Are Gold and Silver Prices in a Sweet Spot?
You must have heard by now. Central Banks of the world are buying less gold and silver. China is often identified as the main player in the story. But, is it true? In over 20 years of following and researching the gold and silver market I have never seen such a strong effort to discredit gold and silver. One particular report I just read, attempts to refute claims that China is selling dollars to buy gold. It claims that China has actually increased its U.S. Treasury holdings by 2000%. That is to say, China has increased its holdings twenty fold.
I am literally staring at the data over the last 12 months. In November 2013, China held $1.316 trillion dollars in U.S. Treasuries. At month end July 2014, that amount fell to $1.264 Trillion. At month end August 2014, China’s trade surplus hit a record high $49.8 billion. Over the last 12 months China’s trade surplus has averaged $27 billion per month. Let’s do a little math. Over the last 12 months a surplus of $327 billion has come into China while U.S. Treasury reserves have fallen $50 billion. Where is all the extra money going?
Numerous reports suggest China is secretly buying gold, at every opportunity, at cheap prices. Not since 2009 has China made an official report of its gold reserves. China has made it SOP to make an official report of its gold holdings every 6 years, although that is not necessarily a hard and fast 6-year rule. Experts believe a report is coming at any time. The 2009 report revealed that Chinese gold holdings had quadrupled since the prior report. James Rickards thinks another quadrupling will be revealed upon release of the next official report. That would push China Gold holdings to over 5000 tons.
Certainly, evidence of secret gold buys has surfaced. Recently, it was reported that 500 tons of gold went missing. It changed hands from someone who reports gold holdings to someone who does not. Outflows of gold from ETFs have also been highly publicized. Not publicized, however, is who the buyers have been. Isn’t one fund’s outflow another’s inflow?
While reports of less central bank gold buying circulate, the World Gold Council reported that at the end of Q2, 2014, central banks accumulated a net 118 tons of gold. That is the last quarter reported. In Q1 122 tons were purchased marking the 13th and 14th consecutive quarters of net purchases. In 2012 central bank gold buying reached a 48 year high at 544.1 tons. In 2013 that amount dropped to 409.3 tons. A marked decrease indeed, but entirely consistent with the theory that gold supply is shrinking. It’s simple, less supply = less gold for sale = less buying.
If I was secretly accumulating gold, I would lay in wait for distressed sellers of larger amounts that could be purchased under the radar. As I alluded to earlier, missing gold is not reported as purchased gold. It’s just “missing”. China has remained the prime suspect for this unreported transaction and others. Just imagine the surge in gold price if and when it comes to light that central bank gold purchases have far exceeded official reports. In the words of Art Cashin, “It would be a different day for gold owners.”
Evidence is now surfacing. That day is coming. In a September 29, 2014 report from Seeking Alpha, Heavy Demand Appears in Gold and Silver. Here are highlights of that report:
- “In the latest month we have seen heavy physical demand for both gold and silver across the globe.”
- “In September 2014, U.S. Mint sales of gold and silver have rebounded.
- Gold and silver sales by the Australian Perth Mint have seen similar rebounds.
- Shanghai silver inventories have hit a new low due to increasing demand.
- At the current rate of declining silver inventories and rising demand, the Shanghai Exchange could be out of silver in “less than two months.” (Remember this one)
- In September, 2014, 50 tons of gold have been withdrawn from the Shanghai Gold Exchange indicating China is willing to “scoop up cheap gold.”
- Silver Miners are selling bullion at a 30% premium to spot.
With the dollar now at its strongest level in years, it only makes sense that anyone with dollars in reserve would convert a portion of those strong dollars to assets that become undervalued in dollar terms, as the dollar gains strength. China seems to be the focus of many reports but China is not the only gold buyer out there now taking advantage of lower dollar-denominated gold prices.
Russia has also been identified as an ally of China in the quest to accumulate gold at cheap prices. Last April, it was reported that Russia dumped a record amount of treasuries to buy 900,000 ounces of gold. By the end of Q2 2014, Russia moved up two places in global gold reserve rankings. Several other countries have joined the effort.
Central bank gold buying is not dead. In fact, gold buying overall, as indicated by the Seeking Alpha report is rebounding at every level. And, let’s not forget about silver. Reported increased sales from both the U.S. Mint and Australia’s Perth Mint, suggest gold and silver demand, at the individual investor level, is on the rise as prices dip into the sweet spot. The sweet spot by my definition is when gold and silver prices fall below their all-in cost of production.
The mainstream media has it all backwards. When stocks dip they tell you it’s a great buying opportunity. When stock prices dip below their book value someone buys all the stock. But, when gold and silver prices dip, you hear buying is the last thing you should do. The very purpose of diversification is to hedge against the worst case scenario and profit in the best of times. If your portfolio is 10% gold and silver and 90% stocks and other assets, why ever be disappointed at a dip in metals prices? It generally means everything else, (the 90%) is doing great. Why spend so much time discrediting gold and silver when on average, it accounts for less than 2% of all the money invested?
I believe a different day for gold and silver holders is coming. Until then, enjoy higher stock prices, revel in our recovery, thank God for any rebound in housing but by all means, take advantage of gold and silver prices now in their sweet spot.
Once again, the opinions expressed herein are just mine. You can agree or not - it’s your money.
RESOURCES
http://www.zerohedge.com/news/2014-05-21/russia-dumps-record-amount-us-treasurys-here-what-it-buying
http://www.gold.org/supply-and-demand/gold-demand-trends#full
https://smaulgld.com/foreign-holdings-u-s-treasuries/
http://money.msn.com/investing/c_galleryregular.aspx?cp-documentid=253826981
http://www.tradingeconomics.com/china/balance-of-trade
http://seekingalpha.com/article/2528885-heavy-demand-appears-in-gold-and-silver?uprof=45
http://www.forbes.com/sites/greatspeculations/2013/07/22/china-working-quietly-to-buy-up-gold/