Most financial analysts have correctly observed that the price of gold has a direct correlation to the value of our money. Ever since the United States removed the gold standard, the precious metal has ceased to anchor the value of the dollar, and instead has become a safe haven asset for those who don’t trust a fiat currency that is backed by nothing. Thus, even though the United States has been off the gold standard for decades, the demand for gold still affects the price of the dollar, and vice-versa.
While these numbers don’t always perfectly correlate, it’s safe to assume that when demand for the dollar is high, people aren’t going to view their gold as a safe haven anymore. Many of these investors feel that the danger has passed, and good times are ahead for our economy.
To some extent this is true, since we’ve seen not only the stock market price of gold plummet and stabilize, but the physical demand for gold appears to have dropped as well. At least for Americans anyway. As of now, sales of American Gold Eagles have dropped 40 percent this year. This is the perfect indicator of America’s current demand for gold since most of these gold pieces are going to be sold to US citizens.
However, Americans aren’t the only people who buy precious metals, and only looking at our current demand fails to capture the bigger picture. While so many Americans are reveling in a resurgent economy, the rest of world is hurting pretty bad, and their demand for precious metals reveals the true state of the global economy.
According to the USGS most recent data, total U.S. gold exports increased significantly in September. Not only did U.S. gold exports surge in September, they were 70% higher than the previous month. This was probably due to increased demand as the price of gold declined $80 during the month.
U.S. exports started off very strong in January, reaching 80 mt (metric tons) with the majority heading to Hong Kong. However, gold exports fell to 47 metric in February and dropped even further in March at 30 mt. If we look at the chart below, U.S. gold exports continue to remain weak from April to August until the spike up in September:
Once the price of gold began to bottom out, foreign governments and private citizens alike began a massive gold buying spree. Switzerland, the UK, and Hong Kong took the lion’s share of these exports at 15.3, 13, and 8.5 metric tons respectively. Even cash strapped nations like Italy took advantage of these low prices, and bought so much gold that it dwarfed all previous imports by a huge margin.
China also received a direct shipment of 3.3 mt of gold while Thailand imported 3 mt, Italy 2.6 mt, Singapore 2 mt, and the UAE 1.5 mt. What is interesting here is the 2.6 mt of U.S. gold exported to Italy. Italy has imported gold scrap from the U.S., but not much in the way of gold bullion.
Matter-a-fact, I went back and looked at the past ten years of USGS Gold Yearbooks and only found one entry listing U.S. gold bullion exports to Italy in 2009 at a paltry 21 kilograms, which is 653 troy ounces. Compare that to the 2.6 mt or 83,590 troy ounces of gold exported to Italy in September.
As I expected, the stock market price of precious metals is completely removed from reality. When you look at other commodities like oil, it’s clear what is driving the price down. Western shenanigans aside, it appears that lower consumption and increased production is killing oil prices. Simple supply and demand at its finest.
But with gold, we’re not seeing the same connection. On the surface it appears that a rising dollar has killed demand, but for now that is only happening for the US. For the rest of the world, lower gold prices means it’s time to buy buy buy! But despite the higher demand, the price of gold doesn’t look like it’s going anywhere. What gives?
Given the fact that global gold consumption sits at roughly 3,800 tons per year (as of 2013) and the United States only consumes 190 tons per year, somehow I doubt that our current lack of interest in the metal is driving the price down. If you needed more proof that the price of gold is being artificially suppressed, then look no further.
If you ask me, it looks like the rest of the world knows something that we don’t. They’re buying safe haven assets while we delude ourselves with this false recovery. They know that gold is currently at bargain bin prices, and they’re taking advantage of it. And when America’s debt-fueled economy finally implodes, they’ll at least have something to weather the coming storm.