Not long ago, Wall Street Daily Founder, Robert Williams, wrote a striking piece on the huge amount of physical gold that’s leaving U.S. shores.
His story piqued my interest, and I decided to dig a little deeper into the gold trade.
What I found is a physical gold market that’s turned into a source of international intrigue involving the United States, the United Kingdom, Switzerland and China.
To see what I’m talking about, let’s connect the dots by following exactly where this gold is going…
Destination #1: U.S. ETF Liquidation
It all started with investors selling 881 metric tons (mt) from gold-backed ETFs. The largest gold ETF, SPDR Gold Trust (GLD), saw outflows of 550 mt alone.
Destination #2: London Bullion Outflow
Now, most of the gold held by these ETFs is stored in vaults located in London. Once it was sold, the gold became free to be moved elsewhere.
Exports of gold from the United Kingdom in 2013 totaled 1,739 mt. This number comes directly from data issued by the United Kingdom’s HMRC tax authority.
To put that into perspective, that’s equal to 60% of total annual gold output – worldwide.
And by comparison, the United Kingdon only exported 160 mt of gold in 2012.
So where did all of this gold go?
Destination #3: Swiss Gold Refiners
Most of it was sent to gold refiners in Switzerland, the hub of the global gold-refining industry.
The gold refiners then quickly melted down the 400-ounce gold bullion bars from London vaults into smaller sizes – such as 1 kilogram bars, which are favored by Asian consumers and investors.
Destination #4: Asia Demand Reaches Startling Levels
And that’s exactly where the gold went….
In 2013, Switzerland exported an amazing 2,777 mt (or $132-billion worth) of gold – mainly to Asia. Hong Kong was the No. 1 destination for Swiss gold exports last year.
Indeed, China became the world’s No. 1 gold consumer in 2013. The country consumed 1,189.8 mt. That’s up 32% from 2012, and is a fivefold rise since 2003.
Analysts estimate that China and India alone consume more than eight million ounces each month. Total mine production around the world – which stands at 7.44 million ounces a month – can’t sustain that demand alone.
Currently, the gold ETF liquidations are making up the difference.
The Future of Gold
Of course, with consumption in Asia outpacing global production, ETF liquidation can’t sustain gold demand forever.
Even if demand from Asia somewhat slackens, ETF liquidations can only go on for so long.
When the liquidations end, the actual physical shortage in the gold market will become apparent.
That point may come in the not-too-distant future. After all, the gold to S&P 500 ratio is approaching the lowest level since 2008.
And “the chase” continues,