Gold’s Supply/Demand Imbalance To Push Prices Higher

June 16, 2015

Over the past several years, world central banks have become buyers of the gold bullion. They continue to buy now, as gold prices remain depressed compared to their 2011 price levels. In the first quarter of 2015, central banks bought 119.4 tons of gold. In 2014, they purchased 588 tons of gold bullion. (Source: World Gold Council, May 14, 2015.)

The first quarter of 2015 marked the 17th consecutive quarter where world central banks were net purchasers of gold. This is significant; since the 1970s, central banks held U.S. dollars as their reserve currency and never really paid much attention to gold. Now, with their buying spree, central banks are sending a simple but clear message: they want gold as part of their reserves.

Going forward, it will not be surprising to see central banks continue to buy gold and demand will most likely come from smaller nations rather than the large ones. Major central banks already hold a sufficient amount of gold in their reserves. Smaller ones don’t.

India and China are also critical when assessing the demand for the yellow metal. They are the biggest consumers of gold and can change the dynamics of the gold market quickly.

Gold buying in India and China is exuberant, to say the least.

Take India, for example. Its appetite for gold is coming back after the Indian government and the central banks tried to curb demand by imposing absurd taxes and tariffs. In April of this year, $3.13 billion worth of gold was imported into the country. In the same period a year ago, it was just $1.75 billion. This represents an increase of 79% year-over-year. (Source: India’s Ministry of Commerce & Industry, last accessed May 31, 2015.)

China is a solid gold buyer, too. However, there isn’t any clear data on how much gold is going into China, as the country doesn’t report its gold imports. We can get a rough estimate about its imports by looking at data provided by Hong Kong‘s customs.

In March of this year, China imported 67.57 tons of gold into the country via Hong Kong alone. If we assume that this is the average for the rest of the year, then China is on pace to import another 608 tons by year’s end. And these are gold imports coming into China from Hong Kong alone. (Source: Reuters, April 28, 2015.) 

(Read more about gold’s demand from India, China, and central banks here:

Gold Production Facing Scrutiny

There’s a simple rule of economics: if the demand remains the same or increases, and supply declines, the prices move higher.

On the supply side of the gold equation, production has been pared back.

In 2014, U.S. gold mines’ production amounted to 212 tons. In 2013, it was 230 tons. This represents a decline in U.S. gold production of eight percent year-over-year. Understand this: the U.S. is one of the biggest gold producers in the world. (Source: U.S. Geological Survey, last accessed May 31, 2015.)

Other major gold producing regions are reporting some contraction in the supply of gold. For example, in Australia, in the first quarter of 2015, gold production declined seven percent year-over-year. (Source: Kitco News, May 25, 2015.)

Looking at the major gold miners, there are only a few that are planning to produce more gold this year than they did last year. 

When assessing the supply side, it’s common business sense that gold producers don’t have a financial incentive to produce gold when production costs are higher than the market price of gold. Subsequent to the semi-crash in gold prices that started when gold was trading at US$1,900 an ounce in 2011, gold producers have taken mines that are not economically feasible in the world of US$1,200-an-ounce gold offline.

Gold Outlook for 2015

Looking at today’s supply/demand equation for gold, prices are poised to rise in 2015 and well into 2016. 


Courtesy of Moe Zulfiqar, BAS; Analyst, Profit Confidential  

The Federal Reserve Bank of New York holds the world's largest accumulation of monetary gold.

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