The following article is presented courtesy of Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!), www.FinancialArticleSummariesToday.com (A site for sore eyes and inquisitive minds) and the FREE bi-weekly Market Intelligence Report newsletter (register here; sample here) and has been edited, abridged and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. This paragraph must be included in any article re-posting to avoid copyright infringement.
The price of gold has bottomed three times since July of last year at what seems to be strong support at $1250/oz level. Whether the price of gold will go up or go down from here, [though, is up] for…debate. See chart below for the recent gold price:(click to enlarge)
Gold demand is best summarized by the data…[as per Table 1 below].
The total worldwide demand per quarter is around 1,000 tonnes for the last eight quarters but we notice that the ETF demand was negative in 2013…In Q1 2014, the outflow of gold from ETFs stopped. Whether ETF gold will revert to inflow in the next few quarters remains to be seen.
The supply of gold is coming from mining [is shown in Table 2 below]…is averaging about 730 tonnes per quarter and trending up slightly.
…The average cost per ounce of gold produced by four major gold miners – Goldcorp (GG), Newmont (NEM), Kinross (KGC) and Barrick Gold Corp (ABX), are shown in Table 3 (Visual Capitalist):
Many smaller miners without the economy [of] scale have much higher costs than the big ones. That is the reason all miner shares were hit much harder than the gold price itself in the gold bear market. While gold price dropped by 30% from its high, the gold miner shares dropped more than 50%. GDXJ, ETF of smaller gold miners, dropped by a whopping 73% from its high. If the gold price drops below $1,100, many unprofitable mines will be forced to shut down or reduce production. The gold supply from mining will reduce dramatically. This provides a very strong support for the gold price at $1,100
The reason for the high cost of gold production is because an average grade gold mine produces only 5.3 grams of gold for each ton of earth mined. The cost will continue to rise…[as] the higher grade ores are getting scarcer.
Gold production is decreasing in the four major gold producing countries – South Africa, Canada, the U.S. and Australia – despite the fact that the world’s top 20 gold producers increased their gold exploration budget from $300 million in 2002 to $1.4 billion in 2013. The decline is particularly significant in South Africa, where gold production fell 50% in the last decade. The higher investment and the employment of better technology in gold exploration does not help to produce more gold. The outlook of gold supply is not bright.
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Gold production in China is offsetting, somewhat, the decline of gold production in the above mentioned four major gold producing countries. China’s gold production has been rising – now at the level of 428 tonnes per year in 2013 – overtaking South Africa as the world leading gold producer since 2007.
China produced about 15% of the gold in the world in 2013 however China’s gold production may not help to suppress the gold price for two reasons:
- China does not export any of its domestically produced gold for strategic reason – it is trying to diversify its foreign currency reserve by shifting toward gold away from US dollars…All Chinese gold miners are small scale, and most of the ores are low and medium grade, thus…it is quite possible that the gold production cost in China exceeds $1,200 per ounce. [As such, given] the current gold price, China finds it cheaper to import gold and, therefore, despite [the fact] that China is the world’s leading gold producer; China is also the world leading gold importer.
- China’s known gold mine reserve is estimated at 8,000 tonnes, less than three years of worldwide production. At the current mining rate, it will be depleted in two decades. The reason that China today still has enough gold mines is because China is a late comer in the gold production and most of its mines are relatively new. As late as 1980, China’s gold production was only 10 tonnes.
The supply / demand gap
The supply and demand data…as per Table 4 below shows that demand is exceeding supply by a wide margin. Apparently, the gold has to come from someone’s inventories or vaults.
The gold price and the gap between supply and demand are plotted in the Chart below. We can see a rough correlation between these two.
The World Gold Council attributes the gap filler as being gold recovered from industry [i.e. scrap gold]. However, this is not a satisfactory explanation. If we look at the gap of supply and demand and the industrial use of gold [as shown in Table 5 below], we find that it is hard to reconcile the two.
The supply demand gap is in average 3.28 time as large as the industrial usage during the time frame of analysis. It is physically impossible for the recovered gold from industrial usage to fill up this gap because industry cannot spit out more gold than it consumes.
Reduction in the COMEX gold inventory [see Table 6 below] is one possible source given that, even if industry can recover 100% of the gold it consumes, it is still far from enough to close the gap. The quarterly COMEX gold inventory is listed in Table 6 below.
In 2013 COMEX had a net outflow of gold 103.7 tonnes [reducing] its inventory to a level not seen since 2008, right before the gold price doubled in the next four years…because the open interest of paper gold trading is much higher today than in 2008. The potential owner for each ounce of gold is at a scary level of all time high of 55 [see the 4th graph below].
There are other outflows of gold into the market as well…such as the gold holding of SPDR Gold Shares [as shown in table 7 below] which is down dramatically…
Central banks are the largest owners of gold in the world. The historical gold holding of the Central Banks is shown in the Figure below:
Since 2007, Central Banks have reverted collectively to net gold buyers from net sellers. This is a significant change because of their huge positions in gold and on 19/5/2014, the European Central Bank and 20 other European central banks signed the fourth Central Bank Gold Agreement. In this agreement, the signatories agreed that gold remained an important element of the global monetary reserves and self-imposed a sell limit. Even before the signing of the agreement, in the last five years, major gold holders from European central banks have virtually stopped all gold sales – selling less than 25 tonnes of gold against an agreed limit of 2,000 tonnes.
China’s catch-up game to increase its gold reserve on par with the US and EU is apparent from its gold imports. The chart below shows China’s accumulated imports since September 2011. Due to the negative sentiment of gold in the West, China has been able to buy gold at a cheap price. SPDR Gold Shares ETF alone dumped 501 tonnes of gold between Q1 2012 and Q1 2014. China is like a black hole for gold – whatever goes in, does not come out again. Now that the ETF gold outflow has stopped (Table 1), there is likely to be a squeeze in the gold market in the near future.
…Comparing the price of gold against US debt…is an excellent way to measure what the price of gold should likely be [as shown in the chart below]. It reflects the effect of more dollars chasing less available gold supply. The supply is determined by what is available for trading, not what is locked up in various vaults around the world. It is the supply and demand that decides the real price action. The analysis shows that the upside for gold is more likely than its downside.
Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.
*http://seekingalpha.com/article/2290503-where-is-gold-price-heading-a-supply-and-demand-point-of-view? (© 2014 Seeking Alpha )
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