There is an upcoming gold supply crunch!
The World Gold Council (WGC) just released its quarterly “Gold Demand Trends” report, which examines trends by sector and geography. This report is one of the few reports available on worldwide gold supply and demand.
The most critical element of their recent report, in my opinion, is the gold demand overview.
As you can see, there is a consistent trend for both Q1 and Q2 of 2013. The ETF demand is going negative to the tune of a cumulative 579.1 tonnes, while coin and bar demand increased by 885.3 tonnes.
Many investors simply assume that the negative ETF demand will cancel out the physical coin and bar demand. This is far from the truth. ETF demand is very different that of physical bullion demand.
ETF demand can move significantly from quarter to quarter due to the incredibly large volume of buying and selling. ETF investors have a short term mentality and buy one quarter to then sell the next and are thus the weak hands in the market. Physical bullion demand is significantly less volatile due to the fact that physical investors buy and hold their coins and bars and are the strong hands in the market. The physical buyer will rarely be selling until we see significantly higher prices.
So ask yourself, “What will happen if ETF gold sales slow and/or stop?” The ETFs have already sold off 580 tonnes of gold (this represents 25% of annual gold mine supply) which allowed for healthy supply for the physical bullion buyers. (This also contributed to the flatter prices and lack of price increases over the last 2 quarters.) With ETF gold selloffs slowing we will see a supply crunch if physical demand trends continue upward.
The bottom line is that the supply and demand balance has a strong chance of falling short on the supply side due to the likely decrease in ETF gold outflows flattening and no longer continuing to decrease at the rate it has in Q1 and Q2. That decrease in ETF demand fed the physical gold supply for six months plus. Without the ETFs as a supply source for buyers, the end game is limited physical gold supply and increased gold prices.
Now add this caveat….what if gold ETFs start buying gold again like they did in 2011 and 2012? They won’t be able to source it from the physical bullion owners that are long on gold. Gold mines have cut back on production and won’t be a reliable source. It is a double whammy supply crunch.
The bottom line is that you need to have your gold (and silver) in hand before the ETFs and the short hands figure out there is the chance of a potentially significant supply crunch heading our way.
