The Long Term Fundamentals Keep Improving

The Long Term Fundamentals Keep Improving


The long term fundamentals keep improving. Chinese gold demand for 2011 has soared to 891 tonnes. Indian gold demand for 2011 was 868 tonnes. Keep in mind that 2011 gold production was approximately 2,700 tonnes. Total gold supply is gold production plus gold scrap plus western central banks sneaking gold into the market. The vast majority of gold supply is from gold production. So, China and India together purchased 1,759 tonnes of gold out of production of 2,700 tonnes. China and India purchased 65% of global gold production in 2011. Below is a recent article on Chinese gold demand.

It should be noted that the article pointed out that Indian gold demand dropped significantly in the 4th quarter of 2011 due to a low rupee that made gold more expensive for Indians. The bottom line is that total Indian demand for 2011 was 868 tonnes which was very healthy demand for the year. I believe that the weak rupee was a temporary phenomenon. With the Indian economy growing 6% to 8% a year and the dollar index dropping over time, the rupee should strengthen which will make gold less expensive for Indians. So far in 2012, Indian gold demand has been healthy.

The big story in the gold market is Chinese demand. Below is a graph of gold imports from Hong Kong.

You will notice that Chinese gold imports from Hong Kong have been soaring. The conventional wisdom is that China gets its gold through Hong Kong. That wisdom is most likely only part of the story. The complete story most likely is that China gets its gold through Hong Kong and several back door channels. The amount of gold coming through the back door channels is most likely only known by a few people within China, so I will not speculate.

There was a very interesting article in Barron’s concerning China. Barron’s interviewed Cheah Cheng Hye with Hong Kong based Value Partners. Value Partners manages $7.2 billion and they complete 2,500 company visits to Chinese companies per year. I would consider Value Partners to be an expert concerning China. Below is a snippet of the Barron’s article.

If you have a chance to read the entire article, I highly recommend it. Cheah Cheng Hye provides valuable insight concerning China and by extension, the gold market. It was mentioned that the banking system is under government control and that there is financial repression. Let me provide a quote from the article.

“People are forced to save money in banks at very low rates, below inflation. The only alternatives are to buy real estate, gold bullion, or store cash under your mattress.”

We all know that cash under your mattress is not a great investment. China has actively been trying to stop real estate from appreciating too fast, which they have accomplished. The stock market in China had a lousy 2011. So what is left? The answer is – gold bullion.

In the Barron’s article, it was mentioned that China would grow 8% to 9% in 2012. Growth of 8% to 9% is down from 10% growth, but it still is a very healthy growth rate. With Chinese foreign currency reserves of over $3 trillion, a growth rate of 8% to 9%, and the Chinese love of gold; gold demand from

China only goes up from here. The only question is, when does Chinese gold demand officially exceed 1,000 tonnes per year?

I want to provide another quote from Cheah Cheng Hye.

“Gold is the lesser evil in the investing world, one of the few places to hide from too much printing of paper money. Financial repression in India and China has made people desperate. I personally have seen more and more mainland Chinese talking about how to buy gold and how it’s a store of value. People are quite bewildered by the fact their savings have been trashed. Bank deposits are so unattractive. We have so much gold because it is better than holding cash deposits. We actually made a lot of money in it. It just outperforms.”

That quote says it all and applies to investors in the United States. With interest rates essentially at 0% in the United States, there is not a good reason to hold anything but emergency funds in cash, money markets, or CDs. There is approximately $1 trillion in US retail money market mutual funds. There is almost another $2 trillion in institutional money market mutual funds obtaining an interest rate of just above 0%. The money market mutual funds have a risk of loss. It makes financial sense to hold some gold bullion and silver bullion instead of having a large amount of money in a money market mutual fund that gets an absurdly low interest rate and has the potential for loss.

Hong Kong based Value Partners appears to be a value investing company. They have been around for 19 years and have 9% of their flagship fund in gold. That is a pretty significant percentage in gold for a value investing company or any investment company. Contrast a 9% holding of gold to a typical western investment company which has less than 1% of assets in gold. At some point in time, western asset managers are going to have to do some explaining why their investment company had less than 1% of assets in gold in 2012.

For the most part, the western mainstream media has been anti gold which has affected western asset managers. The only thing that the western mainstream media dislikes more than gold itself is gold stocks. I have been asked many times by people what the motivation is to perpetually talk down and short the gold mining stocks in the middle of a bull market in gold.

The people who dislike gold have a few motivations to constantly talk down and short the gold miners. If the gold price goes up and the gold miners go down or under perform, the people who dislike gold can scare some of the gold futures buyers away which will cause gold to go up not quite as much as it otherwise would have gone up over the short term. Another motivation is to cause as many people as possible to flee anything gold related. If the shorts can get gold mining investors to throw in the towel with negative propaganda and naked shorting, that just helps to reduce overall excitement in the gold sector. If the SEC will not enforce the downside manipulation of these mining stocks, there is not much standing in the way of the shorts just throwing whatever it takes to break an individual gold mining stock or gold mining index.

Having said all that, take a look at the recent article from Forbes.

The title of the article was, “Gold Stocks Will Outperform Gold Commodities”. I do not remember the last time I have seen an article from the mainstream media indicating that gold stocks will outperform gold itself. Normally, the mainstream media will come up with 101 reasons why gold stocks will under perform. In the article, it was stated that “many companies producing gold, especially the junior producers, look very cheap with upside potential of 30% to 150% this year.” You have got to be kidding me. By saying these stocks have upside potential of 30% to 150% this year is to say that these stocks are extremely undervalued. I agree.

I just checked out the short positions for several of the gold and silver mining stocks, the gold indexes, and the GLD and SLV ETFs. With the exception of Barrick Gold, Goldcorp, Coeur d’Alene Mines, and Silver Wheaton, the following short positions just came out in the 2/13/12 edition of Barron’s. I had to go to another source for the short positions for Barrick Gold, Goldcorp, Coeur d’Alene Mines, and Silver Wheaton. The figures below are the number of shares sold short. For comparison purposes, the short interest fell 5.9% on the NYSE during this reporting period.

As you can see from the table above, the short positions for most things gold and silver has come down significantly over this 2 week reporting period. This is extremely good news. Keep in mind that the short positions were coming down as gold, silver, and the mining stocks were going up. Gold and silver itself were going up fairly constantly over the Jan 13 to Jan 31 time period. The gold and silver mining stocks as measured by the XAU index went up in a jagged fashion as seen below.

The big up day was Wednesday January 25, 2012. The bulk of the gains for the gold and silver mining stocks occurred on that day. My guess is that was the day that the shorts did a large amount of short covering. Notice that the XAU index toyed with the 200 dma for 11 trading days in a row. This is just not natural. Yes, it is good news that the shorts have done some serious short covering. Yes, it is unusual that the shorts covered during rising market conditions. But, the XAU index toyed with the 200 dma for 11 trading days in a row. The shorts are still out there and alive and well.

As indicated in the last issue, I was looking for a profit taking opportunity on a trading basis. I did not anticipate that the XAU index would spend 11 trading days in a row touching the 200 dma. For a potential trading opportunity to present itself, we need to be significantly above the 200 dma. With the Comex dropping silver and gold margins as of February 13, 2012, it stands to reason that the potential profit taking opportunity should not be too far away.

If you are interested in why India loves gold so much, check out the link below to the 60 Minutes segment that just aired on Sunday 2/12/12. It was pointed out that India has 1.2 Billion people which is the 2nd most populous country in the world. India is the 6th largest economy in the world and one of the fastest growing economies in the world. It was pointed out that the American dream is to own a home. The Indian dream is to own gold. The number of rich and middle class now outnumber the 400,000,000 poor people. Indian households save 30% of income and love gold. 60 Minutes pointed out that India is the largest consumer of gold in the world.

Indian gold demand is 32% of total world demand. Indian gold demand is 4 times the total demand from North America.

Gold is considered sacred in India. Not only is gold consider sacred, it is a necessity for a wedding. There is a saying in India – No Gold means no wedding. Half of all gold buying by Indians is for weddings. There are 10,000,000 weddings/yr. in India. The amount of gold held by an Indian family is a sign of social status. Indians love buying gold and they hate selling gold. From the Indian standpoint, the goal is to keep accumulating gold. As far as The Gold And Silver Analyst is concerned, this is music to my ears.

If you have the time, check out the link to the 60 Minutes segment on the Indian love affair with gold. If the gold segment does not come on right away, click the gold segment to the right which is 12:54 minutes. After watching this segment, you may be inclined to agree with me that Indian gold demand only goes up at this point in time.;contentAux

The next issue will come out on February 29, 2012.

Paul Yusem
The Gold And Silver Analyst