05 December 2015

Silk Road Gold Demand Taking All New Mine Production and More - A Game of Consequences

'Books were the proper remedy: books of vivid human import, forcing upon their minds the issues, pleasures, busyness, importance and immediacy of that life in which they stand; books of smiling or heroic temper, to excite or to console; books of a large design, shadowing the complexity of that game of consequences to which we all sit down, the hanger-back not least.'

Robert Louis Stevenson, Old Mortality

"When an official market or cartel overvalues one type of money or asset and undervalues another with respect to its fair market value and risks, the undervalued money or asset will leave the country as best it can, or will disappear from circulation into hoards, while the overvalued money or assets will flood into circulation."

Murray Rothbard, Gresham's Law

"There is not a crime, there is not a dodge, there is not a trick, there is not a swindle, there is not a vice, that does not live by secrecy."

Joseph Pulitzer

Nick Laird of goldchartsrus.com has provided the latest statistics on the consumption of gold by the 'Silk Road' countries.

The monthly demand from these nations as shown below has grown five-fold compared what it was prior to 2008.

In the latest month their total consumption, that is private purchasing in addition to publicly disclosed official reserves, was 365 tonnes.

Nick has estimated global production as averaging about 260 tonnes per month.

This represents a shortfall of about 105 tonnes per month to be drawn from existing supplies.  This shortfall appears to be growing proportionately with increasing demand, visible on the first chart below.

So this is one reason why we have been seeing the existing stocks of gold around the world drawn down to cover the steadily growing demand from these countries.  And as you may recall, the central banks of the world became net buyers of gold around 2008.

Comex has little available stocks in its domestic warehouses compared to this demand, All of the gold in all the warehouses, whether it is for sale or not, if taken and liquidated is just over 200 tonnes as is shown on the report below.

London is a more substantial source of bullion, but is running down it's supply as we have seen in the 'gold float' analysis also included below.

Interestingly enough, the year over year drawdown in the London free float is about 100 tonnes per month.

There is also supply in ETFs and Trusts.  This too has been drawn down steadily, particularly since 2013.

These are not precise figures, but estimates gleaning from public sources.  I suspect the supply numbers are 'generous' with regard to the free float and the unencumbered nature of gold through multiple claims and leasing, but that is conjecture.

But no wonder the Indian government is so anxious to persuade their people to turn their gold into synthetic paper gold, and allow it to be hypothecated into the markets.  And no wonder that the Fed told the German government that their gold was temporarily inconvenienced until 2019.  And no wonder Venezuela is being leaned on heavily to give back the gold that it so recently repatriated so it may be sold.

I wonder what it would take to increase mine production and bring more gold in as scrap and private sales to meet this growing demand.  Higher prices perhaps?

And if so, then perhaps knocking the price down so aggressively, crippling the precious metals mining industry, is not a fruitful idea for the longer term.  Gold supply is not so easily manageable as a fiat currency's may be.

Given the current rate of growth in demand and the current state of supply, next year could be interesting.  Still, I never like to underestimate the 'resourcefulness' of the central banks, especially when they are operating in relative secrecy. And it never fails to surprise me at how reluctant the various groups of the status quo are to discuss these things except on their own terms, and within their own narrative.

And so such great events can happen slowly, and largely hidden and unremarked, until they seemingly burst upon the scene, speaking unpleasant truths.