What has been particularly strange about the gold market over the past two years is that the stronger the physical demand appearing for gold, the weaker the gold price has tended to get.
In the past few months, the gold price has fallen back from around $1,340 down at one time to $1,190 and now hovering back seemingly trying to breach $1,250 on the upside again, yet by all accounts demand in the two biggest consuming nations has been soaring and they are, between them, taking in virtually everything the world's gold mines can produce.
The two countries are India and China. A mild relaxation of some of the import controls put on gold in the former saw gold imports rise to around 95 tonnes in September, while the weekly withdrawal statistics from the Shanghai Gold Exchange show that gold demand has latterly also picked up extremely well in China after a good start to the year, but then a marked downturn from March to August.
Indeed the latest weekly figures from the SGE could be seen as particularly strong given that the markets were closed for half the period due to China's Golden Week holiday. While the total for the two weeks at around 68 tonnes may not seen spectacular, given that these purchases were actually made in only five days (September 29th and 30th and October 8th, 9th and 10th) due the long holiday market closure could suggest that Chinese demand is indeed soaring enormously.
Of course another interpretation might be that the very high sales on the days markets were open were because jewelers and traders primarily were stocking up ahead of the holiday and restocking after it, but one suspects the reality is something of a combination between the two. Subsequent weekly withdrawal figures will show a better light on these figures, but in general withdrawals from the SGE since the end of August have been running at far stronger levels than in the previous six months.
Overall looking at the more recent SGE withdrawal figures we are looking at Chinese total demand for the year reaching close on 2,000 tonnes and, if one subtracts China's own gold production and scrap from the total this suggests gold imports near 1,300 tonnes this year—which is yet another nail in the coffin for the belief that Hong Kong net gold exports to the mainland are representative of total Chinese imports. They patently are not and have not been since around February this year as other points of import for gold have begun to dominate.
The other principal global gold consumer is, as noted above, India. Gold imports here have been so great that they have had a decidedly adverse effect on the country's balance of payments and the previous government too action to mitigate this through imposing some fairly drastic import restrictions including a 10% tax level on gold imports and a regulation that 20% of imported gold would have to be re-exported (the 80:20 rule). It was widely hoped among the very significant Indian gold fabrication sector that the new Modi government, which took office earlier this year, would reverse this decision, but so far has not done so, again in recognition of the country's current account deficit. There has been a minor relaxation of the 80:20 rule, but even this seems to have led to a massive increase in the country's gold imports in recent months with September figures particularly high at $3.75 billion—equivalent to around 95 tonnes. August imports were put at around 60 tonnes plus.
Of course these figures do not represent the full picture for Indian gold imports. The 10% tax regime on imported gold in particular has also led to substantial amounts of smuggled gold coming into the country. While recent reports have suggested that increased seizures have led to this becoming less attractive one suspects these are only the tip of the iceberg with thousands of Indian workers coming home daily from contract work in the Middle East, as well as more professional smugglers taking advantage of India's long land borders and coastline.
So gold hungry China and India continue to accumulate gold, between them at a rate which probably accounts for close to the full total of global mined supply. And there are another group of Asian nations with similar gold hoarding proclivities, not quite at the same scale, but cumulatively significant.
One may ask that, if indeed they are collectively accumulating more than global new mined supply, and with scrap supplies falling with the gold price, where all this gold is coming from. The gold bugs will tell you it is gold leased from the world's central banks which now can never be returned because it now resides in strong hands—yet remains on their books because it is leased rather than sold. Last year it may have come from gold ETF liquidations which amounted to perhaps more than 700 tonnes, but although there have been some sales out of the gold ETFs this year they have been on nothing like the scale of 2013. So the conundrum remains. Demand has to be exceeding supply, yet the price keeps falling. Surely that has to end soon.
And, of course, there is the other big unknown in the gold market demand. Is China surreptitiously building its gold reserves, but not reporting the increase until it feels it is politically expedient so to do. There is a lot of evidence out there in speeches by top Chinese officials and academics (and in a tightly controlled country like China these would seldom be made without some kind of government approval) that China is looking to build its gold reserves to around 8,500 tonnes, thus topping the U.S.'s 8,133.5 tonne official reserve figure. But no-one knows for sure.