Gold 2009 Supply and Demand Impact on Gold Price

By: Julian_DW_Phillips

As the gold holdings of the Barclays Gold Trust and the World Gold Council's gold Exchange Traded Funds across the globe grew larger than the gold holdings of Switzerland this week, we look at the dramatic shape of the likely Supply/Demand formula for 2009. Since the end of 2008 until now the gold market has changed shape and it promises to be a structural change should what we see now continue! Just how much gold is being absorbed at the moment from what sales and purchases? To understand this fully we have to look at the last reported figures in the gold market on Demand & Supply. [We use the numbers supplied by the World Gold Council for this purpose.]

Gold – Demand Supply 2008
Demand: - Tonnes
Jewelry consumption in 2008 until the last quarter of the year...........………........... 2,146.0
Industrial demand………………………………………………………………...............… 437.0
Investment demand – Bullion [coins, bar]……………………………………............…… 766.0
Gold Exchange Traded Funds and the like…………………………….................……. 307.0
“Inferred Investment”……………………………………………………………..................37.0
    Total tonnage.         3,695.0

Supply:
New Mine Supply…………………………………………………………………................ 2,032.00
Central Bank Gold Sales……………………………………………………….......................286.00
Gold Scrap……………………………………………………………………………………. 1,377.00
Total supply…………………………………………………………………….....................3695.00

Gold – Demand Supply 2009
Demand
In 2009 we project an average price above $1,000
leaving jewelry demand around 47% lower than in 2008 at ........................ 1,199.38 tonnes
We see industrial demand falling 20% in line with the current recession at…... 349.60 tonnes
Investment demand Bullion [coins, bars] we see rising by at least 40% to……. 702.8 tonnes
[Big change] Gold E.T.F. and the like will rise from - up to…............. 677.62 to 1,355.22 tonnes
Net Producer Hedging we see no higher than……………………...........…………… 150.0 tonnes
[NEW] Central Bank Purchases [Russia] …………………………………....…………. 414.0 tonnes
Total projected demand …… …........................… 3 ,493.40 to 4,171.02 tonnes

Supply
New Mine supply……………………………………………………………….... 1,930.4 tonnes
Central Bank sales…………………………………………………………………. 150.0 tonnes
Gold scrap ……………………………………………………………………….. 1,413.0 tonnes     
     Total projected supply ……………...............……................................. 3,493.4 tonnes

The shortfall: As you can see there has to be a trimming of demand for projected supply to satisfy demand. The supply itself can only rise through increased scrap sales. Demand can only be reduced by higher prices for gold and greater drops in jewelry demand or investment demand being held back by runaway prices.

• If India takes no imports for the rest of the year, they will see reduced internal demand and increased internal supply of scrap. This is happening, but we do not believe that India will not continue to behave this way for the rest of 2009.
• Jewelry demand will suffer heavily as we have projected, it being replaced by demand for bullion and ETF demand and the like.

We conclude by emphasizing that demand through gold Exchange Traded Funds will dominate the gold market and take gold to new heights well above $1,000.

Notes: -

1) Once AngloGold Ashanti has completed its de-hedging then all the major gold mining companies will have de-hedged as far as they intend to, leaving only a small hedge position left to be closed. With hedging still being used to finance new gold mines, after 2009 we do not expect de-hedging to be a demand factor of significance.

2) Russia has just announced that in January it bought 34 tonnes for its gold and foreign exchange reserves and intends to keep on buying gold for its reserves , thus activating its stated policy of increasing gold reserves to 10% of total gold and foreign exchange reserves. [We have received reports that this takes their purchases above 90 tonnes in the last three months] More significantly this could signal a change in attitude by central banks to the gold content of their reserves and could spur buying by other central banks.

3) But here is the big figure that is changing the entire market. Demand from Exchange traded gold has soared since the December of 2008. The gold held by the Barclays Gold Trust and the World Gold Council gold Exchange Traded Funds [this excludes many smaller funds in Canada and Europe, but gives the overall picture] is growing at such a pace and increasing liquidity to the extent that major institutions are using this vehicle to hold gold for them.

Gold Exchange Traded Fund increases since 16th December 2008
From the 16th of December until the 9th January holdings rose by ………………....…+24.33 tonnes
9th – 16th January 2009 gold holdings rose by…………………………………………….. +0.24 tonnes
16th – 23rd January 2009 gold holdings rose by……………………………………………+18.85 tonnes
23rd – 30th January gold holdings rose by……………………………………………………+32.62 tonnes
31st January – 6th February 2009 gold holdings rose by………………………………..+16.04 tonnes
6th – 11th February 2009 gold holdings rose by…………………………………………….+44.20 tonnes
11th 17th January 2009 gold holdings rose by……………………………………………… + 107.66 tonnes
        Total in 9 weeks……. + 243.94 tonnes

If demand continues at these levels we would expect to see them add…….... + 1,355.22 tonnes in 2009. For the sake of conservatism, [worst case scenario] we will divide the potential purchases by half, so we arrive at 667.62 tonnes for the increase in these funds in 2009. Please note that we do this to demonstrate the change in the market, not because we believe this will be the figure bought this year, as we have already seen 243 tonnes bought in the last two months.

Already, if we total these two funds holdings then they have overtaken the 1,270 tonnes still held by Switzerland in their reserves, having passed Japan and China some time ago standing now at 1,272 tonnes. If the growth continues at this pace then these funds will rank alongside Italy, Germany and France in gold holdings!

4) Identifiable investment demand during the fourth quarter of 2008 amounted to 304 tonnes, excluding ETF-related off take.

5) Central Bank gold sales are likely to stop at the end of September 2009 as the sales that were announced and implemented to come to an end. So reduce expected supply by 350 tonnes per annum from this source.

I.M.F. Gold sales?

The subject of central bank sales keeps on raising its head in the gold market. Last week saw the question raised, “Will the I.M.F. sell its gold still as its cash flow seems to have improved enormously?” The answer from the I.M.F. is of course, “Yes!” It has to be, because the bureaucratic steps for that to happen have been set in place and only a meeting of the members of the I.M.F. can change that at a special meeting. This has not happened.

For the sale of 400 tonnes of gold from the I.M.F. to take place however, the key vote deciding this has not yet been cast. The U.S.A. controls over 16% of the votes [it needs an 85% majority for such a motion to be carried] of the I.M.F. and it cannot cast its vote until the U.S. Congress has cast its vote on whether they will permit the I.M.F. to sell. The vote on the subject has not even been proposed by Congress so until that is on the agenda the likelihood of such a sale is just not there. Meanwhile it sits as a seeming threat to the gold price, or does it?

We think not for several reasons. In the past the I.M.F. has sold gold at auction so that it can achieve the best overall price. That is its task for the benefit of the members and the institution. But then again, the I.M.F. is the key global proponent of paper money, whether it is in the form of the SDR [Special Depository Receipt] or any other paper money. It will want to support that cause too. However, it must get the best price it can for the gold it may or may not be able to sell. This appears to rule out following the sales pattern of the Central Bank Gold Agreement, where an annual ‘ceiling' is placed on the amount to be sold, then individual banks sell in amounts easily absorbed by the open market.

If they follow the maximum price route, then it is likely that a group of buyers or one individual one, who offers the best prices, will be awarded the gold paying the highest price for the total amount on sale. There is nothing to stop a series [say 100 tonnes per auction] of auctions taking place. This too could maximize the price for the entire amount sold at each auction. So this potential sale of 400 tonnes is unlikely to land in the ‘open market', but be quickly absorbed off market and have a neutral impact on the gold price. So we should not even add it to the supply side of the open market and its impact on the gold price.

 “Gold is always accepted and is the ultimate means of payment and is perceived to be an element of stability in the currency and in the ultimate value of the currency and that historically has always been the reason why governments hold gold.”

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By Julian D. W. Phillips
Gold-Authentic Money

Copyright 2009 Authentic Money. All Rights Reserved.
Julian Phillips - was receiving his qualifications to join the London Stock Exchange. He was already deeply immersed in the currency turmoil engulfing world in 1970 and the Institutional Gold Markets, and writing for magazines such as "Accountancy" and the "International Currency Review" He still writes for the ICR.

What is Gold-Authentic Money all about ? Our business is GOLD! Whether it be trends, charts, reports or other factors that have bearing on the price of gold, our aim is to enable you to understand and profit from the Gold Market.

Disclaimer - This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Gold-Authentic Money / Julian D. W. Phillips, have based this document on information obtained from sources it believes to be reliable but which it has not independently verified; Gold-Authentic Money / Julian D. W. Phillips make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Gold-Authentic Money / Julian D. W. Phillips only and are subject to change without notice.

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