The Ascendency of Real Gold Demand


Last week, we followed the trail of a loud noise.  It was “A Giant Sucking Sound from the East” and we discovered one of its primary sources.  Record volumes of gold are flowing from UK vaults (much of it via Switzerland) and other sources to Hong Kong.

According to official records, Hong Kong has imported an unprecedented 807 metric tonnes of gold during just the first 6 months of 2013.  This is an eyebrow-raising figure.

If we annualize this amount, it suggests that Hong Kong is on track to import 1,614 tonnes for the year.  A vast majority of this amount heads to the mainland with a sizeable chunk staying in Hong Kong.  A relatively small 10% to 15% is re-exported to other countries in Southeast Asia.

As we constantly remind our readers in order to provide the proper perspective, the global annual mined supply of gold was 2,863 tonnes last year.  It is estimated to decline slightly this year to 2,817 based on its current pace.  Keep these figures in mind for reference throughout the rest of our discussion.

We also pointed out that China is the world’s largest producer at somewhere in the neighborhood of 400 tonnes, which they keep at home.  That leaves roughly 2,417 tonnes of production from other countries, and as just mentioned, China is on track to take 1,614 tonnes of that.

This will only leave an estimated 803 tonnes for the rest of the world!

If this causes wrinkles in your forehead, and it should, the story gets more intriguing still.

India the Insatiable

As it turns out, that sucking sound in the east isn’t just coming from China.  It’s equally deafening in the direction of India.

We reenlisted the help of our global map from last week to illustrate the sources of similarly unprecedented gold flows into India.

Map of India Gold Import Flows

In digging through India’s trade reports, they reflected record imports of 1,012 tonnes for the 12 month period ending in March.  As the map above shows, Switzerland once again proves to be the nexus for these massive gold flows.  This is not surprising given that the country is home to the world’s largest gold refineries.

The Swiss are responsible for 55% of India’s gold imports.  The United Arab Emirates, a rapidly maturing gold hub in its own right, ships another 19%.  The top gold producing countries of Australia (#2), the U.S. (#3), and South Africa (#5) collectively ship another 21%, with a smattering of other nations making up the balance of 5%.

As with China (via Hong Kong), this is simply an extraordinary level of physical gold flow.

Notice again, that India’s lofty import figure of 1,012 tonnes is significantly larger than our rough estimate of 803 tonnes of leftover supply for the rest of the world, after China devours its fill of global gold production.

We’ll revisit this theme before we close, but first, let’s talk a bit more about India and its venerable relationship with gold.

Indian’s Really Love Gold

We couldn’t resist providing a brief pictorial montage to add a cultural dimension to India’s gold demand story.

Indian women get married adorned in gold. In part, it is a superficial display of social status for sure, but far more importantly it provides the bride with financial strength, standing and insurance in her new family.  This is so important that parents will save gold for a lifetime to provide their daughter with a suitable and respectable dowry.

Indian Woman Wearing Bridal Jewelry

And while we’re on the topic, Indian women are more than a little attractive in their gold!

Not to be outdone by the brides, Indian elephants really love gold to.  There are images of them sporting these elaborate headdresses going back to antiquity.  Although, how they earn the money for this sort of extravagance is beyond us.

Indian Elephant Adorned with Gold Headdress

Indians are also really lavish when it comes to their temples and gold, and it shows. It is estimated that India has a colossal 30,000 to 35,000 metric tonnes of gold in private hands.  It’s a wonder the streets aren’t paved in gold.

Gold Plated Tirupati Temple in India

As an example of the wealth that can be associated with some of the more ancient and important temples throughout the country, a massive medieval treasure trove was uncovered in 2011 at one such temple in Kerala state, with an impossibly long name, so we won’t attempt it.  The temple was built centuries ago.

There were 7 vaults in all with value estimates for the treasure ranging between US$12B and US$22B. Among the items uncovered, the search team mentioned a 4 foot statue encrusted with emeralds, Napoleonic era coins, 15-foot long gold necklaces and jewel encrusted crowns.  It was genuine Indiana Jones type stuff.

The Significance of Cultural Affinity

This love affair with gold can be traced back millennia and gold is deeply ingrained in Indian thought and culture; in spiritually symbolic and practical ways.

As such, it has both profound meaning philosophically and is an important store of generational wealth.  Traditionally, a family’s gold will only be sold as an absolute last resort and/or in dire emergency, if then.

It is probably not a stretch to say that after such a long intimate history with the yellow metal, Indian culture and gold are inseparable.  This is particularly true in rural areas where traditions die hard and where roughly 70% of the Indian population resides.

This is of course an oversimplified sketch of gold’s role in Indian life.  Nevertheless, we thought it important to convey to western audiences a more accurate sense of the cultural force that is Indian gold demand.

This is important because Asian demand in general and Indian demand in particular, must not be confused with the superficial understanding and fickle gold demand displayed by western investors.

We’re referring to those of us who have an online brokerage account, and who can and do trade in and out of gold ETF’s regularly based on the latest taper talk, jobs report, EU bank bailout crisis, or Middle East war rumors.

We often marvel at how the financial media will explain gold price movements based on these types of events while completely ignoring fundamental supply and demand fundamentals, like gargantuan and surging Chinese and Indian gold demand.

Gold Demand’s One-Two Punch

We opened our discussion referencing historic physical demand from China and we’ve now profiled the same for India.  Just how powerful of a punching combination are these two countries together?

Let’s take a look.  In the graph below we’ve stacked them together in a bar chart showing annual domestic gold demand (e.g. jewelry, coins, and bars) since 2008.  In the background we have also included global gold production in order to show how much, in percentage terms, of this production is being absorbed by our two heavyweights.

China & India Gold Demand vs Global Gold Production

The results should get your attention.  As you can see, in 2008 their combined demand represented roughly 47% of worldwide production.  After a mild decline from these levels in 2009, in the wake of the Global Financial Crisis, their demand took a significant leap in 2010 through 2012 to a range between 58% and 63%.

These numbers alone establish the combined weight of both countries as the primary driver behind worldwide gold demand.  However, in 2013, both countries have taken another surreal leap to reach a combined 82% of global mine production.

The chart also gives you a sense of how fast demand is growing in each country.  Both have expanded dramatically since 2008.  However, China gets the gold medal in this track meet.  In 2008, India was the clear number one at 713 tonnes, while China was just 58% of this number at 411 tonnes.

Since then, China has done a very good Usain Bolt imitation, with demand growth rocketing ahead 188% into 2013, assuming they keep up the current torrid pace through the end of the year.

Indian demand has grown 59% since 2008 and up until now that kept them ahead of China.  However, it is looking increasingly like China will surpass the traditional heavyweight champion this year to take 1st place.

Can China keep up this record pace?  We think so.  Both the central bank and the public have voracious appetites for gold.  The government encourages gold ownership by its citizens and is supportive of expanding gold markets, and the public’s access to them.

As a clincher, they have roughly US$2 trillion in US currency reserves and treasury debt available to exchange for tangible assets.  In this context, their estimated gold demand for 2013, at current gold prices, would cost them a paltry US$60B.

As for India, runaway gold imports have made a mess of the country’s exchange rate and balance of trade.  This is causing panic in the halls of government and thus they’ve been trying a witch’s brew of higher import duties and regulations to reign in gold demand.  So far, nothing has worked and the gold continues to flow, either legally or by smuggling.

The gold price has reportedly been trading at all-time highs in Rupees over the last couple of days, as demand persists despite the new regulations and rumors of new efforts being considered to curb imports.

The financial press might ignore the powerful and strengthening one-two punch of these gold market heavyweights, but can serious gold sector investors afford to?


If we annualize worldwide consumer gold demand, as reported by the World Gold Council for the 1st half of the year, we get a massive historic figure of roughly 4,023 metric tonnes.  That’s about 860 tonnes over the previous year or 27% higher.

Simply put, worldwide gold demand is surging, led by China and India.  As reported earlier, mined supply is only in the 2,800 tonne level.  This is a negative difference of 1,223 tonnes between supply and demand.

Ordinarily this situation, ignored by the media, would be driving the gold price much higher.  It hasn’t risen due to equally unprecedented selling during the 1st half of the year from a handful of different sources in the west.

We’ve discussed these sources in detail in previous posts.  They have included heavy bullion bank short selling in the futures market, heavy gold ETF redemptions, along with the mobilization of official and private gold stocks held in vaults controlled by bullion banks, the US Treasury and the Bank of England.

For our purposes in this discussion, we don’t need to quantify the amount of this selling, although we’ve done so in the past.

Instead, the question we pose to keen market observers and investors is this: regardless of the source and whatever the motives, how long can certain western market participants go toe to toe with relentless and colossal Asian demand by disgorging 1,223 tonnes per year to cover the global supply shortfall?

We may be getting our answer as the gold price is up roughly 15% to $1,397 from its late June low near $1,190.

Accompanying the rising price, gold ETF’s are no longer selling and their inventories have begun to rise, albeit slowly.  Reports from the COMEX show that the bullion banks are now net long; after being massively short in late 2012 and the early part of this year.

COMEX inventories are plumbing 2008 lows near 200 tonnes, so there isn’t much physical selling coming from that direction.

The GOFO has remained negative for an unprecedented 39 trading days and the gold futures market remains in backwardation.  Both of these indicators reflect strong demand for physical gold now as opposed to a willingness to enter into contracts for delivery in the future.

Finally, the 2nd half is historically gold’s best time of year. This is because it is festival, wedding, and harvest season in Asia generally, but in India & China particularly.  That means it is the time of year to give gifts, bestow dowries, and save a portion of one’s hard-earned profits from a successful harvest.  For Asians, this means buying gold.