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Physical Gold Demand At A 6 Year Low But Prices Soar

Gold is looking strong again this week — gaining after the Bank of Japan unexpectedly held off on stimulus Thursday, causing a decline in the dollar.

Gold stocks are also having a great run. With indexes like S&P/TSX Global Gold breaking out to near three-year highs.

But even as all this action has investors excited, some unexpected news is emerging when it comes to gold demand and supply globally.

On Wednesday, go-to gold analysts GFMS released their survey of gold market trends for Q1 2016. And what they found when it came to demand was shocking in the utmost.

The most surprising finding was that physical gold demand was incredibly weak during the first quarter of this year. With overall physical buying down 23.8 percent as compared to Q1 2015 — to 781 tonnes, down from 1,025 tonnes last year. Related: Why Saudi Arabia Will Not Win The Oil Price War

That big drop came primarily because of weakness in the world’s largest gold markets — India and China. With India’s physical gold purchases down 65 percent as compared to the same period in 2015. And China’s buying dropping 27.3 percent year-on-year.

That was enough to put overall physical demand for the quarter at a six-year low. While at the same time GFMS estimated that gold supply actually rose by 4.2 percent as compared to Q1 2015.

The combination of rising supply and falling demand led to an estimated market surplus of 310 tonnes during the quarter. Also a six-year high, and well above the 22 tonnes surplus seen a year ago. Related: Big Oil Surprises Analysts, Is The Worst Behind Us?

All of which is seemingly perplexing, given that gold prices were on a tear upward during the quarter in question. But GFMS points to an answer — investment demand.

The group estimated that gold purchased by exchange-traded funds (ETFs) soared to 330 tonnes during Q1 — almost ten times higher than the 36 tonnes that ETFs bought in Q1 2015. And with such investment buying factored in, the global gold market was actually in deficit by 25 tonnes for the quarter. Related: Oil Prices Jump To Six-Month High

It will now be extremely interesting to see if physical buying rebounds. GFMS blames the lack of Asian buying on higher prices (and also the recent jewelers strike in India) — but at some point, if prices stay elevated, buyers will be forced to swallow their hesitation and jump into the market.

Watch for a potential lift from such capitulation, as well as key indicators like ETF demand to see if investment buying is holding up.

Here’s to being back in the market,

Dave Forest

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  • Glenn on May 03 2016 said:
    What is the difference between physical buying and ETF buying? Are ETFs physically buying gold?

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