The Daily Nugget: Gold Supply Concerns

The gold price climbed as high as $1,348.65 yesterday, its highest since Bernanke’s June 24 statement. This morning it has dropped back slightly thanks to some profit taking following the one-month high.

So far, this month is gold’s best since January 2012, it comes after Bernanke and the Fed have sought to reassure markets that they won’t scale back QE to soon and await more data to confirm their next move.

Yesterday holdings in the SPDR Gold Trust fell once again, this time to 929.76 tons a level not seen since February 2009.

Despite Bernanke’s reassurances analysts still expect to see the September 17-18 meeting announce QE tapering. ABN Amro Group NV wrote yesterday that they see gold’s current rally as ‘temporary’ and expect gold to end the year around $1,100.

Given the expectations surrounding the Fed’s September meeting we expect gold to experience further volatility, and some pullbacks, in the weeks running up to the meeting.

In the meantime, look out for weak economic data from the US which will prove to be bullish for gold investment.

Despite Gold’s advances yesterday, silver declined for the second day in a row.

Gold supply concerns

Yesterday warnings of India’s impending gold supply and smuggling problems continued to come from analysts. Local prices are expected to climb as a result of pressures on supply, which are already tight. Measures to reduce the current account deficit are the RBI’s priority as it widened to $87.8 billion earlier this year.

Earlier restrictions placed on gold, namely April’s increase of import duties to 8%, saw gold imports fall to $2.45 billion in June, to $8.39 billion a month earlier.

Worries over supply are also likely to see more banks stop minting their own gold coins. A move which began back in April.

Speaking of supply constraints the World Gold Council has today warned that the supply of gold from recycled materials is likely to fall by 25%, from 400 to 300 tons, this year as lower prices deter sellers. Given recycled gold accounted for 37% of supply last year this is likely to have an impact on the global gold market.

A slowdown in the sale of scrap metal was expected given the high numbers amounts sold when gold has been at higher levels. Barclays estimates that gold recycling peaked in 2010 when as much as 1,719 tons was sold.

The World Gold Council also warned that central bank gold purchases are likely to be down on last year, the lobby group estimates that demand will be at 400 tons, compared to 553 tons last year.

Hong Kong gold imports
One area where purchases do not look set to slow down would be China. As you know we have been heavily reporting on developments in gold investment in China, in recent weeks. Today we draw your attention to @KoosJansen’s latest graph which shows Hong Kong’s net imports from Switzerland. As our previous research has shown, Switzerland has one of the highest concentration of gold refineries in the world. Whilst Hong Kong’s imports from the country are nowhere close to reaching the combined annual capacity of these refineries the jump in gold demand is significant. Surely this should get people asking ‘but, why do they want gold? What do they know that we don’t?’