The significance of this demand shift is striking. If we combine China's implied net change of 568 tonnes with the central banks' net change of 256 tonnes, we're left with a demand shift of over 824 tonnes vs. an annual mine supply of 2,810 tonnes. That represents close to a 30% net change in the physical gold market in 2012. If we remove the portion of global gold production produced by China and the other non-G6 central bank gold buyers (like Russia and Mexico - because we know they're not sellers), we're now dealing with over 824 tonnes of demand change hitting an annual global mine supply of a mere 2,170 tonnes - representing a 38% shift.26 Although we have been continually reminded that 'fundamentals don't matter' in today's marketplace, there isn't a physical market on earth that can withstand that type of demand increase without higher prices over the long-run, and the gold market is no different. There are no sellers of physical gold that we know of who can satiate that scale of new demand, and global gold mine supply has been virtually flat for over the last ten years. Even if we incorporate the estimated 1,600 tonnes of "recycled gold" that the World Gold Council insists on including in its annual gold supply estimates, the numbers above still suggest a net change of 19%.27 Who is going to give up their gold purchases to make room for this scale of new demand? Where is the gold going to come from? We ask because we don't actually know.
We have written at length about the disconnect between the paper gold price and the physical gold market. If the demand changes stated above applied to any other market, the investing public would lose their minds. Could you imagine, for example, if the demand shifts described above were applied to the global oil market? What would happen if a single country came in from nowhere and increased its oil purchases by a factor equivalent to 30% of the world's annual oil supply? We are students first and foremost of the physical market, and the numbers stated above speak for themselves. We remain confident about gold for the simple reason that the demand we are now seeing for physical is completely unsustainable without higher prices, and we do not see that demand abating in the coming months. The US recovery is not happening. Europe is poised for yet another full-fledged economic crisis, and the BRICS countries continue to aggressively convert to hard assets like gold in order to protect themselves from currency debasement. The paper market for gold can continue its charade, but demand in the physical market will soon overpower it through sheer momentum - there's only so much physical to go around, and it appears that there are some very large buyers that are eager to take it.
Footnotes:
1. Cooper, Stephen and Mayo, Raemeka (April 24, 2012) "New Residential Sales in March 2012". U.S. Department of Housing and Urban Development. Retrieved April 24, 2012 from http://www.census.gov/construction/nrs/pdf/newressales.pdf
2. Isidore, Chris (April 27, 2006) " New Home Sales Soar". CNN Money. Retrieved April 20, 2012 from http://money.cnn.com/2006/04/26/news/economy/newhomes/index.htm
3. Reuters (April 19, 2012) "U.S. existing home sales fall 2.6% in March". Montreal Gazette. Retrieved April 20, 2012 from http://www.montrealgazette.com/business/existing+home+sales+fall+March/6484888/story.html
4. Molony, Walter (April 25, 2006) "Existing-Home Sales Rise Again in March". National Association of Realtors. Retrieved on April 20, 2012 from: http://archive.realtor.org/article/existing-home-sales-rise-again-march
5. Fletcher, Michael A. (April 6, 2012) "U.S. hiring slowed sharply in March; unemployment fell to 8.2%". The Washington Post. Retrieved April 19, 2012 from http://www.washingtonpost.com/business/economy/us-hiring-slowed-sharply-inmarch-unemployment-fell-to-82-percent/2012/04/06/gIQAroNXzS_story.html
6. Gibbons, Scott and Sznoluch, Tony (April 26, 2012) "Unemployment Insurance Weekly Claims Data". United States Department of Labor. Retrieved on April 26, 2012 from http://www.dol.gov/opa/media/press/eta/ui/current.htm
7. Department of the Treasury (March 31 1, 2012) "Monthly Treasury Statement". U.S. Treasury. Retrieved April 15, 2012 from http://www.fms.treas.gov/mts/mts0312.pdf (see pg 34)
8. Associated Press (April 13, 2012) "U.S. inflation rate cools in March". CBC News. Retrieved April 20, 2012 from http://www.cbc.ca/news/business/story/2012/04/13/us-inflation.html
9. Rugaber, Christopher S. (April 19, 2012) "US unemployment claims signal slower hiring". Associated Press. Retrieved April 19, 2012 from http://hosted2.ap.org/APDEFAULT/3d281c11a96b4ad082fe88aa0db04305/Article_2012-04-19-US-Unemployment-Benefits/id-6c727abcd67641f193cdb091302d6424
10. Short, Doug (April 20, 2012) "ECRI Weekly Leading Indicator: The Growth Index Slips". Advisor Perspectives. Retrieved on April 20, 2012 from http://www.advisorperspectives.com/dshort/updates/ECRI-Weekly-Leading-Index.php
11. Reuters (April 25, 2012) "Durable Goods Orders Show The Sharpest Drop in 3 Years". New York Times. Retrieved on April 25, 2012 from http://www.nytimes.com/2012/04/26/business/economy/us-durable-goods-orders-fall-sharply.html
12. Kazer, William and Li, Liu (April 22, 2012) "Initial HSBC China PMI Gains In April But Still In Contractionary Range". The Wall Street Journal. Retrieved on April 24, 2012 from: http://online.wsj.com/article/BT-CO-20120422-717772.html
13. Bjork, Christopher and Roman, David (April 18, 2012) "Spanish Banks' Bad Omen". The Wall Street Journal. Retrieved April 19, 2012 from http://online.wsj.com/article/SB10001424052702303513404577351554212260294.html
14. Bloomberg Editors (April 12, 2012) "Europe's Capital Flight Betrays Currency's Fragility". Bloomberg. Retrieved April 15, 2012 from http://mobile.bloomberg.com/news/2012-04-12/europe-s-capital-flight-betrays-currency-s-fragility?category=%2Fnews%2Faustralia-newzealand%2F&BB_NAVI_DISABLE=BIZ
15. Foxman, Simone (April 17, 2012) "Chart of the Day: The Run On Spain". Business Insider. Retrieved April 19, 2012 from http://www.businessinsider.com/chart-of-the-day-deposits-disappearing-from-spanish-banks-2012-4?utm_source=alerts&nr_email_referer=1
16. World Factbook (April 13, 2012) "Spain Section" Central Intelligence Agency. Retreived April 19, 2012 from https://www.cia.gov/library/publications/the-world-factbook/rankorder/2186rank.html
17. Billington, Ilona (April 24, 2012) "Euro-Zone's Private Sector Shrinking Fast". The Wall Street Journal. Retrieved on April 24, 2012 from http://online.wsj.com/article/SB10001424052702303459004577361250582738454.html?mod=googlenews_wsj
18. Baghdjian, Alice (April 23, 2012) "German manufacturing shrinks at fastest pace since 2009 - PMI" Reuters. Retrieved on April 24, 2012 from http://uk.reuters.com/article/2012/04/23/uk-germany-manufacturing-idUKBRE83M0DO20120423
19. Lowrey, Annie (April 20, 2012) "I.M.F. Adds $430 Billion in emergency Lending Ability". New York Times. Retrieved April 20, 2012 from http://www.nytimes.com/2012/04/21/business/global/imf-adds-430-billion-in-emergency-lending-ability.html?_r=1
20. Ibid.
21. Associated Press (March 29, 2012) "India endorses BRICS bank". CBC News. Retrieved April 15, 2012 from http://www.cbc.ca/news/world/story/2012/03/29/brics-summit-india-bank.html
22. Thomson Reuters (April 10, 2012) "Hong Kong February Gold Flow to China up 20%". CNBC. Retrieved April 15, 2012 from http://www.cnbc.com/id/47012323/Hong_Kong_February_Gold_Flow_to_China_Up_20
23. World Gold Council (April 2012) "Demand and Supply Statistics". World Gold Council. Retireved April 25, 2012 from http://www.gold.org/investment/statistics/demand_and_supply_statistics/
24. Reuters (April 11, 2012) "Chinese Gold Imports From Hong Kong Rise Nearly 13 Fold - PBOC Likely Buying Dip Again". Goldcore. Retrieved April 15, 2012 from http://www.goldcore.com/goldcore_blog/chinese-gold-imports-hong-kong-rise-nearly-13-fold---pboc-likely-buying-dip-again
25. Williams, Lawrence (April 24, 2012) "Twelve countries increase their gold reserves in March - some significantly". Mineweb. Retrieved April 25, 2012 from http://www.mineweb.com/mineweb/view/mineweb/en/page34?oid=150086&sn=Detail&pid=102055
26. George, Michael (January 2012) "Gold". U.S. Geological Survey. Retireved April 25, 2012 from http://minerals.usgs.gov/minerals/pubs/commodity/gold/mcs-2012-gold.pdf
27. World Gold Council (April 2012) "Demand and Supply Statistics". World Gold Council. Retireved April 25, 2012 from http://www.gold.org/investment/statistics/demand_and_supply_statistics/
