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Investors continue their love-hate relationship with gold.
The yellow metal has been extremely volatile this year. And while we have correctly forecasted much of the price action, plenty of uncertainty remains. It’s currently trading at US$1,248.43 per ounce.
Should you buy gold and the major gold producers?
We say no…at least not yet.
Our opinion is that gold remains in a long-term bear market and should fall to — at least — US$931 per ounce before it’s over. That might not happen this year, mind you. The gold bear market appears to be extending, and seems set for another rollercoaster ride this year.
Of course, if you read the mainstream media and most gold commentators, you will probably think that’s nonsense. Gold’s fundamentals are always a hot topic, showing more demand than supply.
That can easily swing your opinion to the bullish camp. But is that misguided?
Let’s take a look…
Gold’s demand story… sold by the bulls
Rising demand — especially across India, China and Russia — and falling supply for gold has supported the bull’s camp for some time. That’s despite the yellow metal remaining in a long-term bear market.
Most bullion demand comes from the jewellery industry, Eastern Hemisphere central banks, and sophisticated wealthy and institutional investors. China and India import more gold each year than what is produced from mines globally.
The Russian central bank’s gold reserves have also grown since mid-2007.
India’s gold imports jumped about 175% from February 2016, to 96.4 tonnes, according to Bloomberg. The country’s official gold imports, which don’t include smuggling, tripled during February when compared to last year. Jewellers increased their stockpiles before the festival and wedding period.
Take a look at India’s gold import demand in the chart below:
[Click to enlarge]
‘We expect some heavy buying in April as a large number of weddings are expected to take place,’ Mehul Choksi, chairman of jewellery store chain Gitanjali Gems Ltd, told Bloomberg from Mumbai. ‘The wedding season runs from April to July, so we are expecting some recovery in demand.’
As mentioned above, India isn’t the only one with an appetite for gold.
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China leading the charge for gold demand
179 tonnes of gold was withdrawn from the Shanghai Gold Exchange (SGE) in February. That’s the latest available figure, and 60% higher than in February 2016. Since 1 January, gold withdrawals from the SGE have reached 363 tonnes. Annualised, that would equal about 2,200 tonnes, or 70% of the annual global gold mining supply.
Source: Bullion Star
[Click to enlarge]
Regardless of gold’s rocky ride, that statistic surely makes the bulls feel better. They love the chart above, mind you. It’s always used to argue why you should buy more gold and never sell.
Reuters reported on Chinese gold demand a fortnight ago (my emphasis added):
‘Gold premiums rose in China as traders said supply of the precious metal was limited due to tightening import restrictions to stem currency outflows.
‘Premiums climbed to over $20 an ounce against the international benchmark from $15-$17 last week.
‘“The imports are happening, but with some restrictions. The government has been doing this since November to control the capital outflows. Now, it is becoming a bit aggressive with stringent reviews,” said a Hong Kong-based executive with a precious metals trading firm.
‘“The quotas are reviewed regularly and extended on a case by case basis. The demand has been more than supply.”’
China — the world’s second-largest economy — has seen gold premiums surge to three-year highs. Traders are worried the country will restrict import licences, which would impact supply.
China currently permits only 13 banks — including three foreign lenders — to import gold. That’s not many when you consider the appetite for the yellow metal.
‘There is limited supply in the market. The banks are looking for higher premiums and would want to cash in on the demand,’ a Chinese trader with a leading bullion import bank told Reuters.
That’s the supply situation. For now, at least. It could easily change in the future.
China makes the largest gold discovery in history
Bloomberg reported on 28 March (my emphasis added):
‘Shandong Gold Group Co., China’s No. 2 producer by output, said it discovered deposits in eastern China that could be the nation’s largest discovery as it pushes to add reserves.
‘The Xiling mine in Shandong province told local authorities it had found 382.58 tons of gold reserves and that the volume could reach more than 550 tons once exploration is completed in two years, which would make it China’s largest mine, according to a statement Tuesday that cited the company on sdchina.com, a website supervised by the provincial government. Operating at full capacity, the mine would have a life of 40 years, according to the statement.’
Good luck hearing about the discovery from the gold bulls. It boasts about 20% of the country’s gold reserves.
Chinese gold companies are aggressively exploring the nation and eyeing acquisitions. The country wants to increase its reserves by 3,000 tons, reaching as high as 14,000 tons by 2020, according to the Ministry of Industry and Information Technology.
The elephant in the room that no one is talking about: Has gold’s supply story turned around?
China currently holds the fifth largest gold reserves in the world, after the United States, Germany, Italy and France. The latest discovery could move it to the number-one positon, with the largest reserves in the world.
That’s not great for gold’s demand-supply outlook. And it’s certainly not good news for the gold price — at least in the months ahead.
We stand by our view: Gold’s likely to stay in a bear market for longer than expected.
Editor, The Daily Reckoning
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