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Gold Demand In One Chart: Physical vs ETF

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China’s demand for gold jumped 20% to 294 tonnes in the first quarter of 2013, while global gold demand overall slid 13% thanks to the dramatic rotation of demand from paper to physical. Chinese demand in gold bars and coins grew to 109.5 tonnes – more than double the five-year quarterly average of 43.8 tonnes. Central banks added 109.2 tonnes of gold to their reserves in Q1 2013, the ninth consecutive quarter of net purchases. But it was the Q1 ETF outflows of 176.9 tonnes, equating to a 7% decline in total gold ETF holdings that obscured the strong rise in investment for gold bars and coins at the retail level. In the face of the huge ‘paper’ gold ETF outflows, ‘physical’ gold demand surged to its highest in 18 months…

And direct from the WGC showing Q1 demand breakdown:

More from the WGC:

Overall total global demand for gold in Q1 2013 was 963t, down 19% from Q4 2012.

Marcus Grubb, Managing Director, Investment at the World Gold Council commented:

“The price drop in April, fuelled by non-physical moves in the market, proved to be the catalyst for a surge of buying that has left many retailers short of stock and refineries introducing waiting lists for deliveries. Putting this into context, sales of bars and coins, jewellery and consumption in the technology sector still make up 81% of the market.

“What these figures show is that even before the events of April, the fundamentals of the gold market remain robust with growing demand in India and China, central banks consistently adding gold to their reserves and strong buying of investment products such as gold bars and coins.”

The key findings from the report are as follows:

• Total demand in China totalled 294t in the first quarter, a rise of 20% on the same quarter last year, as the economy continued to pick up from the downturn experienced in the second half of 2012. Of that figure, jewellery demand in the quarter was a record 185t, up 19% on last year, while bar and coin investment was 110t, rising by 22% from last year.

• The Indian market also demonstrated a continued appetite for gold. Total demand was 257t, up 27% on the same quarter last year. Retail investment was up 52% while jewellery was up 15% on Q1 last year.

• Q1 2013 was the seventh consecutive quarter in which central banks acquired more than 100t of gold, and the ninth consecutive quarter in which central banks have been net purchasers as they diversify their portfolios. Central bank net purchases were 109t in Q1 2013, although the figure was 5% lower than the purchases a year ago.

• ETFs saw a net outflow of 177t in the quarter. By contrast there were strong inflows into other forms of investment: bar and coin demand was 378t, 10% higher than last year.

Marcus Grubb, Managing Director, Investment, at the World Gold Council commented further:

“Gold-backed ETFs, which made up 6% of gold demand in 2012, have seen some holders, primarily in the US, collect profits and move into equities. While gold ETF holdings are down, this has been balanced by 378t of investment in bars and coins, an increase of 10% on the same period last year, and up 12% on Q4 2012.

“Overall, the long-term appetite for investment remains strong, demonstrated by the continued demand for bars and coins.”

Source: http://www.zerohedge.com/news/2013-05-16/gold-demand-one-chart-physical-vs-etf

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Gold isn’t insurance against much

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Sebastian Derungs/AFP/Getty ImagesDavid Kaufman: Any correlation gold had with inflation has all but evaporated over the past 10 years, with the two now seemingly totally unconnected.

Anyone old enough to remember the quaint pre-Internet days of summer fairs will remember the infuriating classic midway game of Whac-a-Mole, where participants, armed with an oversized sledgehammer, bang each furry animal that appears through a little hole only to have another pop up from another hole virtually instantaneously.

Lately, I’ve been feeling that the proponents of holding gold as an investment treat it as one big game of Whac-a-Mole, with investors being the hapless contestants. It seems gold bugs have an explanation for every movement in gold that relates in some way to world events, large or small.

As Mark Gimein of Bloomberg pointed out in a recent article on the subject, “When gold is going up, any explanation will do to explain the advance: a world economy in crisis, central banks printing money. And when it goes down, suddenly a slowing in China explains the drop.”

Before determining whether to include gold in a portfolio, it is best to first identify the role that it is supposed to play. Three basic themes are put forward by those in favour of inclusion.

First, gold is a hedge against inflation. Second, gold is a hedge against a precipitous fall in the equity markets and the end of the world. And, third, gold is a good investment because, for whatever reason, it generally goes up in value.

I’ll leave the third theme — gold is a good long-term bet — alone for the time being because it frankly doesn’t deserve analysis except to say that it is outright foolishness.

The first theme — gold as an inflation hedge — makes good sense since gold, generally accepted as currency and in limited supply (unlike fiat currencies), should maintain its buying power as prices shift.

However, even a cursory analysis of gold prices over the past 50 years compared to either interest rates or the consumer price index (available here for U.S. results) shows there are protracted periods of time during which gold has not appreciated in lockstep with inflation — like an insurance policy that pays off sometimes, but not all the time.

Most notably, any correlation gold had with inflation has all but evaporated over the past 10 years, with the two now seemingly totally unconnected. For those who believe interest rates will significantly rise and hyper-inflation is on the horizon, a much more direct way to buy insurance against (or simply profit from) this scenario is to invest in securities specifically linked to sovereign bonds (such as TIPS or inverse T-bill exchange-traded funds in the U.S.).

Now to the third theme: gold as insurance against the sky falling. Some people articulate this idea as wanting to have gold (along with canned food, oil, guns and plenty of ammunition) at the End of Days. Others, who live in the real world, speak more about gold as a hedge against a crash in the equity markets, which I’ll admit is the first step on the road to the end of the world, but it’s a very long road.

If only this were true. Alas, once again, when we need gold the most, it has let us down time and time again. Looking at three months in recent memory — October 2008, September 2011 and April 2013 — we see that owning gold doesn’t soften the blow of plummeting markets, and it has actually made it significantly worse.

In October 2008, during the heart of the financial crisis, the TSX dropped a whopping 16.7%. Gold dropped 20.3%. In September 2011, during the fiscal cliff debacle in the U.S. that saw Moody’s downgrade U.S. government debt, the TSX dropped 8.7%. Gold declined 11.1%. And last month, when the markets started to pull back following a bullish start to the year, the TSX was down 1.7%. Gold dropped 7.7%.

While I’m sure there is a pro-gold explanation for all of these events, the simple fact is that in virtually every test in recent memory, gold has failed as an insurance policy against equity declines.

Wanting something to be true doesn’t make it so. The simple truth is that, other than a purely speculative tool — one, which I must admit, has paid off brilliantly over much of the past 30 years — gold’s place in a portfolio is difficult to defend.

Source: http://business.financialpost.com/2013/05/10/gold-as-insurance-for-what/

Why Wall Street is unmoved by gold fever

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Imports to India, the biggest gold consumer by far, were running at five times average levels, according to investment bank UBS. Chinese smallholders used their May Day holiday not to head for the beach, as this column naively suggested last week, but to flood the gold dealers in Hong Kong. Turkey bought more gold in April than in any month since the fateful days of August 2008. And so on.

Were the financial pros back in New York and London impressed by this spontaneous outpouring of gold love? Not a bit.

The mood in Bloomberg’s weekly gold analysts’ poll darkened substantially in the May 2 results: 20 gurus predicted falling prices, against nine expecting a rise and four abstainers. A week earlier, the bulls and bears were evenly matched. The latest figures from the U.S. Commodities Futures Trading Commission, published April 30, show swap traders holding nearly twice as many short as long contracts on gold.

What might Wall Street know that moms and pops in developing markets do not? One hint comes from an interesting bit of research published by French bank BNP Paribas last week. It seems — and we should all be thrilled to know this — that structured finance has infected the ancient art of gold trading through an instrument known as a “reverse convertible note.”

This involves a financial institution lending cash to an asset buyer, at an elevated interest rate, but in return granting the buyer a put option to sell the lender said asset at a pre-agreed price. Investopedia tells us that RCNs “provide a predictable, steady income that can outpace traditional returns.”

Living with parents can lead to financial independence

There are more adult Americans age 34 or younger sleeping in their childhood bedrooms now than at any other time in the past 30 years, but it can lead to more saving in the long run.

Unless of course the value of the underlying asset falls sharply and the put option triggers. This is just what happened when gold started to tank a few weeks ago. “It’s hard to determine what was the biggest cause for gold’s decline, but structured products played a part in exacerbating the downward spiral,” BNP’s chief of commodity sales, Guillaume Picot, told Bloomberg.

But this latest necromancy with RCNs is just more proof of a bigger picture problem: professional and retail gold buyers are living in separate worlds psychically if not geographically. The pros measure gold’s performance against that of other assets, particularly stocks, and stocks have been killing gold for going on two years now. The S&P 500 SPX -0.37% has climbed by nearly 40% since Oct. 2011; the dominant SPDR Gold Shares ETF GLD -1.16% has lost 15%.

At a certain point all but the hard-core gold bugs will give up on the idea of the metal outperforming. The mid-April market panic seems to have been that point. All the more so as the main intellectual argument for gold — that central bank credit expansion will dilute “fiat” currencies and spur a new bout of monetary inflation — keeps stubbornly failing to come true.

The retail buyers lining up to grab gold at “bargain” prices don’t care about or trust stock markets, for the most part. In India, they are acting on a time-honored tradition that precious metal is a woman’s mad money, her potential salvation in the event of marital disaster or widowhood. Gold stashes are passed down from mother to daughter, or showered on brides as a wearable testament of financial independence. So consumers will always buy more if the price looks affordable.

The retail purchaser has the numbers in the world gold equation. ETF investors sold off 174 tons of metal in April, a record for them and enough to spur a market crash. But jewelry and gold-coin/bar buyers scooped up 222 tons in an average month last year. So a bull run at the shops can easily offset a bear patch on the Street in terms of raw demand.

But the pros can move the market more quickly with cascading instantaneous sell-offs of fund holdings or collateral on their reverse convertibles. Thus, the gold price plunged by 13% in two sessions between April 11-15, and has gained back only half that despite the masses’ positive response.

At the moment the market is in stalemate, having done basically nothing last week. The near-term outlook would have to be called a bit bearish. Institutional investors look determined to shave weightings on gold so long as equities stay buoyant. The retail frenzy has to calm eventually, especially as India’s spring wedding season is winding down this month.

Source: http://www.marketwatch.com/story/why-wall-street-is-unmoved-by-gold-fever-2013-05-0