It's no secret that demand for gold has always been strong in the East. But since gold's mid-April correction, the move from Western economies to Eastern ones has picked up steam. It's not because vaults in North America are less secure; part of the reason is that Western governments own more gold than their Eastern counterparts, especially as a percent of total reserves. But the Eastern world is also seeing more inflation and is, generally speaking, more wary of political promises and assurances.
This trend is increasing, and carries with it a message for investors.
First, here's what has occurred in just the past 45 days in the Eastern parts of the globe…
Deutsche Bank opens gold storage facility in Singapore.
The bank's now second-largest vault has the capacity to store up to 200 tonnes of bullion. JPMorgan and Malca-Amit recently opened vaults in the country as well. "Demand for physical gold storage in the region is growing," says Mark Smallwood of the bank's asset and wealth management unit in the Asia Pacific region. Further, Singapore last year stopped charging sales tax on gold traded for investment purposes.
While some US states are exploring the possibilities of making gold a currency in their jurisdiction, they are clearly in the minority, have had little success, and there's no discussion from any government official that we know of to lower or eliminate taxes on precious metals. Given debt levels and ongoing deficit spending, one won't be coming either.
China approves two gold-backed ETFs.
The new gold funds will trade on the Shanghai Stock Exchange, tracking the spot gold price, just like GLD.
Meanwhile, the overriding message from the North American mainstream is that gold is a dead trade. We think this quote by Zhang Bingnan, secretary-general of the China Gold Association, is quite prescient: "The dumping recently of holdings in gold exchange-traded products by overseas investors may not prove to be a wise move."
Gold demand in Asia is already reaching quarterly records.
Wonder where some of the bullion went from the selling of gold ETFs?
- Net gold imports into China reached between 160-170 tonnes in April alone, and physical demand shows no sign of abating. Chinese gold imports are expected to swell further after more than doubling to an all-time high in March. "Consumers and industrial users tend to see price drops as buying opportunities," Zhang Bingnan, secretary-general of the China Gold Association, told Reuters. "Investment demand should continue to stay strong through the rest of the year because of limited investment alternatives," said Zhang. Jewelry chain Chow Tai Fook, the world's largest jewelry retailer by market value, told Reuters that traffic at its China stores jumped 50% during the recent "May Day" holidays.
- Indian imports are expected to reach 350-400 tonnes in the April to June period, 200% higher than a year earlier and almost half of last year's total. This is also significantly higher than the 256 tonnes imported last quarter. The jump was due to lower prices; Indians looked at the "crash" in April and said, "Thank you!"
This is in stark contrast to how many GLD investors reacted when the gold price fell.
China is now lead financier to new Australian mines.
Beijing has now committed more than US$1.5 billion to projects it wants to see developed to ensure a long-term supply of metals. US and European financiers have retreated from the sector, so China's network of state-controlled banks, mining companies, and engineering and construction groups are taking up the slack. I wonder who will be better positioned by the end of the decade?
US outflows vs. Shanghai inflows.
The SPDR Gold Trust (GLD) has now seen six straight months of outflows. But in Shanghai, it's all about inflows…
The crash in gold was met with a quadrupling of volume, the exact opposite of the reaction in North America. And it should be noted that many Asian exchanges deal in more physical metal than the paper forms the Comex does.
Central banks continue buying.
During the "crash" month of April…
- Russia bought 269,000 troy ounces
- Kazakhstan added 85,000 ounces
- The Republic of Azerbaijan bought 32,000 ounces, the fourth consecutive month of purchases by the former Soviet republic
- Turkey's central bank bought 586,000 ounces
- Belarus and Greece also added to holdings, though amounts have not yet been reported
- Altogether, the IMF says of those that have reported thus far, central banks bought almost a million ounces of gold last month.
The potential for continued strong buying by emerging-market central banks is higher than most analysts realize. If countries in the "emerging market" category raised their gold reserves from the current average of 2.6% to 15%, demand would be 17,359 tonnes, about seven years of global production.
So what does this trend of gold moving from West to East mean?
Eastern countries will increasingly impact demand and price.
China and India already account for over a third of all investment demand for gold. North America? Nine percent. Those figures are based on 2012 data, meaning the gap between the two is certainly greater this year. The upshot is that actions from the East will have an increasingly greater impact on the gold market going forward.
Eastern buying takes metal off the market.
The bullion being purchased by the Asian markets is of a long-term nature and won't come back into the world market any time soon, probably decades or longer. The result will be a shortage of metal when the West decides to reenter the market. Just because investors in New York want a few more ounces doesn't mean it will be available.
Eastern gold storage options are growing.
As the industry matures, expansion efforts have been greater in Eastern countries, as some of the above points show. This trend is widely expected to continue.
The West's need for revenue puts domestic storage at greater risk.
Again, it's not that vaults in the US or other places aren't safe; it's that assets stored here are an easier target by revenue-starved government officials than those stored outside their borders. There is no perfect solution, of course, but having an extra layer between your gold and your local bureaucrat adds a level of protection you wouldn't otherwise have. It is imperative that we all have some gold and silver stored outside our political jurisdiction.
Keep in mind that the issues aren't just confined to US citizens: the European Central Bank reiterated there is "no limit" to the ECB bond-buying program, leading PIMCO to warn that the sterling "will be devalued significantly." The yen is down roughly 30% against the US dollar in the last ten months, the result of Prime Minister Abe's aggressive "whatever it takes" promise to spur inflation.
Given the number of countries today that are basically insolvent and reaching deeper into citizens' lives and wallets, storing some gold in the East may be a very prudent move.
Jeff Clark is editor of BIG GOLD, and a regular contributor to the Hard Assets Alliance.
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