Western investors to dominate gold price this year

It was great to get Income On Demand launched last night.

But I know quite a few people will have missed the online event. I had few emails from people saying they were travelling, or otherwise engaged.

So here’s the deal. You can still watch the recording BUT you need to do so before tomorrow night.

After that we’re taking it down.

Before I share the link to go and watch it, make sure you’ve set aside a couple of hours.

I know that sounds like a lot, but we wanted to go through the strategy thoroughly.

There’s a lot of good info here, so make a brew (or if you’re an animal like me, eat your dinner in front of your laptop!)

Click here to find out how you can make a steady income – one you could potentially live on – from a lump sum of cash.

Yesterday was a busy old day – not just with the launch, but I also went to a gold event.

Our new office is only street away from Bloomberg, which was hosting the launch of Gold Focus 2017, an annual gold industry statfest and chin-stroke-athon from consultancy Metals Focus.

I sound dismissive – it’s actually a great way to keep in touch with the gold market, at both a high level and digging down into the weeds.

So, for example, I can now tell you what happened with gold mining supply last year (it went up, but at a much slower rate than previously), or how Malaysian gold jewellery exports fared (they fell).

I’m going to share a couple of charts I found especially interesting from the presentation.

The first shows Swiss gold bullion trade flows. A lot of refinery action happens in Switzerland, making it a kind of transit point for physical gold moving from one part of the world to another.

The reason is that different forms of gold demand need different forms of gold to supply it.

So a western ETF, say, will have a load of 400 ounce bars in a warehouse, while a Chinese retail buyer is likely to want a kilo bar of “four nines” purity (i.e. 99.99% pure).

Back in 2013, there was a lot of talk about how Swiss refiners were struggling to keep up with demand from East Asia.

I remember it well – I was working in the gold industry at the time.

What happened was this: the gold price dropped sharply, and Asian buyers were grabbing the bargain as Westerners sold.

The metal had to be refined into the appropriate form, and it clogged up the Swiss refineries for a time.

The interesting thing is that to some extent this has gone into reverse.

Certainly you saw a fair amount of dishoarding from Asian holders, with the metal making its way back westwards to Switzerland:

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Source: Swiss Customs Administration via Metals Focus

The 2013 story had a clear narrative: gold going from “the West” to Switzerland, and from there onwards to “the East”.

Last year, though, was more mixed, and a bit quieter. A fair bit coming from Asia, but a greater amount heading towards Asia.

Export flows from North America and Europe netted off to around nought.

I mention this not because it’s particularly exciting, but precisely because it isn’t.

Last year wasn’t a story of frantic demand from Asia. Indeed, the Metals Focus take is that physical demand’s not looking too supportive of gold prices right now.

That’s a fair one. The traditional big demand sources (China and India) haven’t posted marquee demand numbers for a while now.

Fears of slowdown in China and various anti-corruption measures in India have served to constrain demand.

The more positive aspect of all this is that neither was 2016 a year of Western investors dumping gold.

Quite the reverse, actually – after a three-year bear market investors seemed to rediscover at least a little bit of their appetite for gold.

Hold that thought while I share the second slide I want to share:

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Source: Metals Focus

Looking ahead to the rest of the year, Metals Focus expects the gold market to be in surplus.

What does this actually mean?

Well, your first thought might be “Crumbs, a surplus, that’s bearish for prices, right?”

But then, of course, the chart above shows a big deficit in 2013, a year in which gold prices fell.

And a surplus last year, when gold ended up on the year as a whole.
I’ll explain.

The surplus/deficit figure comes from Metals Focus adding up all the supply from sources like the gold miners, recycling and central bank selling (which is actually a demand source since they’re currently net buyers).

They then add up all the demand from jewellery makers, industry, people buying physical coins and bars and, yes, central banks, and subtract that from the supply figure.

The difference is the surplus.

The market, though, has to balance. You can’t sell gold that no one’s buying, and you can’t buy it if there’s none being sold to you.

The balance comes from investors, mainly Western investors, taking long positions in (predominantly) gold futures and gold ETFs.

So the surplus figure gives an indication of how much gold investors have to absorb to support the price.

As you can see from the chart, they absorbed a bigger surplus last year than Metals Focus thinks they’ll need to this year.

But, of course, those investors already in gold may feel they already have their allocation.

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