Markets at a Glance
Do Western Central Banks
Have Any Gold Left???
By: Eric Sprott & Shree Kargutkar
Follow us on The past few months have been difficult for the gold investor as selling pressure in the
Twitter gold futures market has set a decidedly negative direction for the price of the yellow
metal. As fundamental investors, we always pay special attention to the supply and
demand dynamics of gold and, recently, we have found it very difficult to reconcile
lower prices with continued strong demand for physical gold.
While the supply of gold has remained largely static, we have seen a steady increase in
demand for the yellow metal. India and China have emerged as strong buyers, consuming
over half of the mine supply in recent years. Central banks have switched from being
sellers of gold to being net buyers, with their gold purchases in 2012 increasing by 17%
to almost 535 tonnes. Exchange traded products (ETPs) around the world have continued
to add to their gold hoards, as have institutions and private investors. Furthermore,
central banks, such as South Korea and Russia, have added to their bullion reserves
early in 2013, which points to sustained strength in demand. These facts are important
because, over the past decade, the annual supply of gold has stayed flat at approximately
Much ado has been made about the recent sell-off in the yellow metal forcing certain
ETPs to liquidate, adding a supply of gold into the market in the process. Our work
reveals that the previous ETP sell-offs, (which occurred in January 2011, December 2011,
May 2012 and July 2012) have all coincided with gold finding strong price support and
In our September 2012 MAAG, titled, “Do Western Central Banks Have Any Gold Left???”,
we reconciled the annual change in demand for gold between 2000 and 2012 to be
almost 2,300 tonnes. We went on to hypothesize that given the massive change in
demand, the only suppliers large enough to fill the gap between supply and demand
were the Central Banks. Now, our long search for the “smoking gun” to prove our
hypothesis appears to have finally materialized.
www.sprott.com | do western central banks have any gold left???, part ii | FEBRUARY 2013 1
Sprott Asset Management LP Markets at a Glance
A H I S T O R Y O F O U T P E R F O R M A N C E TM
Every month, the US Census Bureau releases For our analysis of supply and demand, we have
the FT900 document, which outlines US very robust statistics as far as mine production,
International Trade Data. Going through this import-export data, coin sales and ETP demand
document, we were intrigued to see that in from GFMS2, the US Census Bureau3, the US Mint4
December 2012 the US exported over $4B worth and Bloomberg5, respectively. We have good data
of gold and imported around $1.5B worth of gold, on gold recycling, jewelry sales and gold use in
representing a net export of $2.5B or almost 50 electronics and industrial applications from the
tonnes1. This surprising number led us to look at CPM Group6.
the previous releases of US International Trade
Table 2 lays out our analysis for 2012 using the
Data which go as far back as 1991 – what we
supply and demand framework.
found was truly shocking. Not only has the US
been consistently exporting large quantities of gold TABLE 2
on a net basis, the amount of gold the US has been Sources of US Gold Supply and Demand
exporting is above and beyond what the US should
Supply (tonnes) FY 2012
be capable of exporting.
The gold market is fairly simple to understand US gold production 230
from a supply and demand perspective. Since you Recycling 44
cannot fabricate gold out of thin air, supply comes
Private sales unknown
from new mine production, scrap gold recycling
Total Supply 607
and investor disposition of bullion. Demand comes
from many sources including investment demand, Demand (tonnes)
electronics, dental and industrial uses to name a
few. There can be short-term aberrations between
GLD ETF demand 5
supply and demand where the market can be
oversupplied, or demand can outstrip supply, Jewelry 41
however, over a longer period, supply should equal Coins sales 23
demand with the price acting as the equalizer. Electronics 21
Under this assumption, the amount of gold that Dental 18
the US is exporting should equate to the amount Industrial 9
of gold that the US is not consuming over a long Private purchases unknown
enough time frame.
Total Demand 885
Table 1 lays out our framework for analyzing the
US gold supply and demand. US supply - deficit (278)
We used this framework to analyze supply and
Sources of Supply Sources of Demand demand in the US going all the way back to 1991,
• Mine production • Jewelry which is as far back as the FT900 documents go.
• Scrap gold recycling • Electronics Over the span of 22 years, the total amount of gold
• Gold imports • Industrial that the US has exported – above and beyond its
• Private investor supply capability – is almost 4,500 tonnes! A truly
• Exchange traded products stunning figure. (See Table 3).
• Coin sales Admittedly there is an unknown in our analysis, that
• Private investor being gold bullion acquisition and disposition by
bullion demand private investors. However, strong demand in ETPs
www.sprott.com | do western central banks have any gold left???, part ii | FEBRUARY 2013 2
Sprott Asset Management LP Markets at a Glance
A H I S T O R Y O F O U T P E R F O R M A N C E TM
TABLE 3: US GOLD MARKET, CUMULATIVE SUPPLY DEMAND 1991-2012 (IN TONNES)
US Supply US Demand Surplus Available for Export
All Uses 6,517
Recycling 1,116 Total 1,014
Total 7,532 Total 6,517
Actual US Actual US US Net that the export ‘gap’ could in fact be significantly
Gold Exports Gold Imports Exports larger if earlier numbers were included or the real
private investor demand for gold was known.
11, 223 5,719 5,504
We are currently in an environment where policy
makers are intent on devaluing their currencies
in an effort to create growth. Real rates continue
Surplus Actual Unexplained
Available Exports Export
to stay negative in most of the developed world.
for Export Gap Every marginal dollar of debt that is created is
producing lower and lower amounts of growth.
1,014 5,504 (4,490) In a world overwhelmed by mountains of debt
and economic growth which is sub-par at best,
precious metals and real assets can act as insurance
such as GLD and PHYS and demand for gold coins against the stupidity of policy makers. The evidence
provide strong evidence that the private investor pointing towards the suppression of the gold price
has been a net buyer over the years. The inclusion is becoming increasingly apparent. Don’t be the last
of the private investor on the demand side would person to figure this out! The current sell-off in gold
in fact skew the ‘gap’ of 4,500 tonnes higher should be viewed not with extreme trepidation but
to a figure that would lie somewhere between as an unbelievable opportunity to buy the metal at
4,500 tonnes and 11,200 tonnes, which represents an artificially low value.
the gross exports out of the US. The only US
seller that would be capable of supplying such an ENDNOTES
astonishing amount of gold is the US Government, 1 Import Export Stats – US Census Foreign trade:
with a reported gold holding of 8,300 tonnes. 2 GFMS – http://www.gfms.co.uk/
The US Government gold holdings have not been 3 Import Export Stats – US Census Foreign trade:
audited or verified in more than four decades. 4 Coin sales from US Mint: http://www.usmint.gov/
The US trade data defines the export of non- 5 Bloomberg
monetary gold as a sale of gold from a private 6 Jewelry, recycling, dental, electronics and industrial from CPM Gold Yearbook
seller within the US to an official agency. In
September 2012, we espoused that the Western
Central Banks have been surreptitiously selling/
leasing their gold through private channels in an
effort to increase the available supply and in turn To learn more about: Sprott Asset Management’s
suppress prices. This new analysis using official investment insights and award-winning investment
US agency numbers seems to provide the strongest capabilities, please visit www.sprott.com.
validation of our hypothesis to date. It is worth
noting that our data only covers two decades and
www.sprott.com | do western central banks have any gold left???, part ii | FEBRUARY 2013 3
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