Gold Demand and Capacity

An interview from Eric Sprott came to my mind today. Apparently, Dubai will build the largest refinery in the world with 1400 tonnes/annum gold refining capacity. You can put that next to the 3000 tonnes/annum Swiss gold refining capacity today. That’s a lot of capacity coming online. Now why would someone do this? It’s simple, because demand for gold is going up, not down.

Just like in the oil refining industry, capacity follows demand. The more people consume gasoline (or gold jewellery), the more oil refining capacity (or gold refining capacity) is needed.

This is the gold refining picture today. If you add it all up we get around 8000 tonnes/annum. Most of these are Swiss companies. But now you can add Dubai’s Kaloti to that list.

I really wonder what will happen at this stage when demand is going up, while gold supply is bound to go down in 2015.

Eric Sprott PSLV Trust Offering

 If you hadn’t noticed yet, the PSLV Trust of Eric Sprott has seen a technical breakout in silver premium. So investors are now paying more to get their hands on the physical silver than paper silver.

If this trend keeps going up, you can be sure that Eric will price another offering of silver trust units to take some silver off the market. He hasn’t made an offering in 2 years, I’m sure he’s itching to finally have one. Maybe this time will be the last blow to the imbalance in silver supply and demand before the silver price takes off.

Gold Supply and Demand Analysis

What I like about Eric Sprott’s letter to the World Gold Council are his numbers about the supply and demand in gold.

In that letter he said that demand far exceeds supply at this moment. See second column in table below. 

Demand is 5184 tonnes and supply is 4403 tonnes. If mine supply increases by 3% it would mean nothing compared to the increased demand from China.

Eric explains why demand is far more important than supply

But Eric’s numbers haven’t accounted for the increased demand from China and the decreased ETF outflows nowadays. If we take the current numbers I believe the Chinese gold demand could be in the 1560 tonnes and the ETF outflows could have halved to 450 tonnes based on the flattening slope in the GLD ETF.

That would give supply of 3936 tonnes and demand of 5670 tonnes. That’s a deficit of 1734 tonnes, which means the gold price should go up.

On the supply side we need to watch what the mines produce, because that’s a big part of the supply. ETF outflows are just a small part and they are declining. Gold recycling should be subdued due to low gold prices.

Gold Supply

On the demand side it is very important to watch China, India and Hong Kong as they control the whole demand picture. What central banks do are essentially meaningless compared to China and India.

Gold Demand

Follow Up on Eric Sprott’s Bullish Call on Gold

As a follow up on Eric Sprott’s bullish call on gold here, let’s see what has happened ever since.

His premise was that hedge funds take possession of their physical gold of the GLD trust, because there isn’t any other gold available. As they take possession of this physical gold, they are going to sell it to China who give huge premiums on this physical gold (around 3%).

Following chart indeed says to us that hedge funds are still taking possession of their GLD trust units. The GLD now only has 969 tonnes of physical gold left. The question is now, how much physical gold does GLD really have? If someone knows, please tell me. But we have another way we can look at it, by just looking at how much registered gold there is on the COMEX.

Chart 1: GLD

If we look at the COMEX warehouses, registered gold (which represents 40 tonnes physical gold) is declining (blue chart on Chart 2). Total stock is declining too (around 200 tonnes). When these charts hit zero, there is no gold anymore at the COMEX and we will see defaults. The gold exchange will become a cash exchange.

Once the blue line intersects with zero, bad things will happen because no physical gold is available at the COMEX. I guess that when the blue line intersects, there is a chance GLD could blow up as people scramble to get physical gold at the GLD trust.

Chart 2: COMEX

Jim Sinclair confirms:

As long as physical gold remains at a premium above future that is above the cost of insurance and transportation, the lower the inventory of gold at the COMEX goes. A futures exchange without a warehouse inventory becomes a cash exchange. This is the emancipation of physical gold from the manipulative capacity of No-Gold, Paper – Gold

Now let’s see how this translates into the premiums on the Shanghai Gold Exchange.

Chart 3: Shanghai Gold Premium

As you can see on Chart 3, the premium has never been as high since I monitored it. We are at 2.8% now.

So investors are taking the opportunity to make arbitrage profits by buying gold from GLD and selling it to China at a premium.

Let’s see how long this can go on.

On the silver front, premiums have almost skyrocketed to 40% for some miners.

Chart 4: First Majestic Silver premium

The Great Disconnect in the Paper and Physical Precious Metals Market

Over the last few months, precious metals investors have seen their net worth decline due to declining precious metals prices (GLD), (SLV). A lot of this decline in precious metals prices was due to a decrease in demand, which was the result of selling by hedge funds as the World Gold Council reported here.

First quarter gold demand of 963 tonnes was down 13% compared with Q1 2012 due to an outflow in the total gold ETF holdings of 177 tonnes. 2013 marks the first year in a decade where ETF’s are actually selling gold. While ETF holdings were reduced, this selling has been countered by an increase in physical demand for gold by China and India. Total demand in China rose 20% to 294 tonnes in Q1 2013 as compared to Q1 2012 (50 tonnes increase).

This huge increase in demand for physical gold can be witnessed on Chart 1, which gives the net imports of gold from Hong Kong to China.

Chart 1: Net Gold Imports from Hong Kong to China

While Chinese demand for gold was strong, Indian demand increased at an even higher pace. The Indian demand for gold increased 27% on the same quarter last year to 257 tonnes.

On the supply side we see a total increase of 1% in the first quarter of 2013 as compared to Q1 2012. Mine production increased 4% while recycling of gold decreased 4%.

(click to enlarge)

Chart 2: ETF gold holdings in tonnes by region to end Q1 2013 (Source: World Gold Council)

So, the reason for the decline in precious metals prices is evident from an increase in supply (mine production increased) and a decrease in demand for gold (ETF outflows) (Chart 2). But there is an important point I need to make here. While the supply side is pretty constant at 1% increase, the demand side is the critical indicator we need to look at with its 13% decline. The decline was a result of hedge funds converting their gold holdings into equities. The Dow Jones (DIA) hit an all time high last week, fueled by a bullish prospect in the equity market of Japan, which on itself was a result of the massive Japanese monetary stimulus announced in April 2013. Although investors are cheering the bull market in equities, the macroeconomic conditions keep worsening. A few examples were a deterioration in PMI, capacity utilization, ISM manufacturing, vehicle sales, ADP employment, initial claims, PPI, mortgage applications, wages.

To see what this means for gold, read on here.

Gold: Supply and Demand

Just a note to myself. Eric Sprott has got supply and demand numbers for gold out:
http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2012/8/24_Sprott_-_We_Are_Staring_At_Chaos_%26_Collapse_In_Front_Of_Us.html

Gold Supply = 4000 tons/annum
Gold Demand = 6500 tons/annum
Gold Lease = 2500 tons/annum

We’ll just have to find out what these numbers mean…

Silver off to the races

As I predicted before, silver is having a breakout these days. And the evidence is piling up. One of the evidences of a bullish scenario is the silver stock at the CME. 

As you can see on chart 1, the silver stock at the CME is declining, ever since Eric Sprott did his PSLV offering of $US 200 million on the market on 12 July 2012. I predict that registered silver will start to decline soon (blue dots).

Once the silver price breaks the $US 30/ounce level, it’s off to the races.

Chart 1: Silver stock at CME

Although the CME numbers amount only to 140 million troy ounces (Chart 1) (30 million ounces held by dealers at COMEX), while the silver supply from miners is around 760 million ounces a year, the decline in silver stock at the CME can be a small secondary indicator of declining supply (or increasing demand) in the silver market.

The Status on Silver

This article is a summary on the most recent developments in the silver market. I will talk about the silver technicals, silver-gold ratio, silver investment, silver depletion, silver long/short positions and silver warehouse stock.

Let’s start with the technicals. A pretty concerning picture for silver can be witnessed on the gold-silver ratio chart (Chart 1). You can see that in mid 2010, silver started to outperform gold until mid 2011. During that period, silver went from $US 18/ounce to $US 50/ounce (Chart 2). But recently, the silver price underperformed the gold price, with the gold-silver ratio going back to 60.

Chart 1: Gold – Silver Ratio

Chart 2: Silver Price

However, based on historical gold-silver ratios, we could go back to a 16:1 ratio as the trend in the gold-silver ratio is downwards (chart 3). We already had a second peak in 1992 at gold-silver ratio of 94 and we will go back to the low of 16.

Chart 3: Long Term Gold – Silver Ratio

Last year, silver had been doing well, going to $US 50/ounce and a gold-silver ratio of 30. Recently, we saw a correction in the gold-silver ratio back to 60. I believe that correction is over and many other investors including Eric Sprott acknowledge this. We’re approaching a key technical point of a wedge pattern. Either we’ll get a huge move to the upside or we get a huge move to the downside. I believe we’ll see upside and we already see evidence of this. Just recently, the Sprott Physical Silver Trust priced in a follow-on offering of silver trust units in an amount of $US 200 million.

The fundamentals of silver are getting better and better every day. Concerning the depletion of silver, the New Scientist forecasted in 2005 that silver would be depleted in about 15-20 years. This means today we have only 10 years of silver left. Unlike gold, silver is being consumed as it is used in many applications. After consumption, the silver will be thrown together with its applications into land fills and will never be recovered. You could argue that silver can be recycled, but studies have shown that the recycling of silver is not feasible below a price of $US 50/ounce.

Silver scrap is a very important factor in supplying the silver to the markets because it comprises 22% of total silver supply. Since year 2000, the silver scrap to silver supply ratio has been steadily declining. Only just recently in 2011 we saw a spike in the silver scrap to silver supply ratio to 24.7% (Chart 4). This spike is due to the record high price of silver in 2011 ($US 50/ounce), which spurred investors to recycle jewelry and silverware. I expect this number to come down in 2012 as the silver price has been correcting.

Chart 4: Silver Scrap to Silver Supply ratio

Events like the offering of the Sprott Physical Silver Trust add to the velocity of depletion as investment demand will take silver supply out of the market. Manipulation of bullion banks to decrease the silver price only adds to the demand of investors to buy silver. We see this in the Silver Institute’s 2011 report on silver demand/supply. The demand for silver coins went up an astonishing 18%.

On the net short positions of silver I want to make clear to investors that we are approaching a decade low in the Large Commercial Net Short positions (LCNS). Historically, when LCNS goes up, the price of silver goes with it. Basically this means that a huge spike to the upside is imminent.

Chart 5: LCNS silver

On the COMEX silver front we note that registered silver went up from 29.0 million troy ounce (25 April 2012) to 38.7 million troy ounce today, indicating that physical silver has been stocked in COMEX warehouses. Total silver inventories rose from 140.6 million troy ounces (25 April 2012) to 144.4 million troy ounces today (Chart 6). Rising stocks typically mean that there is less demand for silver, declining stocks typically mean there is more demand for silver. On chart 6 we see that stocks had been slowly rising in the previous months (less demand), but more recently, the stock has been declining again since the start of July 2012. Demand is picking up again due to seasonal strength in precious metals (month of July).

Chart 6: COMEX silver stock

On the more fundamental side of the economy we noted a very interesting event in the deposit facility of the ECB. Overnight deposits declined by more than half due to the ECB deposit rate cut. This 500 billion euro will basically find its way somewhere, possibly in the precious metals market.

Conclusion: It should be a very good time to invest in silver.

Eric Sprott Taking Silver Off The Market With Offering

Yesterday, Eric Sprott priced a follow-on offering at $US 200 million, which is a 20% increase in its silver holdings. This will certainly increase the silver price at a faster pace by taking silver away from the market. Eric said silver would be at $US 50/ounce at the end of the year, maybe he’s just trying to speed it up to get his call on being right. 🙂

Too bad for PSLV holders who lost 4% premium, but I’m sure it will go much higher in the future.

Chart 1: PSLV Price Vs. Premium

P.S.: I’m going to stop monitoring the premium now as the PSLV site finally gives me the PSLV premiums in a nice chart! Looks like my requests came true. My first blog post ever, was about the PSLV premium and how it wasn’t available on the PSLV site.

Sprott Physical Silver Trust Prices Follow-on Offering of Trust Units In An Aggregate Amount of US$200,005,000

TORONTO, July 12, 2012 /CNW/ – Sprott Physical Silver Trust (the “Trust”) (NYSE: PSLV / TSX: PHS.U), a trust created to invest and hold substantially all of its assets in physical silver bullion and managed by Sprott Asset Management LP, announced today that it has priced its follow-on offering of 18,100,000 transferable, redeemable units of the Trust (“Units”) at a price of US$11.05 per Unit (the “Offering”). As part of the Offering, the Trust has granted the underwriters an over-allotment option to purchase up to 2,715,000 additional Units. The gross proceeds from the Offering will be US$200,005,000 (US$230,005,750 if the underwriters exercise in full the over-allotment option).

The Trust will use the net proceeds of the Offering to acquire physical silver bullion in accordance with the Trust’s objective and subject to the Trust’s investment and operating restrictions described in the prospectus related to the Offering. Under the trust agreement governing the Trust, the net proceeds of the Offering per Unit must be not less than 100% of the most recently calculated net asset value per Unit of the Trust prior to, or upon determination of, pricing of the Offering.

The Units are listed on NYSE Arca and the Toronto Stock Exchange under the symbols “PSLV” and “PHS.U”, respectively. The Offering will be made simultaneously in the United States and Canada by underwriters led by Morgan Stanley and RBC Capital Markets in the United States and RBC Capital Markets and Morgan Stanley in Canada.

Copies of the U.S. prospectus related to the Offering may be obtained by contacting Morgan Stanley & Co. LLC, 180 Varick Street, 2nd Floor, New York, New York 10014 Attention: Prospectus Department (telephone 866-718-1649 (toll free) or 917-606-8474) or by e-mailing prospectus@morganstanley.com, or RBC Capital Markets, LLC, Attention: Prospectus Department, Three World Financial Center, 200 Vesey Street, 8th floor, New York, New York 10281-8098 (telephone: 212-428-6670, fax: 212-428-6260). Copies of the Canadian prospectus related to this Offering may be obtained by contacting RBC Capital Markets, Attention: Distribution Centre, 277 Front St. W., 5th Floor, Toronto, Ontario M5V 2X4 (fax: 416-313-6066) or Morgan Stanley & Co. LLC 180 Varick Street, 2nd Floor, New York, New York 10014 Attention: Prospectus Department (telephone 866-718-1649 (toll free) or 917-606-8474) or by e-mailing prospectus@morganstanley.com. The Offering in Canada is only being made by the Canadian prospectus, which includes important detailed information about the Units being offered.

This news release does not constitute an offer to sell or a solicitation of an offer to buy the Units, nor shall there be any sale of the Units in any state or jurisdiction in which such an offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction.

For further information:

Investor Contact Information:
Sprott Physical Silver Trust
(416) 203-2310 or Toll Free: 1 (877) 403-2310
Email: bullion@sprott.com

Vista Gold: Concordia turns into a catalyst

Vista Gold (VGZ) has been in the spotlights because of Eric Sprott’s involvement in the company (5 million shares or 7% of the company). Recently Sun Valley Gold invested quite a big amount in Vista Gold (6 million shares).

Vista Gold’s market cap is $US 250 million. The company has no debt and has a working capital of $US 25 million. Its management is very experienced (all around 30 years of experience).

To see my analysis go to: Why Vista Gold is Extremely Undervalued

Vista Gold (VGZ)