Heavy buying by just three dictatorships add significantly to current gold demand, but are overwhelmed by even faster supply flows. Prices are falling. Investors are shying away

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Gold is in a bit of trouble.

And without three dictators, things would be much worse.

In the September 2018 quarter, Putin’s Russia bought more than 90 tonnes of the yellow metal, Erdogan’s Turkey bought more than 18 tonnes, Nazarbayev’s Kazakhstan bought 13 tonnes. These three bought 83% of all central bank purchases in the period, and they were joined by India who also bought 13 tonnes. These four accounted for more than 90%.

Gold needed them. Other than central bank buying, supply rose and demand fell according to the latest World Gold Council data. In fact supply in Q3 2018 was 1,162 tonnes and demand was only 816 tonnes, an oversupply of 346 tonnes. So even with strongman buying the overhang was almost 200 tonnes in the quarter. How long the price can hold up in the face of the strong supply flows is an open question.

From November 1, 2017 to November 1, 2018 prices in US dollars have slipped -5%. In New Zealand dollars they are virtually unchanged.

But what will happen to the extra 197.2 tonnes produced in the third quarter of 2018? Don’t forget that is on top of the 104.2 tonnes of excess supply in Q2, and 110.3 tonnes of excess supply in Q1. It is mounting up; in the past year the excess is 445 tonnes, even after those handful of ‘central banks’ above bought 426 tonnes on the open gold markets. Without central bank buying, the excess has been 872 tonnes of more supply than private market demand. That is a massive 24% overhang over the past year.

Unfortunately, jewellry demand is stagnant at 2,220 tonnes in the past year. Technology demand is always stagnant at about 330 tonnes a year and has been like that for seven years (and prior to that it was higher), while investor demand is declining and only 1,056 in the past year (down -9.3%). A recent loss of faith by professional buyers for exchange traded funds isn’t helping and overshadows the decline by the traditional bear-investors in coins and bars which itself is -8.4% lower in the past year to September than in the equivalent prior period. For them, they have the ongoing costs of storage, so a lack of price gains will add to their overall losses.

You kind of need a sort of blind faith to keep buying gold. Yes, it might have the sort of counter-cyclical insurance feature often touted, but that seems a very risky bet these days when the supply overhang is as much as 24% ! and the only main buyers are three dictators.

And even for them, their holdings are minor. Russia for example has now amassed more than 2000 tonnes in their reserves as they actively de-dollarise. But at today’s prices that is worth only US$80 bln and is equivalent to about 5% of Russian GDP, or a bit over two weeks of activity in their economy. Hardly a big reservoir of financial stability. And it will be an increasing problem for Russia if this ‘investment’ loses value in international terms.

Here are the long run global gold demand charts (in tonnes) with the Q3 2018 data added:


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