Monday, March 29, 2010

China is Sucking Up the World's Physical Gold Supply...

If the World Gold Council (WGC), which is probably the only industry trade group on the planet that does nothing constructive to support the product it is supposed to promote, publishes a report that highlights the growing demand for physical gold in China, the real demand in China is likely at least 2-3 times greater than acknowledged by the WGC. Those who study the gold market have always had issues with the reliability of WGC, as it usually underestimates demand and overstates supply.

China's Central Bank has reported the accumulation of gold over the past few years, but there isn't really anyone who takes seriously the amount China reported last summer any more than anyone takes seriously the amount of gold held by the U.S. Treasury. Obviously, China is understating its gold holdings and the U.S. has refused to let anyone count the gold and verify quality since Eisenhower was in the White House, indicating that the U.S. substantially overstates the amount of gold it owns. has posted the report from the WGC. They've pulled out the salient points and have linked the whole report. Here's an excerpt:
The World Gold Council (WGC) believes that gold consumption in China will continue to catch up with the rest of the world following the deregulation of the Chinese gold market in 2001. Demand from China’s two largest sectors (jewellery and investment) reached a combined total of 423 tonnes in 2009 but domestic mine supply contributed only 314 tonnes during the same year...
Here's the full link: China's Insatiable Demand for Gold. I would like to point out that the WGC report omits the amount of gold being accumulated by the Central Bank. We have no idea what that number is, anymore than we know how much U.S. gold is leased out by the Fed in any given year. Both are large and it's likely that the a large amount of the gold leased out by the Fed ulitmately ends up in the possession of China.

I would like to also remind readers that the Chinese Government recently implemented programs which enable the Chinese citizens to easily accumulate gold, including legalizing private ownership of silver. That will light a demand fuse that ultimately will drive the price of gold/silver much higher.

On another note, I noticed on Friday that spot gold started trading at a price higher than the June gold future "front month" contract. This state of backwardation, as it is known, when it occurs in commodity futures, is indicative of the demad for spot market deliveries exceeding spot market supplies, driving the spot price higher than the future price. And I'm not referring to the availability of coin dealer retail inventory. This refers to the global "big boy" gold, which is the 400 oz. LMBA (London bar market) bars, which are utilized by Central Banks and wealthy investors. Usually the condition of backwardation implies that we can expect higher prices until either demand subsides or supply arrives.

Given that increasing the supply of 400 oz. bars is difficult, especially now that Central Banks are net buyers rather than sellers, the big banks with large short positions in gold futures on Comex, and forwards in London,  better pray that the demand side of the equation subsides. There's no rush like a gold rush...


  1. Cannot wait for the day the fiat scam of paper gold gets blown sky high! At least you can get settlement in cash, HA!

  2. if I am not mistaken, this is yet the second incidence of negative basis or backwardation, the first occurring on December 2, 2008, which was the source of Antal Fekete's "Red Alert" which received wide circulation at that time. He states "once entrenched, backwardation in gold means that the cancer of the dollar has reached its terminal stage" and goes on to suggest that eventually gold will enter permanent backwardation at which point "the people controlling the supply of monetary gold cannot be persuaded to part with it" at any cost. I assume these are the global big boys you refer to.

    In addition, the massive short liquidations in the most recent COT release in S&P as well as the commercial positioning in gold, silver and copper portend some possible big movements upwards in the metals.Though is sounds too good to be true, it looks like, just maybe, those Comex gold short positions are about to get steamrolled.

  3. yardfarmer, almost every year for at least the past 6 years that i've been trading futures there has been periods in which we go into backwardation. it typically precedes a nice move higher. I can't remember exactly when, but i think it was late spring 2008 that we had about week or so when spot to front-month had a $3-4 constant inversion.

    if you look at Indian/Shanghai/Viet Nam premiums right now, it is clear that he east is really hoovering physical gold, for now anyway. Fekete is right on the money about what it will be like, although expect that the Comex and the LME will change the rules and allow cash settlement, as getyourselfconnected alludes.

  4. gyc, you love throwing out a sarcastice bone! i love it!

  5. Dave, how far have you gotten into reading the posts from "ANOTHER"? Apparently to him the LBMA and the paper ponzi game was supposed to implode a decade ago.

    If I remember correctly, he said claims on physical was oversold 3X through paper... Now its apparently 100X in a recent zerohedge article.

  6. got it all covered. are you looking for a reason as to why another and GATA are wrong?

    how extreme can the paper to gold ratio get? I don't know. We'll know when we know and when we know, we'll wish we didn't know.

    Look at history. Look at the Dutch tulip bulb episode. People mortgaged their homes to buy one bulb. How about the internet mania? I was short Commerce One at $200/sh. CMRC had NO revenues and was nothing more than a "B2B" url. It ran up to $600 within a month of my shorting it at $200. The stock went to zero w/in about 24 months.

    All I know is the eventually the paper gold ponzi scheme - like all ponzi schemes - will collapse and likely take the western financial system with it.

  7. At the core this may serve as a real lesson; fiat "works" for paper because paper has no tether to anything tangible. The paper gold market (via leases, swaps, etc) exists on a scale that dwarfs what gold can be actually had in hand. How can all these contratcs be based on, well, nothing? Good question indeed. Welcome to our economy.

  8. A gold standard takes away any possibility of human character defects infecting the control of money.

  9. As far as China goes, they are using the Sun Tzu playbook. As such, they operate in stealth while emitting mixed signals.

    At some point, they will bring their entire game plan to bear, in a surprize attack, and her enemies will surrender without firing a shot.

    Joe M.

  10. Agree Joe. Been waiting to see how they address what is obviously broken with our system and U.S. dollar. It will not be pretty when they decide to flinch.