Gold Shortage Now!

It is absolutely fascinating to observe what is currently occurring in the in the world gold markets, as suddenly there seems to be a notable gold shortage. I estimate the shortage to be somewhere in the neighborhood of a 300 plus tonne annual deficit range. That is a rate of 25 tonnes per month. This shortage can be readily confirmed by monitoring the Indian gold market.

For nearly three months now, India has been a part timer in the world gold markets. This in itself is no small potatoes, as India has the distinction of being the single largest consumer of gold in the world. India normally consumes nearly 1/3 of world mining production or 1/4 of total worldwide supply. This shortage is real. I am about to unveil before your very eyes the proof on which I base my supposition. Not only will it likely change your perspective on the gold market, it will undoubtedly change the market itself.

Tomorrow or the following day, you are likely wake up to a whole new world with substantially higher gold prices.

First we need to understand the Indian gold market and exactly what sets it apart from the gold markets of the rest of the world. The primary differential characteristic however can be really summed up in one word. The word is "TAXES".

In India, the custom's duty tax slaps on $15.86 (25 rupee per gram) per ounce of gold. Another 1%, is then levied by the authorized agencies and banks, which sells the gold to the bullion merchants. By the time taxes and fees are added in, Indian gold is some of the highest priced in the world.

When the price of gold spikes, India pretty much stays out of the market until local dealer stocks are depleted and dishoarding comes in to fill the gap. Once the dishoarding falls off, demand once again warrants going back into world markets and paying the added premium of import and agency fees.

As we observe the buying habits of the Indian market lately, one thing in particular stands out. Indian prices have almost continuously remained below import levels. Other than bites and nibbles in the troughs of the gold price, India has been somewhat absent from the world scene.

This first came to my attention while I was out scouting around for additional information regarding the Indian market and dishoarding. That was when I happened upon the following remark in early March from an individual involved in the Bombay gold scene.

"When the gold reached $307 India started dishoarding gold and we did not buy a single ounce from international market -- Gold went down to $292 and Indian dishoarding disappeared."

The pattern seems to be that gold spikes up, leaving a gap between Indian prices and world gold prices. Gold then slips back a bit and just like clockwork, Indian prices rise to meet the legal import level. No sooner do the two levels meet and almost instantaneously, gold powers up, moving out of reach of Indian consumption once again.

I see a clear and repeated pattern developing here, with the indication that there is a gold shortage. A shortage that can only be met through the dishoarding of existing Indian held gold to meet Indian demand. While this may get us by in the short term, I see serious long-term implications here in regards to future gold prices.

If we are to use recent history generated over the past three months to base future price trends, I would expect the following to happen. Once the current breakout has run it's course, world gold prices will consolidate while Indian prices move up. Once the two converge, I would once again expect the process to repeat. This "Indian floor" pressure has been key to our current price move.

Up to this point, I have been successfully able to use the Indian market data to determine when the dip is nearing completion and signaling when a buying opportunity has arisen. I suggest that you also use this data in making such decisions, as it helps to take emotion out of the trade. It has also been highly profitable.

The source I use is Bill Murphy's daily column at the James Joyce table at the Le Metropole Café, where he reports on Indian ex-duty premiums and as to whether or not Indian gold prices are within import range. For those interested, you can use the following link.   www.lemetropolecafe.com

The gold demand statistics provided on the World Gold Council (WGC) web site put year 2001 Indian consumption at 855.2 tonnes. So far, it appears that India will fall far short of last years estimate. This is wholly due to the increased level of demand outside the Indian market that is keeping world gold prices higher and new gold imports just out of reach.

The catalysts in this market appear to be that of reduced producer hedging, producer buybacks, coupled with investment buying from the Japanese and Germans.

While most are quite aware of three of the former demand examples, most have ignored the Germans factoring into the equation. German buying being a significant factor was first brought to my attention by way of Chris Thompson of Gold Fields Ltd. As he is now replacing Bobby Godsell of Anglogold as head of the WGC, I would assume that he knows what he is talking about.

How long will this situation continue? Every indication seems to point to at least mid-year 2003 as a minimum. That is the minimum. It could conceivably go much longer if additional producers join the hedge reduction program. The producer hedge books that were constructed with borrowed gold from the central banks were not built in a day. As a result it will take some time to unwind them.

With the current scenario having produced gains of $25 over the last three months, I think it is quite fair to say that we could expect at least another $50 over the next nine months and quite likely even hitting $75 per ounce ($380+ range).

What do you suppose will happen though, once the Indians catch on to what is happening? At some point, the Indians are likely to figure out what is going on and be less likely to sell an asset that will be worth more the following month and even more the month after. After all, if I were holding an asset whose only foreseeable direction was up, why part with it now? That kind of knowledge would only spur buying, as opposed to the facilitation of dishoarding.

This brings us to a very interesting development. As I was taking a well-deserved break, I strolled over to the Café to soak up Mr. Murphy's latest commentary. As I descended through his daily column, I reached the point where he includes a portion from John Brimelow's report concerning Indian gold market activity. To my surprise, India is already a buyer at world gold prices in excess of $310!

At this point the light bulbs should start going off if they have not already.

The new players on the demand side, the producers, the Japanese, the Germans and new investment demand, etc., all want gold to meet their needs. The problem is that there is not enough gold to fill their baskets and the baskets of the Indians too. Undoubtedly, there must be winners and losers in the mix. The winners of course, will be determined by who was willing to pay the higher price.

Seems to me that I recall a major gold producer saying that they would be "opportunistic" about unwinding their hedges. That's funny, because from where I am viewing it, "opportunistic" will be at ever increasing price levels.

I can almost guarantee you that this essay will reach the gold trading pits, gold analyst, financial advisors, hedge funds managers and financial risk management department heads around the world. Once they comprehend, digest and verify the information that I am serving, the wheels will be set in motion.

I say, "Let the games begin!"

NOTE:

If you are reading this and you just happen to be short gold, gold stocks or other vehicles that are derived from the price of gold, start to worry. Better yet, close out your positions or take offsetting positions as quickly as possible.

As what I am telling you starts to hit home, it is a sure bet that this information has fallen into the hands of others that are in the exact same boat as well. Not just short positions, but likely positions that are far larger than yours. At the same time, it is being read by those ready to take on new long positions.

When it comes to factoring risk vs. reward, and you can clearly see the downside floor set by India, it is not just time to go long, but to go long in a big way.

Don't get stuck being the last one in line at the gold window to cover. The attendant may just happen to be slapping up the "Sold Out" sign before you have a chance to be served. To not heed what I am telling you could well lead to financial ruin. There will be no further warning from me. At this point, there likely isn't time hammer one out anyway.

Nothing lights a fire under a market like the cry of "SHORTAGE!"

The word is getting out.

David Walker

May 4, 2002

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