Sprott Update: An Open Letter to the WGC

121
Tue, Oct 22, 2013 - 11:22pm

Open Letter to the World Gold Council

Dear World Gold Council Executives;

As you very well know, the business environment for gold producers has been extremely challenging over the past few years. While demand for physical gold remains extremely strong, prices on the COMEX have fallen precipitously. This contradictory situation is the single most important obstacle to a healthy gold mining industry.

In my opinion, the massive imbalance between supply and demand is not reflected in prices because available statistics are misleading. It is not the first time that GFMS (and World Gold Council) statistics have come under pressure from the investment community. In his now celebrated “The 1998 Gold Book Annual”, Frank Veneroso demonstrated the inconsistencies in GFMS gold demand data and proceeded to show how they grossly underestimated demand. The tremendous increase in the price of gold over the following years vindicated his conclusions.

For very different reasons, we are now at a similar pivotal point for gold. Over the past few years, we have seen incredible incremental demand from emerging markets. Indeed, so much so that the People’s Bank of China has announced that it is planning to increase the number of firms allowed to import and export gold and ease restrictions on individual buyers.1 In India, the government has been fighting a losing battle against gold imports by imposing import taxes and restrictions.2 Moreover, Non-Western Central Banks from around the world are replacing their U.S. dollar reserves by increasing their holdings of gold.3

But, demand statistics reported by the World Gold Council (WGC) consistently misrepresent reality, mostly with regard to demand from Asia.

To illustrate my point, Table 1 below contrasts mine production with demand from some of the world’s largest gold consumers. According to WGC/GFMS data, the world will mine, on an annualized basis, about 2,800 tonnes of gold for 2013.

But, I adjusted these figures to reflect mine production from China and Russia, which never leaves the country and is used solely to satisfy domestic demand. After adjustments, we have a total world mine supply of about 2,140 tonnes. On the demand side, I make some in-house adjustments to better represent demand from emerging markets. To proxy for gold consumption in China, Hong Kong, India, Thailand and Turkey, I use net imports of gold, as reported by their various governmental agencies. While imports might in general be an imperfect proxy for demand, those countries see very little re-export of what they import and keep most of it for themselves, so it is not unreasonable to assume that what they import they “consume”, on top of their domestic production. To this I add the demand, as estimated by the GFMS, from other countries and that of central banks. I annualized the year-to-date figures and found that for this year, annualized total demand is approximately 5,200 tonnes. On that basis, “core” annualized demand is approximately 3,000 tonnes more than mine supply.

TABLE 1: WORLD GOLD SUPPLY AND DEMAND 2013, IN TONNES


Sources: GFMS data comes from the WGC’s “Gold Demand Trends” publications for 2013 Q1 & Q2. Chinese mine supply comes from the China Gold Association and is up to August 2013, the annualized number is a Sprott estimate.5 Russian mine supply comes from the WBMS (Bloomberg ticker WBMGOPRU Index) and is for 2012, 2013 statistics are still unavailable. Chinese data is taken from the Hong Kong Census and Statistics Department and covers the period Jan.-Aug. 2013 and is annualized to account for the 4 missing months to the year. Changes in Central Bank gold reserves are taken from the IMF’s International Financial Statistics, as published on the World Gold Council’s website for 2013 Q1 & Q2 and include all international organizations as well as all central banks. Net imports for Thailand, Turkey and India come from the UN Comtrade database and include gold coins, scrap, powder, jewellery and other items made of gold. The data is for 2013 Q1 & Q2. ETFs data comes from Bloomberg’s ETFGTOTL Index.

However, these figures also exclude what the GFMS dubs “OTC investment and stock flows”, which is a name for a simple plug because no one really knows what is traded in the OTC market. Also, to remain conservative and avoid possible double counting, I exclude the category “technology” from my demand estimate, which the WGC/GFMS estimates to be about 400 tonnes a year.6 Certainly, some of this demand is captured by the demand numbers for China, Turkey, India or Thailand, but it is near impossible to disentangle them. Nonetheless, it should be kept in mind that my demand estimate is conservative and probably understated by a few hundred tonnes.

Of course, another important source of supply is gold recycling, which the GFMS estimates at about 1,300 tonnes for the year. However, this number is questionable at best as gold recycling is hard to estimate. But, most importantly, a large share of it is probably done in India and China, which as mentioned before do not re-export their gold. In the context of my analysis, recycling from those countries should therefore be excluded from the total supply number.

The real incremental source of supply this year has been the flows out of ETFs. According to data compiled by Bloomberg, and as shown at the bottom of Table 1, ETFs have seen outflows of approximately 724 tonnes year-to-date. On an annualized basis, this represents an additional supply of 917 tonnes. But, this incremental supply is only temporary. As shown in Figure 1 below, ETF holdings of gold seem to have stabilized at around 1,900 tonnes after a rapid decline in the first few months of 2013.

The evidence presented here is clear, demand for physical gold is extremely strong and, in reality, without the massive outflows from ETFs (half of world mine supply), it is hard to imagine how this demand would have been met. Since ETFs have a finite size (about 1,900 tonnes left), these outflows cannot continue for much longer (see our article on the topic).7 All these observations point to a considerable imbalance between supply and demand (unless Western Central Banks decide to fill this void with what is left of their reserves). If recycling was reduced by one half (China, India and Russia) and the temporary sales from ETFs were excluded, demand could be as high as 5,185 tonnes versus supply of 2,140 tonnes. The supply-demand imbalance is obvious to all.

FIGURE 1:TONNES OF GOLD IN ETFS

Source: Bloomberg

As was the case when Frank Veneroso first published his book in 1998, the GFMS methodology understates demand and the World Gold Council, by using data from the GFMS, misleads the market place.

To conclude, I urge the leaders of the World Gold Council, for the benefit of their own members, to improve the quality of their data and find alternative sources than the GFMS, which paints a misleading picture of the real demand for gold. This lack of quality information has certainly been one of the driving factors behind the lack of investors’ confidence towards gold as an investment. Gold has been one of the best performing asset classes since 2000, and the World Gold Council should be promoting it accordingly.

Regards,

Eric Sprott

1 https://www.reuters.com/article/2013/09/30/china-gold-idUSL4N0HQ15N20130930
2 https://www.bloomberg.com/news/2013-10-09/gold-imports-by-india-slump-as-curbs-reduce-demand-for-jewelry.html
3 https://business.financialpost.com/2013/10/07/central-banks-to-add-15b-in-gold-this-year/
4 This is calculated by taking the total consumer demand for jewellery, coins and bars for 2013 Q1 & Q2 from table 10 of the WGC’s “Gold Demand Trends” and subtracting from it demand from the individual countries we have listed in the table (China/Hong Kong, India, Turkey, Russia and Thailand).
5 https://www.cngold.org.cn/newsinfo.aspx?ID=942
6 Technology refers to gold used in the fabrication of electronics, dental, medical, other industrial purposes, etc.
7 https://www.sprott.com/markets-at-a-glance/redemptions-in-the-gld-are,-oddly-enough,-bullish-for-gold/

About the Author

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  121 Comments

Watcher
Oct 22, 2013 - 11:28pm

Furst

Well isn't that special.

TPTB don't like gold. They actually hate it. Nice try Eric. For gold to take its place and gain respect there must be a collapse of the fiat empire.

Bongo Jim
Oct 22, 2013 - 11:35pm

Who does...

#2 work for?

Beez
Oct 22, 2013 - 11:36pm

My head is just spinning

after i read this stuff. I was surprised last week when listening to one of Gerald Celente's daily rants (I'm a subscriber) that he said he just bought gold again and he is looking at the second quarter of next year for an implosion. He is usually not that specific. He is so furious right now. He is still trying to figure out how to get his money off shore. He said that the Chase decision to not allow more than 50K wire transfer at a time is the beginning of the same thing that happened in Greece. He keeps talking about the 3 G's - gold, guns and a get-a-way plan. But where am I going to go?

tyberious
Oct 22, 2013 - 11:44pm

ok, fif

Just because!

ivars
Oct 22, 2013 - 11:49pm

Continuing French revolution

Continuing French revolution analogies:

Two outcomes of the USA revolution in 2001:

So the winners are- corporations.. I am not sure how big or small enterprises this includes. And the losers are salaried workers=trade or labor unions were finished off ; it started at least during Reagan times in a wake and even prior to collapse of the Soviet Union as its collapse pulled the rug out from beneath the ideological grounds of labor movement, replacing it with everyone can become capitalist or at least work for a friendly and sharing capitalist..The fluctuations during first wave represent the uncertainties of the collapse of soviet Union, alternating. After 1990 its one direction traffic- USA as sole superpower , unrestrained capitalism based on greed as sole system. As Plato said, what creates forms of societies ( greed in oligarchy based on property rights) , that destroys the when applied without checks.

So far happening right before our eyes.

The last log-periodic wave sequence starts in 1970 as all mid term sequences related to removal of gold from international monetary stage. Applying the same fibo ratio back, we get years around 1937-1940 (something during Great Depression-moving off gold domestically-taking gold from FED to government) and 1885-1890 ( real end of bimetallism?) and 1800-1810 ( slave trade ends? Slaves were also substitutes for money ?) . Not 1913.

Anyway, the second chart is most instructive. It shows-again-the characteristic reduction of cycle lengths while increase in cycle amplitude characteristic for non-sustainable super exponential processes approaching crash ( in this case crash would mean sharp, unnatural under current system reduction in average unemployment length- e.g. killing all people unemployed longer than 40 weeks during 4 week time- just to make clearer what crash means in this context).

But before that, again with our nice end of 2015-2016 time point, the average unemployment duration should almost double - to 70-80 weeks. Under no statistics would this lead to reduced unemployment percentages- on the contrary, they will shoot up, never having reached even with current accounting the FED's 6,5%.

Now, as unemployment trend will start to turn around, the political will to spend will become irresistible- as they know no other solutions. Again, move to direct government money issuance is almost guaranteed given the Democratic congress and Senate and President and Yellen.

P.S. Calling 2001 a year of the revolution in the USA is by analogy to Argentus Maximus brilliant overlay of assignat value vs gold over USD value vs. gold in recent years, found here:https://www.tfmetalsreport.com/blog/5170/french-history-fascinating

it clearly shows the same patterns in USD and assignat value at respectively 1789 ( French Revolution happens) and 2001 ( in my terminology , USA revolution happens).

The question I am trying to find out here and elsewhere is revolution by whom? for whom? who were beneficiaries? Who were executives, front man and propagandists of this not so visible BUT revolution ( measured by effect on USD value). Clearly a turning point in the USA history. Orchestrated? In France, the Royal Court in initial years of the revolution was all the time behind it, controlling it and paying subsidies to people like Mirabeau- critical force in driving fiat printing through.

Who are the Royal Court behind ( and at power) before the USA 2001 revolution? And hoping to steer it through while maybe not being so lucky ( French King was beheaded in January 1793, which would correspond to approximately 4x2,3 +2001 = 2010-2011 in present history, followed by internal Reign of terror from June 1793 ( 2011-2012 ) till August 1795 ( 2015-2016). This is superfluous I understand on other hand drone strikes reached its maximum ( outside the USA, of course, in 2010). Where will they hit next remains to be seen.

Also, for terror to work its not necessary to kill. Modern terror- it is enough to demonstrate its possible, and also let people know that their whereabouts, intentions and coordinates are known in real time by agencies who can feed it into drone and kill at will;

30 years old Snowden flies out and informs everyone in a wide publicity stint. Nothing happens to him or information; he is living as guest of Putin who no doubt is happy to hear what is possible- and level of fear creeps up in subconscious of masses;

establishing few precedents with killing the USA citizens helps as well as NO ONE FEELS SAFE ANYMORE.

Well, that is the modern reign of TERROR. It is here ( I mean in the USA), voting "present".

Louie
Oct 22, 2013 - 11:49pm

Two #2s!

AKA - Fourth!

in other words, all dips should be bought. When the EFTs run out of supply, there is nowhere to go but up. How many of us are saying to ourselves, right now, "I wish I had bought when it dipped to $1,255 last week?"
atarangi
Oct 22, 2013 - 11:52pm

The Saudi wedding

A Saudi couple, Ahmed and Layla, preparing for their wedding, meet with their Mullah for counseling.

The Mullah asks if they have any last questions before they leave.

Ahmed asks,'We realize it's tradition in Islam for men to dance with men, and women to dance with women.
But, at our wedding reception, we'd like your permission to dance together.'

'Absolutely not,' says the Mullah.'It's immoral. Men and women always dance separately.'

'So after the ceremony I can't even dance with my own wife?'

'No,' answered the Mullah,'It's forbidden in Islam.'

'Well, okay,' says Ahmed,'What about sex? Can we finally have sex?'

'Of course!' replies the Mullah,'Allahu Akbar!(GOD is great) Sex is OK within marriage, to have children!'













'On the kitchen table?'

'Yes, yes! Allahu Akbar!'

'Can I do it with all my four wives together?



'You may indeed.. Allahu Akbar!'

'Can we do it standing up?'

'No, absolutely not!' says the Mullah..'

'Why not?' asks the man.

'Because that could lead to dancing!'

Mr. Fix
Oct 23, 2013 - 12:02am

The big “stash” that always seems to get overlooked.

While most people are busily looking at the records on the COMEX, or trying to figure out if there's any gold in Fort Knox, wondering if the Federal Reserve has its own stash, trying to tally up gold mine production,

no one seems to have included the Vatican into this equation except Jim Willie. It is his belief that for the relatively short duration of the “end game”, the markets are being supplied by the Vatican.

This makes sense to me on a number of levels, I'll try explaining a few, even if it risks being branded a heretic.

Unlike the United States who has been accumulating gold for the past couple hundred years,

the Vatican has been accumulating gold for thousands of years. None of it has to be accounted for, going back as far as the Crusades, and let's not forget about the Inquisition, the vast amounts of gold that were plundered and stolen, even monarchies were toppled, and all wealth was taken. And then, on a more charitable note, the vast amounts of gold have been freely given to the Vatican, many people who spent a lifetime hoarding gold, (and of course Silver), would will their wealth to the Vatican at the end of their days since it was promised that a rich man would find it very difficult to enter heaven, ( harder for a rich man to enter heaven than for a camel to pass through the eye of the needle).

Every individual church needs to send a percentage of its take to the Vatican, and every individual member of each individual church is asked weekly to “donate” 10% of his earnings. of course, simply refusing to do so would guarantee eternal damnation, and an eternity experiencing the fires of hell.

Seems like a small price to pay.

Has anybody actually done the math, to figure out how much wealth the Vatican is sitting on?

Even if it had to donate a couple thousand tons of gold to “the cause”, I doubt if it would even put a dent in their stash.

What's the motivation?

It could be survival, what the heck would the “new world order” need with a church anyway?

Why would a bunch of godless psychopaths let the Vatican survive with its wealth intact?

the answer is, they wouldn't.

Many of us have finally come to the conclusion that the American government has been completely hijacked, and that the wealth of this nation is being transferred from its citizens, to the evil Empire.

Has anybody even considered the possibility that this might also apply to the Vatican?

When you look around the world, and all that is good is being destroyed, and replaced with evil,

I think Jim Willie might actually be onto something here.

I offer this commentary only for your consideration as to the possibility of a fairly large “stash” that nobody ever takes into account. I know it is sheer speculation, but common sense dictates that it could be of considerable size, and it is currently being liquidated, outside of the system, with no one looking.

It could also take a while.

TheGoodDoctor
Oct 23, 2013 - 12:20am

Top Ten?

Top Ten?

Bongo Jim
Oct 23, 2013 - 12:25am

@Mr Fix

Would you consider that the big V is partially if not totally running the show?

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