Sunday, July 28, 2013

Huge Demand for Physical Gold Has More than Countered ETF Sales

Lawrence Williams
Marcus Grubb of the World Gold Council says that the big outflows from gold ETFs this year, some 600 tonnes, have been more than countered by enormous demand for physical gold, particularly from China and India.
The gold ETF outflow has had a significant price impact on the yellow metal but, Grubb says, there has been good demand for physical gold this year. China alone will come in between 900 and 1,000 tonnes (if the reports on Chinese net imports through Hong Kong are accurate, this could prove to be an underestimate). Gold premiums in India and China remain high at a seasonally weak time for gold.
While the government clampdown on gold imports in India (because of the balance of payments problems it causes) will undoubtedly have an effect on Indian take-up, Grubb believes this will create a grey market (smuggling) for gold that could be as high as 200 tonnes. “Indians love gold” said Grubb,” it’s deep in their religion, mythology, culture. So you’re not going to reduce gold demand in India.”
Asked why Chinese gold demand is so strong, Grubb pointed out that China’s gold deregulation came in around 10 years after India and the country has been playing catch-up ever since, with the Chinese demand curve rising faster than India’s.  He doesn’t feel that slowing growth in China will have much effect on gold.
Grubb noted that global mined gold supply may come in well below expectations this year as gold miners are cutting production from now-uneconomic mines at the current price. Scrap sales are also well down, so in his view the gold supply has already rebalanced itself from the excesses of the ETF offloads.
He feels the possibility of tapering is already ‘baked in’ to the gold price, and that the Fed may find it difficult to implement. There is a propensity for the gold market to react strongly to Fed statements, particularly downwards, perhaps stimulated by heavy sales of paper gold by those who have an interest in seeing the price fall, which could keep the price volatile for the time being.
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