Eric Sprott’s Open Letter to the World Gold Council: Official Statistics Are Misleading

sprottWhile demand for physical gold remains extremely strong, prices on the COMEX have fallen precipitously. This contradictory situation is the single most important obstacle to a healthy gold mining industry.
In my opinion, the massive imbalance between supply and demand is not reflected in prices because available statistics are misleading. It is not the first time that GFMS (and World Gold Council) statistics come under pressure from the investment community. In his now celebrated “The 1998 Gold Book Annual”, Frank Veneroso demonstrated the inconsistencies in GFMS gold demand data and proceeded to show how they grossly underestimated demand. The tremendous increase in the price of gold over the following years vindicated his conclusions.
I urge the leaders of the World Gold Council, for the benefit of their own members, to improve the quality of their data and find alternative sources than the GFMS, which paints a misleading picture of the real demand for gold.
This lack of quality information has certainly been one of the driving factors behind the lack of investors’ confidence towards gold as an investment. Gold has been one of the best performing asset classes since 2000, and the World Gold Council should be promoting it accordingly.

 

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By Eric Sprott, Markets At A Glance:

Dear World Gold Council Executives;

As you very well know, the business environment for gold producers has been extremely challenging over the past few years. While demand for physical gold remains extremely strong, prices on the COMEX have fallen precipitously. This contradictory situation is the single most important obstacle to a healthy gold mining industry.
In my opinion, the massive imbalance between supply and demand is not reflected in prices because available statistics are misleading. It is not the first time that GFMS (and World Gold Council) statistics come under pressure from the investment community. In his now celebrated “The 1998 Gold Book Annual”, Frank Veneroso demonstrated the inconsistencies in GFMS gold demand data and proceeded to show how they grossly underestimated demand. The tremendous increase in the price of gold over the following years vindicated his conclusions.

For very different reasons, we are now at a similar pivotal point for gold. Over the past few years, we have seen incredible incremental demand from emerging markets. Indeed, so much so that the People’s Bank of China has announced that it is planning to increase the number of firms allowed to import and export gold and ease restrictions on individual buyers.1 In India, the government has been fighting a losing battle against gold imports by imposing import taxes and restrictions.2 Moreover, Non-Western Central Banks from around the world are replacing their U.S. dollar reserves by increasing their holdings of gold.3

But, demand statistics reported by the World Gold Council (WGC) consistently misrepresent reality, mostly with regard to demand from Asia.

To illustrate my point, Table 1 below contrasts mine production with demand from some of the world’s largest gold consumers. According to WGC/GFMS data, the world will mine, on an annualized basis, about 2,800 tonnes of gold for 2013.

But, I adjusted these figures to reflect mine production from China and Russia, which never leaves the country and is used solely to satisfy domestic demand. After adjustments, we have a total world mine supply of about 2,140 tonnes. On the demand side, I make some in-house adjustments to better represent demand from emerging markets. To proxy for gold consumption in China, Hong Kong, India, Thailand and Turkey, I use net imports of gold, as reported by their various governmental agencies. While imports might in general be an imperfect proxy for demand, those countries see very little re-export of what they import and keep most of it for themselves, so it is not unreasonable to assume that what they import they “consume”, on top of their domestic production. To this I add the demand, as estimated by the GFMS, from other countries and that of central banks. I annualized the year-to-date figures and found that for this year, annualized total demand is approximately 5,200 tonnes. On that basis, “core” annualized demand is approximately 3,000 tonnes more than mine supply.

TABLE 1: WORLD GOLD SUPPLY AND DEMAND 2013, IN TONNES
open-letter-table1.gif

Sources: GFMS data comes from the WGC’s “Gold Demand Trends” publications for 2013 Q1 & Q2. Chinese mine supply comes from the China Gold Association and is up to August 2013, the annualized number is a Sprott estimate.5 Russian mine supply comes from the WBMS (Bloomberg ticker WBMGOPRU Index) and is for 2012, 2013 statistics are still unavailable. Chinese data is taken from the Hong Kong Census and Statistics Department and covers the period Jan.-Aug. 2013 and is annualized to account for the 4 missing months to the year. Changes in Central Bank gold reserves are taken from the IMF’s International Financial Statistics, as published on the World Gold Council’s website for 2013 Q1 & Q2 and include all international organizations as well as all central banks. Net imports for Thailand, Turkey and India come from the UN Comtrade database and include gold coins, scrap, powder, jewellery and other items made of gold. The data is for 2013 Q1 & Q2. ETFs data comes from Bloomberg’s ETFGTOTL Index.

However, these figures also exclude what the GFMS dubs “OTC investment and stock flows”, which is a name for a simple plug because no one really knows what is traded in the OTC market. Also, to remain conservative and avoid possible double counting, I exclude the category “technology” from my demand estimate, which the WGC/GFMS estimates to be about 400 tonnes a year.6 Certainly, some of this demand is captured by the demand numbers for China, Turkey, India or Thailand, but it is near impossible to disentangle them. Nonetheless, it should be kept in mind that my demand estimate is conservative and probably understated by a few hundred tonnes.

Of course, another important source of supply is gold recycling, which the GFMS estimates at about 1,300 tonnes for the year. However, this number is questionable at best as gold recycling is hard to estimate. But, most importantly, a large share of it is probably done in India and China, which as mentioned before do not re-export their gold. In the context of my analysis, recycling from those countries should therefore be excluded from the total supply number.

The real incremental source of supply this year has been the flows out of ETFs. According to data compiled by Bloomberg, and as shown at the bottom of Table 1, ETFs have seen outflows of approximately 724 tonnes year-to-date. On an annualized basis, this represents an additional supply of 917 tonnes. But, this incremental supply is only temporary. As shown in Figure 1 below, ETF holdings of gold seem to have stabilized at around 1,900 tonnes after a rapid decline in the first few months of 2013.

The evidence presented here is clear, demand for physical gold is extremely strong and, in reality, without the massive outflows from ETFs (half of world mine supply), it is hard to imagine how this demand would have been met. Since ETFs have a finite size (about 1,900 tonnes left), these outflows cannot continue for much longer (see our article on the topic).7 All these observations point to a considerable imbalance between supply and demand (unless Western Central Banks decide to fill this void with what is left of their reserves). If recycling was reduced by one half (China, India and Russia) and the temporary sales from ETFs were excluded, demand could be as high as 5,185 tonnes versus supply of 2,140 tonnes. The supply-demand imbalance is obvious to all.

FIGURE 1:TONNES OF GOLD IN ETFS
open-letter-chart1.gif
Source: Bloomberg

As was the case when Frank Veneroso first published his book in 1998, the GFMS methodology understates demand and the World Gold Council, by using data from the GFMS, misleads the market place.

To conclude, I urge the leaders of the World Gold Council, for the benefit of their own members, to improve the quality of their data and find alternative sources than the GFMS, which paints a misleading picture of the real demand for gold. This lack of quality information has certainly been one of the driving factors behind the lack of investors’ confidence towards gold as an investment. Gold has been one of the best performing asset classes since 2000, and the World Gold Council should be promoting it accordingly.

Regards,
eric-sig.png

Eric Sprott

1 http://www.reuters.com/article/2013/09/30/china-gold-idUSL4N0HQ15N20130930
2 http://www.bloomberg.com/news/2013-10-09/gold-imports-by-india-slump-as-curbs-reduce-demand-for-jewelry.html
3 http://business.financialpost.com/2013/10/07/central-banks-to-add-15b-in-gold-this-year/
4 This is calculated by taking the total consumer demand for jewellery, coins and bars for 2013 Q1 & Q2 from table 10 of the WGC’s “Gold Demand Trends” and subtracting from it demand from the individual countries we have listed in the table (China/Hong Kong, India, Turkey, Russia and Thailand).
5 http://www.cngold.org.cn/newsinfo.aspx?ID=942
6 Technology refers to gold used in the fabrication of electronics, dental, medical, other industrial purposes, etc.
7 http://www.sprott.com/markets-at-a-glance/redemptions-in-the-gld-are,-oddly-enough,-bullish-for-gold/

 


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Comments

  1. GFMS and WGC have been a joke for a very long time. Hard to see anything good coming from them.
     
    Veneroso’s work was vilified back in the late 1990′s as I recall. He was spot on back then, much like Sprott is right now.

  2. The majority of information provided is misleading and manipulated.  Everywhere you look, many reporting agencies, particularly our government.  The numbers have constantly been and will continue to be manufactured for the purpose of misleading the masses.
     
    When the supply of physical PM is no longer available, they will spin the truth again.
     
     
     
     
     

  3. The EU’s version of the U.S. pity party.  Maybe we can send some actors over to help the cause.
     
    http://www.ukip.org/newsroom/news/942-eu-could-run-out-of-money-by-mid-november

  4. Yes, Eric.
    For silver, add up all the main mintages, and compare that to our supposed annual investment demand. It’s multifold of reported.
    That begs the question, where is that silver all coming from? I just had a long Skype call with a silver vlogger who is now of the opinion that there may be very substantial stockpiles we’re not being told about. That the US powers that be are creating an image of scarce gold and silver, while really they have too much to admit. And Karen Hudes came with that 170,000 tonne gold storage in Hawaii story. Perhaps THIS was supplying metal for this sell-off, not German gold, although they gladly play along and make it seem like a big deal that’s being exposed.
    Something to think about. China might be suckered into thinking they’re cornering the gold market, when USA has not (multiples) of what tey claim and make sure to not let anyone audit.

  5. “I just had a long Skype call with a silver vlogger who is now of the opinion that there may be very substantial stockpiles we’re not being told about. That the US powers that be are creating an image of scarce gold and silver, while really they have too much to admit.”
     
    Yeah right, the US has sooo much gold Germany has to wait seven years just to receive only 300 tons. If there was this massive stockpile available to the US Government then the Shanghai Gold Exchange  would not have run out of gold for an entire month after the April gold smash when global demand surged. India wouldn’t be desperately trying to quell demand for gold through draconian measures. The GOFO rate is again negative after being negative for a record 40 consecutive days in July and August. Clearly physical gold supplies are very tight in London, supposedly the largest physical gold market in the world, otherwise the banksters would not be raiding GLD and other ETFs. UK gold exports this year are over 1100 tons as at the end of August (1000 to Switzerland, 100 to Hong Kong), nearly ten times what they were last year. The gold bars are refined in Switzerland and then sent to China likely never to return.
    The US dollar is finished as the world reserve currency. Any tiny credibility that the US Government/Federal Reserve had was lost after the latest Government shutdown/debt ceiling debacle. After this who in their right mind would want to be holding US dollars?

    • When exactly did gold run out? Who was supplied with the last bar?
      It sure looks like shortage, but the gold always shows up, even at the lower prices AND premiums.
      Why are premiums so low right now, when someone was just handed the last bar? Is demand dropping as much? How can you convince investors to stop buying gold at low prices when stockpiles are depleted?
      You know, there might be something to the theory that there is more than is being acknowledged. A lot of gold changed hands in the wars of last century. It was mined for 5000 years, and the ore grades were always better than today. See all those deserted gold mines. They used to be of much higher grade than what we’re digging now. If there was ever a creek with gold, if has been sifted through by armies of volunteers, through centuries.
      Nothing is sure in this world and economy. Every year we learn that what we considered fact, was not correct. Why not consider the fact there could be (much) more gold in secret stockpiles? Gold is power, for when you really need it. And where did all the war gold go otherwise? No gold has even been known to be thrown away intensionally. Goldfinger didn’t nuke the largest stockpile.

      Silver, obviously those number we’re told by guru’s are also way wrong. Investment demand has been several 100′s of millions of ounces a year. How much of that was melted to create new bullion? I think under 1% is a good bet. It’s out there. Over a billion ounces in VERY modern bullion. More than a year’s production. Because modern bullion is a bit like gold. Gold you don’t destroy/lose, modern silver bullion you don’t melt away. The smelter always pays less than the eagerly buying stacking population. 
      What if USA has stockpiles they don’t tell us. Just like China doesn’t tell (but we KNOW they have more).
      They sell into the market as much as they have to, or CAN without being noticed. If Karen Hudes is somewhat accurate, even factor 10 overstating a Hawaii stockpile, you can do a LOT of manipulation and merry go round with that. 
      I think it’s wise to explore all possibilities. Gold might be less rare than USA is letting us on to believe. And it’s hard to prove otherwise.
      Silver stockpiles beyond the reported are a possibility. The size of the vaults however, would be crazy. Silver is 20x harder to high. And if you go for fiat value, over 100x. One billion $ in silver kind of gets in the way. And that would still be a tiny spec of a stockpile. Roughly ASE annual production. Hardly a war winning amount. When 30,000 ounces used to buy off wars.

  6. I don’t believe ANY government supplied statistics including those from China and Russia.

    • Indeed, Mary.  Lying is as natural to a politician as is breathing to the rest of us.  It’s gotten to the point now, where lies are told in situations wherein there is NO reason whatever for not telling the truth.  I dunno… maybe they just want to stay in practice?
       
      Both China and Russia view gold as a strategic material.  Because of this, ALL info in their possession regarding gold IS a state secret.  They are not about to go around blabbing what they have in terms of gold tonnage, what they are importing, or what they are producing.  They would just as soon publish the truth about their military capabilities regarding hardware, manpower, and training scenarios as to say anything about gold that even vaguely resembles the truth.

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