Huge Physical Gold Shortage Looms
By Patrick A. Heller
Commentary on Precious Metals Prepared for CoinWeek.com
A number of so-called experts are proclaiming that gold’s price is in a bubble that has burst. However, actual market activity signals that demand for physical gold is draining available supplies.
In the first five months of 2012, at least 315 tons (10.1 million ounces) of gold had been imported into China. This quantity exceeds one-third of all global newly mined supplies during that time. The actual quantity is almost certainly higher as the Chinese government has a habit of not reporting all of the gold it adds to its reserves until several years later.
Demand in China is so strong that its government is trying to establish new venues through which people can acquire gold. By the end of August, at least one new exchange is expected to open in that nation to allow citizens greater access.
To give you some idea of how massive Chinese gold demand is, there was a recent report of a nearly $60 billion fraud perpetrated on 5,000 Chinese investors who thought they were purchasing gold futures contracts in London. The size of this fraud is on the scale of Bernie Madoff’s in 2008, which made headlines for years. However, this Chinese scandal has been only lightly reported by the US media.
The Chinese scandal will no doubt spur more of that nation’s citizens to demand physical gold in the future. At current prices the size of the fraud indicates a demand for about 37 million ounces of gold, which is more than a half year of global mining production.
Not only has there been strong daily demand for physical gold from China, but there is constant demand from the Middle East. With some lulls, there is also strong demand from India. Russia’s central bank is also a relatively constant buyer.
By the way, these buyers are having such difficulty procuring physical gold that they are aggressively buying physical silver as well.
The previous continuing demand I just noted does not include the higher demand for physical gold by other central banks around the world. Although any particular central bank may not be buying gold on a regular basis, the effect of the combined demand from all of them is steady.
Not only has demand been growing, but available supplies of physical gold are obviously dwindling. There are a growing number of reports that supposedly allocated physical metals in storage (which means theoretically that specific bars identified by serial number are set aside credited to the name of a specific owner) that have not been available for delivery to the owners upon request.
There are also claims that gold placed in unallocated storage (where an owner has a claim to some unspecified portion of a bulk quantity of the commodity) have been removed to fulfill obligations to make physical deliveries. To the extent that customer property is being taken without their consent to deliver to other parties, that is a clear signal that it is time to consider selling off all investments in precious metals exchange traded funds and replacing them with physical metals. Also, anyone who has precious metals in unallocated or allocated storage should consider taking delivery, and doing so sooner rather than later.
The US government is showing new cracks in the soundness of its finances and of the US dollar, which I will detail in another column. As these problems deteriorate, that will only add to the demand for physical precious metals.
Patrick A. Heller owns Liberty Coin Service and Premier Coins & Collectibles in Lansing, Michigan and writes Liberty’s Outlook, a monthly newsletter on rare coins and precious metals subjects. Past newsletter issues can be viewed at http://www.libertycoinservice.com. Other commentaries are available at Numismaster (http://www.numismaster.com under “News & Articles). His award-winning radio show “Things You ‘Know’ That Just Aren’t So, And Important News You Need To Know” can be heard at 8:45 AM Wednesday and Friday mornings on 1320-AM WILS in Lansing (which streams live and becomes part of the audio and text archives posted at http://www.1320wils.com.