The story of gold supply and demand
A couple of weeks ago I said that I needed to get a better handle on the supply and demand dynamics that were driving gold. I thought it would help me from my constant waffling of late; into and out of the gold stocks with every move up or down in the price.
Well it remains to be seen how much it helps with my waffle (I was pretty darn close to dumping OGC, AUM and CAN on Friday morning), but I did the work and here are the results. I used data from the World Gold Council for all the estimates.
Its all about Asia
So the first thing that I was a little surprised by was by just how much India and China mean to the market. I mean for all practical purposes, India and China are the market. Take a look:
Maybe this helps explain why when gold keeps getting hammered down intraday here in North America, those moves to the downside can’t gain any traction. When you think about it, the big, sustainable moves down of late have all come overnight. The main reason I didn’t include a number of my gold stocks in my sacrificial orgy on Friday was because it seems to me that someone is doing their best to bring gold down, and isn’t having much luck with it. The outsized influence of China and India on the demand side show why.
The other point to make, just in passing, about the above chart is that Chinese demand is a lot more stable than Indian demand. If I had to pick out who was at the margin here, I’d have to say it was the Indians.
The jewellery buffer
This second chart isn’t really telling a surprising story. Its just confirming the one we know, and that is that investment demand is driving demand increases.
A couple of more nuisanced comments about the chart. First, the chart is in tonnes. So what you say? Well if jewellery demand is flat in tonnes it is “to the upper right” in dollars.
Look, when you go out and decide to buy a piece of jewellery you don’t say to yourself “well I think I will by a 0.1 oz gold ring.” You say, “I think I will buy a $300 gold ring”. The point is that the key metric for understanding jewellery demand is probably not mass. Its dollars spent. And if demand in tonnes is flat, then demand in dollars spent is going up pretty substantially.
If you put this together with the previous fact that much of the demand is coming from developing Asia, you are left with the conclusion that there is a rather firm underpinning of jewellery demand brought on by the rising wealth of the Chinese and Indians. If the gold price ever stalls out for a year, or heaven forbid goes down, I would expect to see a substantial uptick in jewellery demand as those increasing “dollars spent” buy more gold.
I think you can look at jewellery demand as a big old damper. If prices go up too fast than the dollars spent number isn’t increasing in concert and so you see a reduction in demand from jewellery. If, on the other hand the price goes down the opposite happens, and jewellery demand puts a floor under price as the same dollars spent buys more tonnage.
Mine supply versus recycled supply
Last chart. Mine supply. First thing about mine supply is that all the data is in tonnes and no one I know thinks about the amount of gold a mine produces in tonnes, so this chart is in ounces.
Does anyone else think its kind of wild that there are only 25 million ounces of gold produced every year. You could basically fit a whole years production of gold into one of those big 500 tonne mining trucks.
Second, supply is growing. It is growing, but mine supply alone does not match demand. Mine production was 746 tonnes in the third quarter. Recycled production was 427 tonnes. So recycling of gold makes up almost 50% of the total supply.
Again this is all about what is the drive at the margin. Clearly its the recycled gold that is going to come when gold prices go up and go away when gold prices go back down. Just as with jewellery demand, this is another great dampening factor. Somewhat more intriguingly, one has to wonder if a point will be reached where the recycling has run its course, or at least all the easy recycling has been done. No signs of a drop so far, but one could point out that even with vastly higher gold prices, recycling has been pretty flat for the last couple years.