The following commentary is the opening salvo to the May 2nd issue of my Mining Stock Journal. You can learn more about this mining stock newsletter here: Mining Stock Journal information
“The ‘other side’ has a problem.” – John Brimelow, formerly of Brimelow’s Gold Jottings”
For many years John Brimelow published a daily report and commentary on the global gold market, with specific emphasis on the eastern hemisphere demand for physical gold, particularly China, Indian, Turkey and Viet Nam. It was a pricey newsletter targeting primarily institutional investors who focused on precious metals and commodities investing. His newsletter contained gold market data and statistics that rarely makes its way into the western mainstream media. John still emails several of his long-time subscribers, including me, with frequent updates of the latest demand data from the east.
The quote above references an email he sent on April 26th which reported that premiums charged by Indian gold dealers rose to $5 over official domestic prices after having been negative for nearly two months. Indians pay a 15% import duty plus a 3% sales tax, or 18% more than the world gold spot price. Thus, at $2300 gold, Indians minimally pay an added $414 above the spot price, or $2714 per ounce. However, the premium/discount factor reflects the level of demand. The premium or discount measures the relative supply/demand for gold by Indians. When dealers can charge a premium it means that demand is strong relative to the amount of gold flowing into India.
What’s most interesting about this is that, when gold rises sharply over a short period of time as it did from March to mid-April, Indian demand slows considerably. Over short periods of time Indian demand is price sensitive and the premium flips to negative. They tend to curtail buying when the price runs higher and resume buying after it pulls back. However, once they “acclimate” to a higher price level, strong demand resumes. The reversion to a premium this past week means that gold demand has picked up considerably again.
But it’s not just the Indian populace buying gold for investment and as jewelry for seasonal holiday and wedding festivals (the spring and the fall are when Indian demand spikes), but the Indian Central Bank, the Royal Bank of India (RBI) has been has been steadily and consistently accumulating more gold on a monthly basis. As of the end of March, the RBI’s gold reserves hit an all-time high. But not only that, according to the Center for Monitoring Indian Economic Data as well as the World Gold Council, The RBI’s net buying of gold YTD has already surpassed its net buying for all of 2023.
The RBI thus has been one of the primary entities driving the price of gold higher.
But it’s not just India. Per Brimelow’s email referenced above, dealers in China are charging $20 to $25 per ounce above the global spot price. This reflects the steady $25 to $30 premium to world gold that has been reported by the Shanghai Gold Exchange. Moreover, China’s net gold imports via Hong Kong rose 40% over February (Hong Kong Census and Statistics Department). This plus the price premium buyers are willing to pay reflects strong investment demand by Chinese investors as well as the Peoples Bank of China. Keep in mind that the Hong Kong data does not account for all of the gold flowing into China. The Government does not report the amount of gold that enters China via Beijing and Shanghai.
And it’s not just India and China. According to the World Gold Council, total global demand for gold rose 3% YoY in Q1 2024. In fact, Central Banks bought more gold in Q1 2024 than any other first quarterly period on record. This was driven largely by persistent Central Bank buying and high demand from Asian investors. Based on WGC numbers, investment demand (bars and coins) rose 3% YoY in Q1 while demand for gold used in technology jumped 10% YoY. The wild card is the PBoC. While it reports “official” holdings monthly, research done by a few different analysts (most notably Alasdair Macleod) shows that official numbers are just a fraction of the amount the PBoC holds and accumulates. I have detailed previously that China does not report the Beijing and Shanghai import data specifically to “help keep PBoC purchases discreet” (South China Morning Post).
Circling back to Brimelow’s comment that “the other side has a problem,” he is referencing the both the massive bank short interest in gold derivatives, most visibly Comex contracts and LBMA forward contracts, as well as the harder to quantify short-fall of vaulted custodial unallocated physical bars backing the amount of potential claims on those bars. The surge in demand for physical bars with immediate delivery requirements thereby has the potential to trigger a vicious short-squeeze in gold which would drive the price considerably higher.
With or without a short-squeeze, the demand for physical gold has been the catalyst pushing the price of gold higher. I was looking for a pullback/consolidation of the sharp move higher from March to mid-April which created an extreme technically overbought condition in the precious metals sector per the RSI and MACD momentum indicators. That said, given that it appears that world demand for physical gold – particularly in the eastern hemisphere and middle east – will limit the magnitude and duration of the correction that is occurring currently in the sector. Historically gold will often correct down to its 50 dma after a sharp price rise. The 50 dma currently is at $2236 (as of May 1st). I’m not making that price prediction, per se, I’m just stating the lay of the land.
Regardless of the price path, the current pullback will set-up the foundation for another large, sustained move higher in the precious metals sector, especially now that the Fed announced that it is reducing the amount of its Quantitative Tightening program per the latest FOMC policy statement.