This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Does a Gold Supply Crisis Loom?

If we look at the WGC (GFMS) headlines for the second quarter, it's pretty straightforward. Gold demand was down 7%, gold supply was down 6%. Looks pretty even, with perhaps a slightly bearish bias. Right? Wrong.

We don't even get to the end of the first paragraph before we begin to see the slipperiness of these numbers. We note that, expressed in dollar figures, gold demand was only down about 1%. So we immediately see the following dynamic: A 1% drop in (sales) demand -- virtually no decline at all -- is accompanied by a 6% drop in supply.

In other words, based upon GFMS' own numbers we see the decidedly bullish scenario of a market that can only be kept in balance if accompanied by steadily rising prices, a markedly different picture than what was presented in the headlines, and entirely different than what GFMS asserts in its analysis in talking about "The lack of a clear price trend..."

When a market can only be kept in balance with steadily rising prices, that certainly looks like "a clear trend" to me.

Dig deeper into the numbers and we find that:

...[investment] demand is also heavily-skewed by demand in India and China...excluding them from the total data gives a notably different result: a 16% year-on-year increase in demand to 195.2. Outside of these two markets, investment demand declined in only four countries [in the entire world].

When it comes to China, what we apparently witnessed was a mere pause in demand, brought about by the long sideways movement in prices. In fact, what we have seen with Chinese gold buyers is they are encouraged to buy with rising prices, and since prices must rise to offset declining supply it's inevitable Chinese buyers will soon leap back into the market.

With India, we had a large coordinated manipulation in the value of the Indian rupee lower, causing the price of gold in rupees to soar. Unlike the Chinese, Indian buyers are notoriously price-conscious. Thus, they, too, can be expected to move back into the market in much larger numbers since the devaluation of the rupee appears to be at an end.

Meanwhile, GFMS acknowledges the explosive growth in central bank purchases:

The second quarter was another period of significant purchasing by official sector institutions, with demand amounting to 157.5 tonnes. This was a record quarter for central bank buying...

So what we see is the bankers sitting on the market to restrain demand (along with a little currency manipulation in India), and then jumping into the market to swap their own paper for gold at the fastest rate on record. However, it's when we look to the all important supply side that the half-truths of GFMS and the WGC are most glaring.

2 of 4

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 16,563.30 -317.06 -1.88%
S&P 500 1,930.67 -39.40 -2.00%
NASDAQ 4,369.7730 -93.1290 -2.09%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs