald Trump’s legislative program and divisions in the UK over plans to leave the European Union … While irritating for traders who make a living betting on strong moves, the sleepy gold market also reflects stability in other assets, with measures of global shares at record highs. Investors from currencies to equities have been boxed in between concerns over a weakening dollar and speculation that central banks will tighten money supply.”

Investors tend to fixate on current prices and price trends, but a sidebar in the GFMS report makes a good point. When it comes to gold, it’s not all about the current price. It’s about value.

This is where we come to an important distinction – between ‘price’ and ‘value.’ Gold’s price is tangible and subject to market forces. Gold’s value is far more conceptual. It is reflected in its anonymity and portability, while its very low or negative correlation with virtually all other asset classes, as well as its role as an inflation hedge, makes it a valuable component of a portfolio as it expands the efficient frontier. So if an investor is looking to spread risk across his portfolio, it doesn’t matter what price he pays for the gold because over time its contrarian spirit will mitigate his risks.”

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