Gold Field Mineral Services

The metals consultancy GFMS released an update to its 2013 Gold Survey which was very interesting. A few things in particular stand out to me.

The first was something we have been talking about here for some time now and that was the fall off in world investment demand for gold last year. GFMS stated that demand fell 11% last year to 1,342 metric tons. In terms of value, world gold investment dropped by 25% to just under $61 billion; the lowest level since 2009.

The firm projects world gold investment for the first half of 2014 to total 762 tons, down 14% on the second half of 2013, but also 65% higher than the first half of 2013.

They mentioned solid Asian demand which they suggest ( surprise, surprise) will keep a floor of support beneath the market. Chinese gold jewelry fabrication increased 31% last year and Chinese physical bar investment rose 47% to a record high. The consultancy noted that this buying was essentially bargain shopping as price sensitive buyers picked up the metal when it fell in price.

Net official sector buying ( World Central Banks) fell 34% to 359 tons last year. They believe that official sector net buying for the first half of the year will total 132 tons, down 10% from the preceding six months and down 37% from the first half of 2013.

Central Bank demand is a big factor in the gold price, something that many seem to forget at times.

They also projected gold prices to average $1,225 in 2014, 13% below that of 2013. They do not believe that the price will breach $1,300.

In short, the firm has stated the same thing I have been saying here for quite some time now -namely that while Asian demand for gold is strong and is providing a floor of support for the metal, Western-based investment demand ( I am inserting "Western" whereas they are taking a global view) in and of itself has been falling as money flows into equities in search of yield.

This is the reason I monitor the reported holdings of GLD, the big gold ETF. It is as good as any a gauge of Western investment demand for the metal. Until its ceases dishoarding gold, Asia is going to have to carry the slack. The problem with that is that these buyers generally DO NOT CHASE PRICES higher, especially if they understand that they do not need to compete with Western interests. They tend to wait for price setbacks to buy.

Keep all of this data in mind folks when you read the sensationalized claims about Asian gold demand soaring, etc.... It is indeed solid, I am not disputing that, but Western investment demand is the key to any SUSTAINED RISE in the price of gold.

One thing is certainly going to be interesting to watch is how that Asian demand responds to these higher gold prices of late.

Incidentally, I am noticing that the HUI is stronger today but has not confirmed an upside breakout as of the time I type these comments. Charts are improving however.