Gold Flow

“There has been a distinct flow of physical gold from West to East. What does this means for gold’s place in the world – should it have been bronze, silver and bitcoins1 awarded in Sochi?”

Empty the vaults

The Federal Reserve Bank of New York vault sits 5 storeys deep underground, anchored to the bedrock of Manhattan and capable of surviving atomic bombs and hurricane level flooding. The location of commercial vaults remains a closely guarded secret, although many theories abound on exact positions in the major financial centres. The NY Fed acts as custodian for 6,700 metric tonnes of gold, most of it the property of more than 60 sovereign nations. Much of the gold arrived after World War II as many countries wanted to store their gold in a safe, “imperial” location. Germany’s central bank made waves last year when it announced the repatriation of gold stored in New York, London and Paris to its own vaults. Another gold withdrawal from US domiciled vaults came on the 23th of January 2014 when Comex (Commodity Exchange Inc.) reported that JP Morgan saw 321,500 ounces (about 10 tonnes) of gold leave it’s vault on the day. China is the answer to that flow.

Stock piling in the East

There are numerous articles about global mints being unable to keep up with the demand for gold bars and coins from Eastern (Middle East, Chinese and Indian) consumers. Asian buyers typically like smaller bars and the mints melt down and refabricate the gold stocks to meet that demand. The Singapore bank vault is expanding to accommodate the storage requirements from Asian buyers and a new 2,000 metric tonne vault recently opened in Shanghai. All this happens as Western investors have withdrawn record amounts from physically backed gold exchange traded products – see table below. The West has been dumping physical gold and the East has been happy to become the new owners.

1Bitcoins are a digital peer-to-peer currency introduced in 2009 and are being suggested by some proponents as a viable alternative to fiat currencies (much like gold) for those who mistrust central banks. Whether bitcoins themselves have longevity remains to be seen.

2013 World Gold Demand Overview (Tonnes)

goldflow1

 

Consumer Demand in Selected Countries/Regions (Tonnes)

goldflow2
Source: World Gold Council

Central bank reserves

Central banks and organisations like the IMF (International Monetary Fund) still hold vast quantities of physical gold in reserve in addition to fiat currencies. The IMF tracks these gold reserves through voluntary reporting by central banks. In terms of actual tonnes of gold, the United States holdings far exceed that any other sovereign with just over 8,100 tonnes in reserve. They are followed up by Germany, the IMF itself, Italy and France. China has the sixth largest physical gold reserve with 1,054 tonnes. What is of interest is the percentage that physical gold makes up of total reserves of the ten largest gold holders – see the chart below.

Top 10 gold holders – gold as a percentage of total reserves, February 2014

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*IMF: Statistics not calculated
Source: IMF International Financial Statistics

 

Peoples Bank of China

The Peoples Bank of China (PBoC) has over 1,000 tonnes of gold reserve, but this accounts for just 1.1% of total reserves. This is in sharp contrast to the Western Nations (US, Germany, Italy, France) where gold holdings account for over 65% of total reserves. As a percentage of total reserves, Portugal followed by Greece have the highest percentage of gold at 85% and 78% respectively. An often drawn conclusion by the gold bulls it that the PBoC has enormous fire power and capacity to increase its physical gold reserves as it seeks to diversify its reserves away from US Dollars.

Investing opportunities?

Gold investing has been likened with marmite – you either love it or you hate it. There are incredibly compelling arguments for and against holding gold, but the undeniable truth is that gold is here to stay as a means of storage of wealth – for individuals and sovereigns. Olympic athletes will continue to strive for the coveted gold medal and investors should certainly hold gold as part of a diversified investment portfolio.

 

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