Monday, March 21, 2016

Demand For Physical Gold Is Back (From The West)

China accounts for a large stake in world demand for gold. What is more, the Chinese people are mainly interested in investing in physical gold, contrary to the West where investors are very busy in speculating in gold futures contracts.

The chart below shows the withdrawals of gold reported by the Shanghai Gold Exchange, starting from 2008 (red bars). Apart from withdrawal numbers I have plotted also the world gold production (yellow bars). All figures are presented in tons of gold:

source: World Gold Council and

* - only the January and February data

As the chart shows, China was very eager to absorb a vast amount of world's gold production, particularly since 2013. Let me present this phenomenon at another chart:

Here, I plotted a percentage share in demand for gold, attributed to China (represented by SGE - the Shanghai Gold Exchange). It is easily seen that since 2013 the Chinese have been absorbing around 60% - 80% of world's gold production.

Next thing, although this year (January and February) the Chinese demand has been a little bit weaker than before (probably due to higher prices of gold), China has absorbed 67% of  world's gold production to date (still an impressive figure).

Quite interestingly, this year the Chineses demand is strongly supported by the gold inflows to one of the biggest gold ETFs, SPDR Gold Shares (NYSE Arca: GLD):

Year to date the fund reported an inflow of as many as 176.7 tons of gold. In my opinion, it is a vast amount of gold - for example, in 2014 and 2015 the fund reported an outflow of 155.9 tons of gold so in just 2.5 months of 2016 the gold inflows were higher than the 2014 and 2015 outflows, combined.

So the Western demand on gold is back. What is more, the combined demand on gold, demonstrated by China and GLD this year, accounts for around 89% of gold production. In other words, during the first two months of 2016 China and GLD absorbed 89% of gold produced worldwide! This data does not take into account such countries as India or Russia, which are also active players accumulating physical gold.

Summarizing - it looks like the strong demand on gold is back.

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