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Thanks to a set of excellent charts on gold imports vs
exports by Nick Laird (www.sharelynx.com), I would like to
give you a brief outlook of where is gold going. We heard for some time that
gold is moving to the Far East but is it really only moving there? Well if we
start with the US, it certainly is going out. In the first chart, we can
observe that at least since 1996 gold has been leaving the US without
exception. Even at the top of the gold market when the price crossed briefly
$1,900 gold exports exceeded gold imports for the US. However, according to
Nick Laird, for the US if you add up their gold mine production it puts them
in a net neutral position. So their imports plus production equals their
exports; this over the last 18 years.
Chart #1: US Gold Imports minus Exports
Is this the same case for Europe? Contrary to what you
might think gold is moving from West to East but some is not going all the
way to India and China but rather stops in Europe. I have always made a
distinction between North America (US and Canada) and Europe. In the second
chart below, we see that European central banks have stopped selling gold in
2008 which corresponds with the financial crisis that almost brought down the
international financial system. What is interesting is that they have not
restarted buying although we have heard during the last year several European
central banks talking up gold and in the last quarter, the central bank of
Italy published a very positive study on the value of gold as a reserve
asset. Last year Mario Draghi, president of the
European Central Bank, at a question asked about gold, without hesitation, replied
“For central banks this [gold] is a reserve of safety, it’s viewed by the
country as such. In the case of non-dollar countries it gives you a
value-protection against fluctuations against the dollar.” Can we expect a
change in attitude by the ECB towards gold and the beginning of buying? I
wouldn't be surprised.
Chart #2: European central bank agreement on gold
selling
The next chart shows clearly that Europe has been
importing more gold than it exported since the low in the gold price in 1999.
The lowest dollar gold price was the afternoon London fix on July 20, 1999
when gold was fixed at $252.80. Exports started to exceed imports only in
2013 and they have been decreasing since then. I expect imports to be higher
than exports again in 1016 in Europe.
Chart #3: Total European Union Gold Imports minus
Exports
Two interesting and particular cases in Europe are
Switzerland and Romania. In chart #4 we can see that since the 60s there has
been more gold flowing into Switzerland than it has been exported. However
even more interesting is the high level of imports vs exports in the 70s and
since 2008. Both periods correspond to major international financial and
monetary crisis. Switzerland is reputable as an excellent place to store
wealth and in particular gold. Switzerland is known for a stable political,
economic and social environment. This explains in large part the pressure on
the Swiss National Bank to stop the flow of funds into Switzerland. Gilles
Labarthe, Swiss journalist and ethnologist, said “Switzerland is for gold
what Bordeaux is to wine.” ("Switzerland’s Role in the Gold
Market"). Switzerland, according to
Nick Laird, has net 7,930 tonnes of gold of which 1,040 tonnes as official
reserves. My speculation is that there could be a lot more unaccounted gold
hidden under the Alps.
Chart #4: Swiss Gold Imports minus Exports
To the other extreme in Europe, let me mention the case
of Romania. Romania with a GDP of only $199,950 mil. is not as rich as
Switzerland who has a GDP of $703,852 mil. However, Romania has a very large
stock of gold in its official reserves (103.7 tonnes). According to
Romania-insider.com, “Romania is one of the countries with the highest gold
reserves per inhabitant (5.5 grams of gold per inhabitant), and the local
currency is 60% to 70% offset by gold, said the Romanian Central Bank
Governor Mugur Isarescu.” During a recent trip to Romania, I was also
surprised by a marketing campaign at the foreign exchange desk of a major
bank to sell gold bars to the public.
Russia is a large producer of gold so I expect some gold
to be exported but looking at chart #5 we can see clearly the massive gold
buying by the central bank of Russia since the 2008 financial crisis and an
acceleration since the beginning of the new cold war and the sanctions
imposed by the US and the EU. Since 2008, Russia has increased by four its
official gold reserves. Russia buys most of its official gold internally from
Russian gold miners.
Chart #5: Russian Central Bank Gold Buying
If we move east to Asia, we can see the large demand of
gold by both India and China. The import restrictions imposed by the
government of India has not stopped the flow of gold into India. Some
estimates indicate approximately 18,000 tonnes of gold is held in India with
most of it in private hands vs 557.7 tonnes by the Federal Reserve Bank of
India. Indian gold in private hands represent about 10% of the world’s entire
aboveground gold stocks. Other estimates go even farther than that to
approximately 30,000 tonnes. A French visitor to India, Francois Bernier,
enviously wrote 360 years ago how “It should not escape notice that gold and
silver, after circulating in every other quarter of the globe, come at length
to be absorbed in Hindustan.” Roman historian, Pliny, lamented some 1800
years ago, how India, the sink of precious metals, was draining Rome of gold,
an appellation that resonates even today.
Chart #6: India Gold Imports
Both India and China are net importers of gold. The
Reserve Bank of India announced in 2009, it has increased its official gold
reserves of 357 tonnes by 200 tonnes (56%), while China’s total gold demand
since 2008 has gone from zero to approximately 10,000 tonnes.
Chart #7: China and India Gold Demand
So as you can see from these charts gold is certainly
flowing from West to East and mostly transiting through Switzerland but some
stops into Europe. I have not mentioned Australia, which I speculate being a
major gold mining country with Canada and South Africa, are exporting more
than they import and mostly to Asia.
Two other areas that have a strong affinity with gold is
North Africa and the Middle East but for which I don’t have much information.
Saudi Arabia, one of the richest countries in the Middle East, is not making
public its official gold reserves on a regular basis. Like China in the past
it announced in 2008 it doubled its gold reserves. We could get a similar
announcement soon. I would not be surprised by an announcement that they have
more than 500 tonnes of gold reserves. Jordan, a very small country in the
Middle East and not an oil producer, has discreetly almost tripled (2.7
times) its official gold reserves since 2008.
Recent data (chart #9 and 10) has also showed
accumulation of gold by Australian, Canadian and American individuals. The
demand for gold coins in these countries has been up which are mostly bought
by small investors. However, Nick Laird was telling me that Bron Suchecki,
Perth Mint, an excellent gold analyst from Australia, told him that 90% of
what Perth Mint sells in Australia goes overseas; so Australian's like North
Americans are not large holders of bullion as a society.
Chart 8: US Gold Coin Sales
Chart 9: Australia Gold Coin Sales
As you can see gold is being accumulated not only in the
East (China and India) but also in Europe, Middle East and North Africa. The
major selling seems to be in the US and mostly in the paper gold market,
which still has control of price at least for now.
Gold is an opaque market but my research and anecdotal
evidence shows me that there is a lot of accumulation of gold going on that
takes gold of the market for a long time. This is not short-term buying.
Based on recent statements, as I already stated above, coming out from
European central bankers, I would not be surprise to hear that Europe will
soon start buying gold for its official reserves.
In the 80s and 90s when I was doing technical analysis
research, I was often told by institutional portfolio managers not to tell
anybody they were using technical analysis in their decision process.
Computer screens with charts were turned off when someone came close.
Technical analysis was considered unprofessional analysis (voo doo
economics). Today every respectable and established investment management
firm has a technical analyst. It seems to me to be the same today with gold.
Accumulation is being done but very discreetly. It’s not good today for your
career in the investment industry to mention gold and especially physical
gold. An allocation of 5% will become part of a portfolio allocation as it
was in the 60s. This, I promise you, will change sooner than you think.
Chart 10: Gold as a Percentage of global
Financial Assets
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