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Global Gold Supply and Demand Dynamics

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This post was submitted by Erik Oswald, SchiffGold Precious Metals Specialist. Any views expressed are his own and do not necessarily reflect the views of Peter Schiff or SchiffGold.

In this article from Smaulgld, Louis Cammarosano examines the fundamental supply and demand figures for the gold market. Demand for physical gold has been increasing year over year since 2008, despite rising prices up until 2012. Following the correction from $1900 per ounce, market demand for physical bullion really took off. While many in the West do not appreciate the monetary significance of precious metals, the East has been consuming physical gold and silver at an unprecedented rate. This is evident in the official reserves reported by central banks. On the whole, Western central banks have been decreasing their holdings of physical bullion while Eastern central banks have been all too eager to purchase the surplus.

Countries like China are all too familiar with the dangers of paper monetary systems and have a much longer view of history than most Western central banks. The United States has never experienced a hyper inflationary environment in which the dollar has dropped to its intrinsic value of zero. Because we have exported inflation to our trading partners since World War II, we have been able to stave off the destructive effects of circulating irredeemable paper notes as real money in ever increasing quantities. Meanwhile, the developing BRICS countries have been cementing various trade and financial agreements with one another over the last several years. Their appetite for physical gold and silver is but one of many steps being taken to prepare for a world without the US dollar as a reserve currency.

Gold Supply and Demand

Despite strong global gold demand and claims that a lower gold price will lead to a shut down of unprofitable gold miners, the gold supply/demand dynamic, unlike the silver supply/demand dynamic, is in surplus.

According to Overall Metals Focus’ forecast, global gold supply will be be down 2% at 139 million ounces (4,323 tonnes) for the full year, with supply and demand in balance.

Gold Supply & Demand – Surplus/Deficit

14 11 17 gold demand 1

Gold supply and demand is in surplus with mining production and scrap keeping up with demand.

Will the Gold Supply/Demand Dynamic Remain in Balance?

Yesterday the World Gold Council issued their third quarter 2014 gold supply and demand report that showed a 2% decrease in demand year over year and a 7% drop in supply, with the volume of recycled gold continuing to shrink.

While gold supply/demand appears to be in balance, there are many changes on both sides of the equation that threaten to disrupt the seeming peaceful equilibrium.

Gold Mining Costs Are on the Rise

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Increased gold mining costs now exceed the price of gold and may soon threaten supply.

Gold Demand in China, Russia, India, and Asia is Strong; US/European Gold Demand Muted

The most important trend in gold demand in recent years is the shift from west to east.

In “Gold Around The World” we noted the insatiable gold demand of China, Russia, and India.

In “The Importance of Gold To Nations and Individuals” we noted, in contrast, that gold is of little interest to the vast majority of US citizens, the US government, or the Federal Reserve.

Standard Chartered recently noted that strong Chinese gold buying puts a price floor on the yellow metal.

They should have added that strong gold demand from Russia, India, the rest of Asia and perhaps from Switzerland – if the Save Our Swiss Gold initiative passes on November 30, which would require the Swiss National Bank to purchase approximately 1,500 tons of gold to boost its gold reserves to 20% in accordance with the initiative – would also act as a floor on the price of gold.

Central Bank Gold Holdings

14 11 17 gold demand 3

Russia and China are recent entrants in the top gold holding nations. Switzerland, having sold 1500 tons of gold in the 2000’s, has fallen out of the top five.

Gold Demand by Geography

Gold Demand by Region/Country 1985-2014

14 11 17 gold demand 4

Gold demand is coming increasingly from Eastern nations, and less from the United States and Western Europe.

Gold Demand: East vs. West 1984-2014

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Demand for gold is increasing in the east, while decreasing in the west.

East vs. West Gold Reserves 1950-2013

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As a result of increased gold buying in recent years, the east is gaining a larger percentage of the world’s gold.

Chinese Gold Demand

China is the number one consumer of gold in the world, passing India over the past two years during which time the Indian government has placed import duties on gold.

Indeed China has been importing, producing and hoarding gold. Some speculate that China is accumulating gold to back its currency with gold. Bullionstar recently reported that Song Xin, President of the China Gold Association, General Manager of the China National Gold Group Corporation and Party Secretary China advocates that his country should accumulate 8,500 tonnes in official gold reserves. This would be more more gold than the official holdings of the United States.

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