When Fundamentals No Longer Apply, Review the Fundamentals

[pmbug]

...
If there's one thing we now know for certain, it's the fact that the market has completely missed the importance of the demand-side changes currently taking place in the physical gold market. China has now imported 436 tonnes of gold through Hong Kong over the past eight months.24 This compares to imports of a mere 57 tonnes over the same eight month-period a year earlier (July 2010 - February 2011). The net new demand implied by this increase is 379 tonnes, which when annualized equates to 568 tonnes of new demand in a market that supplies 2,810 tonnes per year in mine production. These are astounding numbers. Recent IMF data also shows that at least 12 countries increased their physical gold reserves by 58 tonnes in the month of March, with Mexico, Turkey, Russia and Kazakhstan making sizeable purchases.25 58 tonnes annualized equates to 696 tonnes of demand per year. We know that central banks bought 439.7 tonnes of gold in 2011, and if the pace of recent central bank purchases continues, it will equate to another 256 tonnes of net new change in the physical gold market.

The significance of this demand shift is striking. If we combine China's implied net change of 568 tonnes with the central banks' net change of 256 tonnes, we're left with a demand shift of over 824 tonnes vs. an annual mine supply of 2,810 tonnes. That represents close to a 30% net change in the physical gold market in 2012. If we remove the portion of global gold production produced by China and the other non-G6 central bank gold buyers (like Russia and Mexico - because we know they're not sellers), we're now dealing with over 824 tonnes of demand change hitting an annual global mine supply of a mere 2,170 tonnes - representing a 38% shift.26 Although we have been continually reminded that 'fundamentals don't matter' in today's marketplace, there isn't a physical market on earth that can withstand that type of demand increase without higher prices over the long-run, and the gold market is no different. There are no sellers of physical gold that we know of who can satiate that scale of new demand, and global gold mine supply has been virtually flat for over the last ten years. Even if we incorporate the estimated 1,600 tonnes of "recycled gold" that the World Gold Council insists on including in its annual gold supply estimates, the numbers above still suggest a net change of 19%.27 Who is going to give up their gold purchases to make room for this scale of new demand? Where is the gold going to come from? We ask because we don't actually know.

We have written at length about the disconnect between the paper gold price and the physical gold market. If the demand changes stated above applied to any other market, the investing public would lose their minds. Could you imagine, for example, if the demand shifts described above were applied to the global oil market? What would happen if a single country came in from nowhere and increased its oil purchases by a factor equivalent to 30% of the world's annual oil supply? We are students first and foremost of the physical market, and the numbers stated above speak for themselves. We remain confident about gold for the simple reason that the demand we are now seeing for physical is completely unsustainable without higher prices, and we do not see that demand abating in the coming months. The US recovery is not happening. Europe is poised for yet another full-fledged economic crisis, and the BRICS countries continue to aggressively convert to hard assets like gold in order to protect themselves from currency debasement. The paper market for gold can continue its charade, but demand in the physical market will soon overpower it through sheer momentum - there's only so much physical to go around, and it appears that there are some very large buyers that are eager to take it.

http://www.sprott.com/markets-at-a-...als-no-longer-apply,-review-the-fundamentals/

 

[pmbug]

...
Gold buying has spread to other Asian countries, like Japan. Lombardi points out that, ever since the Japanese government reported a budget deficit, the Japanese consumer increased its buying of gold bullion to be at a 15% greater pace than last year

“The Japanese consumer bought 15% more gold bullion in 2011 than 2010. Thus far in 2012, this trend has shown no signs of slowing down,” says Lombardi.
...

http://www.prweb.com/releases/prweb2012/4/prweb9449740.htm

 

[DCFusor]

Some other "fundamentals":
http://www.zerohedge.com/news/funds-cut-positions-gold-4-and-silver-20-gold-positions-3-year-low

 

[pmbug]

Yeah, definitely a sign of a "bubble"!

 

[DoChenRollingBearing]

I wonder, and wonder, when all of this central bank demand for physical will actually affect the price.

CHINA is really buying up a storm, thanks for the post PMBug!

 

[DCFusor]

I think the CB's are doing their "mandate" stuff and not buying when their demand would drive up the price. They can generally afford to be more patient about it, though if they've actually learned how to trade - that's big news. Remember when they tried to dump some mortgage paper awhile back? Disaster.

 

[rblong2us]

another 'fun'damental to ponder, as a result of this coming weekends supermoon -

http://www.zerohedge.com/news/cashin-supermoons-911-and-isreali-call

comment from Popo -

Just in case you were thinking it: (You know you were). How great would the moon's gravitational force be on the gold that you are buying and selling? Well, the moon's mass is about 1/100th of the earth's mass. And the distance from the gold being weighted to the moon is about 60 times the distance to the earth's center (240,000 miles vs. 4,000)

Since the force of gravity is proportional to the body's mass, and inversely proportional to the SQUARE of the body's distance from the object, the moon's gravity would generate (1/100) / (60^2) times as much force as earth's gravity on the gold. Thus it is approximately 1/360,000th as strong as earth's gravity.

If you bought $360,000 worth of gold, waited till the moon moved to where it would have the most favorable effect, and then sold the gold, you should gain about 1/360,000th of the amount bought and sold.

...which is one way to make a buck.

 

[KMS]

I would give you more greens if I could for that tidbit, Rblong, but alas, I cannot!

 

[pmbug]

Uh... The moon's pull is acting in opposition to the Earth's. If the moon is pulling stronger, wouldn't that mean that gold would weigh 1/360,000 less? Good time to buy 90% silver by weight.

 

[DCFusor]

Depends on which side of the earth the moon is on...

 

[rblong2us]

So in order to get the moon to pull the metal a bit harder in the weigh scale, it needs to be far side.

And does the blocking effect of the planet diminish the gravitationel effect of the moon, thus messing up our cunning plan to maximise weight gain when selling ?

Was my old great grandaddy right to say -
"only buy gold when theres a full moon overhead"
and did he even say it :shrug:

And if the moon passes over us approx once a day, why do we have two tide cycles ?

F**k me this sooper moon is clearly having some effect :judge:

 

[ancona]

I weighed a silver ounce last night. It weighed........one ounce....

 

[rblong2us]

spring balance or beam balance ?

and where exactly was that big fat moon in relation to your scales ? (-: