Return of the Gold Bugs?


Location Date: 
August 15, 2013
Content: 

The World Gold Council* released its second quarter report today and it shows what many observers already know i.e. that the demand for gold fell in Q2 – by approximately 12%.  In particular, investment demand for gold (via ETF’s and other proxies) has fallen off a cliff this year as shown in the chart below. This lines up with the capitulation selling we have seen in the large macro hedge funds like Paulson, Loeb and Soros (it appears that Seth Klarman kept the faith though).
 

 

What strikes me however, is how massive the demand for physical gold has been. It appears that “retail” buyers in the East (China and India) have mopped up a lot of the slack.  This is impressive given India’s rising import tax on gold. Roughly 60% of the jewelry and coin/bar demand comes from these two countries. Lower prices seem to work with these folks – ironically it is the complete opposite when it comes to equities and investing. The supply of gold actually fell in Q2 mostly the result of a fall in recycling –many people in the West who were responding to the ads on TV to sell their gold likely did, but a lot of them are not heading to their pawn broker at $1300 an ounce.  The miners produced moderately more in Q2 but many now are facing cash flow and cash crunches.  With capex budgets being slashed and a round of mine closures we could see a more material impact on supply before the end of this year.  As they say – nothing cures high prices like high prices!

* Gold Demand Trends, Second quarter 2013, World Gold Council (www.gold.org), August 2013

Jim McGovern 

P.S. By the way, my guess is that at least one of Eric Sprott, Frank Holmes, Dennis Gartman or Peter Schiff will be on CNBC in the next 60 minutes!?!