Tuesday, December 24, 2013

A River of Gold from West to East

Asia's love affair with gold became worldwide news when the price of the yellow metal dropped last April. Asian consumers saw the price drop as a fortunate buying opportunity, and metals dealers were swamped with orders for both bullion and jewelry. Premiums skyrocketed across the continent, but this did not slow demand.

With all this demand, shouldn't gold's global spot price have continued rising? Unfortunately, many Westerners were selling into the Eastern demand. In fact, the stagnant spot price concealed a historic transfer of real wealth.

The rising price of gold over the past decade had lured many Western investors into the paper gold market through precious metals exchange-traded funds (ETFs). To ETF investors intent on fast growth rather than long-term capital preservation, the recent drop in price was viewed as a sell signal, not an opportunity.

By the end of September, gold ETFs had sold off about 700 metric tons of physical gold - more than half of it in just the second quarter. The World Gold Council reports that the majority of these outflows have been absorbed by Asian demand.

However, Western selling was enough to keep the global spot price from recovering. Instead of more capital flowing into gold, it was the gold itself which was flowing from Western financial institutions to Eastern households.

The latest data shows that consumer demand for physical gold in the first three quarters of 2013 hit a historical record of 2,896.5 metric tons. 90% of the year-over-year increase in this demand came from Asia and the Middle East.

Meanwhile, Americans have been distracted by one record high after another in the domestic stock market.

- Source, Schiff Radio:

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