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Physical Gold Demand Substantial

Commodities | Jun 06 2013

By Jonathan Barratt

The physical demand for Gold over the last few weeks has been unprecedented. Not only has the physical demand for Gold and Silver been absorbent but Central Banks (CB) seem to be lifting their interest in the metal, which is helping to offset the paper selling that has been a feature of trading over the last few weeks. We have always known that CBs have been on the bid and last year the combined purchases of Gold was 534.6 tons which was the most since 1964. Further, just over the last month we have seen Russia, Greece, Turkey, Kazakhstan and Azerbaijan all expand their gold reserves.
The reason that gold has re-emerged on the balance sheets of CBs around the word is simple. It is firstly all about diversification of foreign reserves which act as a hedge towards tail risk events and debasement, and secondly a hedge against inflation. The key to CB activity and support for Gold is in understanding how long they will be in the market. In a recent article by the South African Central Bank Governor it suggested that the average holdings for CBs was about 10% of reserves in Gold. We tested this out with the WGC [World Gold Council] and it provides a good benchmark. In fact it is the international average. This suggests that one of the key drivers for gold will be with us for some time.

This analysis suggests that some CBs would have a long way to go. If the rhetoric is true then countries such as China, whose foreign reserves have jumped by 700% since 2004 and has enough to buy the entire Gold CB reserves twice over, will be on the bid for a while. As a percentage of reserves it barley represents about 1.7%. Russia who has been buying Gold for sometime is at 9.8%, Japan is at 3.2%, and India is at 9.9% . The recent dip in prices has provided an excellent entry opportunity for many CBs. And as these buyers a passive we expect their programs will be with us for sometime.

We continue to be long the metal at US1349 and happy to hold. The stop on the position is below US1320 as a break below here puts in question any bull move for a while.

On another note we have seen some good moves in Platinum and Palladium so it is worthwhile commenting on. Occasionally we like to look at the “whites” as they are sometime referred to. It is interesting to hear the developments in these markets as they are relatively controlled and an opportunity particularly in the platinum market is presenting itself. In retrospect both metals have outperformed Gold this year why? South Africa (SA) mines about 80% of the metal. It is labor intensive to mine and uses large amounts of energy in order to extract. Currently, SA is being torn apart by labor unrest. The largest miner Anglo American Platinum has indicated that it would reduce its mine staff by 6000 workers and thus reduce production by 250,000 ounces and then 100,00 the year after. It’s a good supply issue. On Palladium most comes from Russia. Russia built huge stockpiles of the metal in the 70s and 80s and is slowly getting rid of them. The interesting point is that most of the metal has come from the production of nickel and as ore quality is becoming poor and environmental problems persist the supply of Palladium to the market will be another issue.

However this is only half the story, the supply side. When looking at the demand side it potentially becomes even more problematic. Platinum and Palladium are mainly used in the catalytic converters for cars. If demand for cars continues to increase then expect the demand for these metals to increase dramatically. Already we are looking at a shortage 511,000 ounces of Palladium. If the demand for cars in 2013 is projected to be 82.7 million sold worldwide and each cars converter contains about 4 grams of ether. Then the math’s clear., buy on dips.

Chart Point – Gold:

Technically, a double bottom is in play and so far the structure looks healthy. We need to see a break above US1423 to conclude a new leg higher targeting US1470. Momentum indicators are turning however it is not yet an issue.

Reprinted with permission of the publisher. Content included in this article is not by association necessarily the view of FNArena (see our disclaimer).
Edited by Jonathan Barratt, Barratt's Bulletin is a weekly subscription newsletter that provides expert analysis of commodity markets, global indices and foreign exchange movements. Click here to take a no obligation 21-day trial to Barratt's or to learn more visit Content included in this article is not by association necessarily the view of FNArena (see our disclaimer).

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