The Coming Big Change in Gold Investing

There seems to be no shortage of conflicting analysis on the future of the gold market.  Some analysts believe gold will head lower towards $1,100, while others see the yellow metal moving higher towards the $1,500 level.  In all actuality, these short-term forecasts are meaningless as they fail to understand the coming big change in gold investing.

Up until the past 40+ years, gold has been used as money by the majority of advanced societies.  After Nixon dropped the convertibility of the dollar for gold in August of 1971, gold began trading in the futures market at the NYMEX in 1975.  Since then, the price of gold has been valued relative to its fabrication and investment supply and demand forces.

Philip Klapwijk, former chairman of GFMS gave a presentation titled “Is the Gold Bull Market Over?” at the LBMA/LPPM Precious Metal Conference in October.  During his presentation he provided the following chart:

Gold Surplus

(original chart includes my annotations)

Klapwijk is implying that even though the gold surplus is forecasted to decline in 2013 compared to the past several years, it is still very large historically.   GFMS figures the surplus by subtracting fabrication (minus coins) from the total of mine supply and gold scrap.

As you can see from the chart, the supposed gold surplus was much smaller during the 2003-2005 time period.  At this point in time, gold traded from an average of $363 in 2003 to $445 in 2005.

Interestingly, as the gold surplus increased, so did the price of gold.  From 2008 the gold surplus increased from approximately 1,000 tonnes to average around 2,000 tonnes between 2009-2012.

Here are the average annual prices of gold (Kitco):

2008: $872

2009: $972

2010: $1,225

2011: $1,571

2012: $1,669

2013: $1,438

During the 2008-2012 time period when the supposed gold surplus doubled, so did the price of gold… not quite, but it did rise from $872 in 2008 to $1,669 in 2012.

There are several points worth discussing here.  First, if there wasn’t such a large gold surplus, there may not have been enough available supply to meet demand.  This can be clearly seen in the next chart from Klapwijk’s presentation:

World Gold Investment

Investment demand doubled from less than 1,000 tonnes in 2008 to nearly 2,000 tonnes in 2009.  GFMS states investment demand as the sum of implied net investment, physical bar and all coins & medals.

Second, it has been investment demand that has been driving force in pushing the price of gold higher. If we take out implied net investment and look at just physical bar and coin demand, this is the result:

Total Global Gold Bar & Coin Investment

We can clearly see that as physical bar & coin demand increased substantially, so did the price of gold.  In 2011, gold hit a high of nearly $1,900 in Sept. 2011.  In the following two years as the price of gold moved lower, so did the physical investment demand.

However, with the huge take-down in the price of gold in April & June of this year, physical investment demand increased the most in history.  In just the first half of 2013, physical bar and coin demand hit a record of 914 tonnes.

Third, fabrication demand has had the least impact on the price of gold.  Why is this so?  If we look at the first chart again, the so-called gold surplus fell to its lowest level in 2005 while the price of gold only increased from $410 (2004) to $445 (2005).

The Coming Big Change In Gold Investing

The most important event most analysts fail to recognize is the “BIG CHANGE” coming in gold investing in the future.  Today, most traders and investors look at gold according to its supply and demand forces.  Very few are prepared for the time when gold is revalued higher as a monetary metal — and that time if fast approaching.

Furthermore, the majority of investors have their funds allocated in paper assets that provide a yield.  Everyone is after yield.  I would like to remind the investor who places his or her faith in digits in an account that promise a yield… this is based on a healthy and growing economy.

I have provided information in prior articles showing that a growing economy is only possible due to a growing energy supply.  Unfortunately, the world has already hit a peak in cheap oil, but will soon hit a peak in total liquid production.  When this occurs, the global economy only has one way to go… and that is to contract.

This will have serious ramifications on paper assets that promise a yield.  I believe as the world peaks in oil production and falls down the slope of depletion, investors will be forced to change their investment strategy from obtaining a “YIELD” to acquring “PHYSICAL ASSET SAVINGS.”

Those who are smart enough to realize this before the majority of investors will switch out of paper assets and move into physical assets such as gold before the available supply dries up and blows away.

I will be discussing this coming change to “PHYSICAL ASSET SAVINGS” in more detail in following articles.

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16 Comments on "The Coming Big Change in Gold Investing"

  1. At the New York hard assets convention on May 12, 2009 Philip Klapwijk, then GFMS executive chairman said “that the fundamentals for both gold and silver are extremely negetive.”

    GFMS (Gold Field Mineral Services) also see – Consolidated Gold Fields,are/were headed up by Philip Klapwijk, Paul Walker and Hester le Roux. These entities hold associate member status in the London Bullion Market Association, which basic annual fee is $8,720.00 USD.

    The GFMS is part and parcel of the same beast, The World Gold Council and receive support from their sponsors, some of who are;
    Commerzbank GPM
    RBK Capital Corp
    Goldas
    Polyus
    Valcambi SA
    Dubai MCC
    Scotia Mocatta
    Johnson Mathey
    Tanaka PMG
    Barrick Gold Corp
    Standard Bank
    Rand Refinery
    PAMP
    JP Morgan
    Newmont
    Societe Generale

    To name just a few. Just (IMHO) any pronouncement or “facts” produced by these persons or entities,should be examined carefully, with a sceptics eye. Varification of their “facts” is a must.

  2. Big chunk of the recycled gold is central bank leased gold sold by the bullion bankers to buy sovereign debt – my guess – 600 tons annually. Additionally, China and Russia produce another 600 tons of gold annually which they hoard. Klapwijk surplus therefore, shrinks by 60% for these 2 factors. Also, the physical demand data based on 2013 actual data published by gov’t entities provided by Eric Sprott recently showed that it was around 1000 tons higher than the wgc data. So there is no “surplus”.

    USA and Japan are printing nearly $2 trillion per year resulting from qe. They’re flooding world markets with their fiat currencies trying to create inflation. Klapwijk wants you to think that fiat currencies provide stored value while gold does not. Very silly.

    • Your last statement says it all,Norm.How poor and misguided are the feeble masses!

      I,too,have often wondered why folks seem to think that Central bank intervention,0% rates, and endless issuance of worthless bonds by bankrupt sovereigns to bankrupt banks is the safest bet,surest road to prosperity,and holding onto a finite resource that has to be pulled out of the ground with no counter party risk is foolish.

  3. The alleged supply of gold of 3,000 to 5,000 tons per year is a highly misleading figure. The true supply of gold is around 160,000 tons of gold – almost all the gold ever mined is still available and waiting to come to the market.

    Gold is different from all other commodities. Gold mined 500 years ago is still as good as freshly mined gold today. That can not be said about pork bellies, oil, and many other metals.

    Anything useful will be used one day. Once it is used, it is abused and turned into garbage. Something which will turn garbage one day can not be very valuable in the beginning. That is the reason why gold is valuable. It is valuable because it is useless. Since it is useless it can not be abused and turned into garbage.

    The point is: Since gold does not ever turn into garbage (like oil for instance), all the gold ever mined is potential supply in the sense that it will come to the market when the price is right.

    Since the true supply of gold is around 150,000 tons of gold, the newly mined gold (somewhere between 2,000 and 3,000 tons of gold per year) is an insignificant part of the total supply of gold. It is therefore grossly misleading to pretend that only freshly minted gold and scrap represents supply. This type of analysis makes perfect sense in the car market where new cars are of superior quality and value in comparison to the models of a few years ago. So the supply of cars is indeed the newly produced cars.

  4. One thing I don’t think the west understand (or they underestimate) how serious the Chinese people attitude to gold. In some ways, the chinese are obsess of gold. It is much much popular in chinese to have some of their savings in precious metals, it’s part of their long history of culture. The scary part is that chinese in average save 25% – 33% of their wages, again this is deeply in their culture.

    So they have large savings in currency and precious metals. The only way for the savers to give up their PMs into currency is when they have used up all their currency savings (Same to a nation). That is very unlikely for a saver to suddenly spend all their savings, their savings will only go north until retirement. Then they start spending their currency savings. Moreover, their savings are in currency Yuan which will appreciate inevitably. So it will cost the west way lot more to tempt some PMs back.

    My point is once the gold flow from west to east, it ain’t coming back. Only war will move the gold.

    • The average Chinese citizen is too poor to save anything, like the direction the U.S. is heading. However the sheer number of people in the country, along with the billionaires who make up the inner circle of the communist party & ruling elite, combined with the cultural and government attitudes you mention, does mean once the gold flows east it isn’t coming back.

      • David,

        I have read so many western comments stating “China, the communist country”. China has the control on media and human right issue but so as the US has the mainstream media control and Guantanamo Bay. Peter Schiff once said socialist is another form of communist.

        But one thing I think most of the west don’t realise that China is actually a lot more capitalist than they think. Don’t take my words for it. I STRONGLY recommend you to travel to China and see. A lot of big cities have brand new infrastructure. Jim Rogers repeatedly saying China is more capitalist than US, the man who travels countless miles around the world. He is not a BS guy.

        I have met the financial elites from around the world work in the Shanghai money city, it is very prosperous. Of course, there are always poor people in China but their living standard have improved from 20 years ago. Bearing in mind, the yuan will inevitably appreciate, so the poor people can afford more basic stuffs eventually. I travel to HK twice a year, I witness the influx of middle class chinese spending makes you think twice how depress about your home economy.

    • this

      the fundamentals are written on the wall people

  5. “The alleged supply of gold of 3,000 to 5,000 tons per year is a highly misleading figure. The true supply of gold is around 160,000 tons of gold – almost all the gold ever mined is still available and waiting to come to the market.”

    I’ve heard this argument many times but the fact is that gold price increased from 2010 to 2011 by about 40% but recycled gold tonnage decreased by about 15% so that blows your supply theory at sub $2000 gold.

    It’s going to take a much higher price than $2000 an oz for folks to sell their jewellery, coins and bars.

    The recycled gold data from the world gold council includes leased gold by central banks which masks the data. My guess is that the recycled gold data, historically, is inflated by about 40% due to this factor.

    Also, think that central banks have exhausted their available supply of gold they’re willing to lease to bullion banks who in turn sell it to the Chinese for essentially the cost of marginal production – all in sustaining cost.

    With $3.6 trillion in fx, the Chinese would love to buy up all of the remaining gold reserves of the west. 10,000 tons of gold – about 5 years of global production – at $1300 gold – has a value of $600 billion or about 17% of Chinese fx. What would rather hold in your fx reserve – gold or dollars/yen which are coming off printing presses at unprecedented rates.

    The Chinese know there is going to be a major reset of gold prices. Dollar/yen will be devalued. Consequence of flooding global markets annually with $2 trillion of additional dollar/yen hot off the press.

  6. Norm Lasky: One needs to be careful when defining “supply” and “scrap”. One could for instance define supply to be simply equal to demand. That definition would make the article above pointless. The picture changes, if supply is defined as the totality of all gold waiting for the right price to be sold.

    Similarly with scrap. It does not make sense to define scrap as all the gold coming to the market which was not freshly minted. In my understanding, scrap refers mostly to old jewelery which is melted down and refined before entering the market again. I very much doubt that the bars sold by central banks or bullion banks are counted as “scrap”.

    Finally, one also needs to take into account that the gold market is one of the most secretive markets. That means that all the figures published about the gold trade are highly suspicious. There is really no way to verify all the supply and demand figures quoted by the industry. There is too much secrecy around these numbers. Case in point: Almost everybody keeps saying that the total amount of gold above ground ever mined since ancient times is around 150 to 170 thousand tons. There is really no scientific way to verify that figure precisely because nobody will honestly say how much gold is in his or her possession. Even central banks routinely provide misleading figures about their gold reserves. Then, a fact often overlooked,
    some of the gold kept in vaults is fake (happened to the gold reserves of Ethopia when a few years ago it was discovered that all the gold they had was fake). Somebody must have stated the figure of 160 thousands tons and everybody ever since keeps repeating that number without providing any explanation how that number came into existence. When you think about it for a few minutes, you will realize it is impossible to estimate with any reasonable degree of precision the total amount of gold in existence above ground.

    The price of gold is the only thing we can know with certainty in the gold market. All the other figures are in my opinion suspicious.

  7. Joe,

    You bring up a good point. While its hard to pin-point how many Chinese-Asians are saving a portion of their earnings in gold, we can assume its a great deal larger than those in the West. This is indeed what I was writing about at the end of my article.

    Everyone in the WEST is going for “YIELD”. Most of the retirement and conventional assets under management are by the WEST (yes, Japan is the exception). Investors in the WEST have this idea that if they have enough DIGITS in an account, then they could live off the “INTEREST-YIELD”.

    Unfortunately, at some point in time, that whole system will collapse and the world will go back to storing wealth in physical assets such as gold and silver. When they need the funds, they will sell a portion of their physical assets.

    Norm & Robert,

    Even if there were 150,000 tonnes of gold floating around, its only 4.8 billion oz. That’s less than 0.7 oz of gold for every person in the world. I am not saying that every person would get this amount, but it goes to show that with all the supposed wealth in the world, 150,000 tonnes of gold is a very small amount indeed.

    steve

  8. ” I very much doubt that the bars sold by central banks or bullion banks are counted as “scrap”.”

    Gold refiners have been melting down hundreds of tons of central bank bars annually for decades This is certainly no secret. Much of it is central bank leased gold sold by the bullion banks. In 2003 lawsuit, jpmorgan stated that the amount of central bank leased gold to bullion banks globally was 4700 tons.

    So if you don’t think the world gold council reports lease gold sold as “scrap”, then where do they report it? Do you have any evidence to support your comment?

  9. Al topcallers have been wrong since $250. Nor did any of them see $1650 Gold coming in 2011. They either talk their position,or have an agenda other than your safety.

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