India Buying 450% More Gold?

How Can Gold Prices Possibly Go DownThe demand and supply situation for gold bullion, something I’ve often talked about in these pages, has taken a new course…one very favorable to gold bulls like me.

Gold buying in India is up 450% in the first nine months of 2014 compared to the first nine months of 2013. (Source: Government of India, October 14, 2014.) The jump in gold bullion buying in India is related to the easing of restrictions on gold imports into the country by the Indian government in 2014.

The buying of gold bullion in China continues to be strong. And world central banks are increasing their gold reserves, too.

In the chart below, I’ve compared the gold holdings of various central banks now compared to their gold reserves in 2011.

Three-Year Change in Gold Reserves of Five Countries

Country Gold Holdings in October 2011 (in tonnes) Gold Holdings in October 2014 (in tonnes) % Change
Russia 841.1 1112.5 +32.27%
Turkey 116.1 511.7 +340.74%
Kazakhstan 67.3 181.9 +170.28%
Korea 39.4 104.4 +164.97%
The Philippines 147.8 194.4 +31.53%

Data source: World Gold Council web site, last accessed October 23, 2014

Mind you, the central banks mentioned in the table above are just a few of the many that have posted a significant increase in their gold bullion reserves. Unfortunately, many countries (like China) do not regularly release data on their gold purchases.

Meanwhile, the supply side of the gold bullion equation is bleak.

As I wrote in 2013 when gold bullion prices got whacked, the lower gold prices go, the more mines taken off-stream as gold mining companies close operations where production costs come in at more than $1,200 an ounce.

Below is a chart of U.S. gold bullion mine production in the first seven months of this year compared to the first seven months of 2013.

In the chart, you’ll quickly see that gold production has declined in each reportable month of 2014.

If the supply of gold bullion is declining and demand is rising, how can gold bullion prices fall?

U.S. Gold Mine Production, January–July, 2014 vs. 2013

Month 2013 Production in Kilograms 2014 Production in Kilograms % Change
January 18,500 17,800 -3.78%
February 17,200 16,400 -4.65%
March 18,700 17,500 -6.42%
April 18,000 16,500 -8.33%
May 18,900 17,200 -8.99%
June 19,500 17,700 -9.23%
July 20,100 18,400 -8.46%

130,900 121,500 -7.18%

Data source: U.S. Geological Survey web site, last accessed October 23, 2014

While you may need to take the following words with a grain of salt, they are nonetheless thought-provoking to say the least. I leave you with some thoughts from my colleague Robert Appel, BA, BBL, LLB:

“It’s official, the U.S. manufacturing index just showed the weakest numbers in over two years.

The Saudis have caved to pressure and cut oil supply, so oil prices are higher. In response, the broad market popped again and the Dow Jones is running up again.

If you can’t quiz your fifth-grader about this, because he or she is still in school, here is the answer:

That horrible data has somehow ‘assured’ traders that the Fed really has no intention of cutting back on the heroin (oops, sorry, QE), and therefore all the ‘taper talk’ is just that (talk)—and therefore, since this entire bull market is mainly a function of Fed money finding its way into stock somehow as Rome burns (oops, sorry, while the average American struggles)—then, clearly, it’s time to let the good times roll and be merry again.

And the greenback is crazy-strong again (which will do even more damage to exports, and, hence, manufacturing). The gold miners are trading at values like it’s the early 1900s, when men were wearing top hats and women hoop skirts.

And as we hear when parents read bedtime stories to their children at night, many now start with the words, ‘Once upon a time, when the markets were free…’”