ETF Investing

Who’s Got the Gold?

I recently got my first long-term buy signal on gold in many months. That means we can shift from “playing” short-term swings in gold and miners to long-term investing in the shiny metal’s producers.

However, one thing nags at my mind: Who’s got the gold?

We know that most of the world’s biggest gold-owners are governments. Here is the list of top 10 sovereign gold holdings…

Gold Holdings

But we must make two adjustments to this list.

One is the SPDR Gold Trust ETF (NYSE: GLD), which recently held 798.31 metric tons. That means that this one bullion-backed fund owns more gold than Japan.

And mind you, this is after the GLD and other gold ETFs sold 869.1 tonnes of gold last year – a third of their total holdings.

Another adjustment should be made to China’s column, which hasn’t reported its official gold holdings since 2009. The whisper is that China secretly added 500 metric tons of gold to its vault.

And yet China needs more gold.

Its foreign exchange reserves, the world’s largest, rose to $3.82 trillion at the end of 2013. Much of that is in dollar-denominated U.S. Treasurys. China needs something real to balance out all that paper. And gold is the “realest” of currencies.

China’s central bank aside, ordinary Chinese are buying gold hand over fist. Imports through Hong Kong last year came in at 1,158 tons – double the previous year – even though China is the world’s No. 1 gold miner, and doesn’t ship a net ounce beyond its borders.

As a result, China’s total gold consumption jumped 41% last year to 1,176.4 metric tons.

What’s more, the buying frenzy continues into this year. Shanghai Gold Exchange data shows that withdrawals from its vaults in January 2014 accounted for 247 tons. This is an increase of 43% compared to January 2013. It’s also more than monthly global mining production and an all-time record.

Who’s Selling?

Now, let’s add one more complication. China isn’t the only central bank that is buying gold. In fact, central banks around the world have been buying the metal for four years in a row.

Net Gold

The total central bank demand in 2013 dipped a bit from 2012. But you have to keep in mind that 2012 was the strongest year of central bank gold buying in nearly 50 years.

Central banks will probably buy for a fifth year. Where is all that gold going to come from?

Who is willing to sell?

Last year, the sellers were the gold ETFs. As the funds dumped gold, Chinese buying helped stabilize the price. In addition to ending up in the other central banks, those boatloads of gold sold out of the bullion funds ended up in Chinese ports. A river of gold vanished into China, probably never to be seen again!

This year, the gold funds aren’t selling. They’re buying. In February, the SPDR Gold Trust is on pace to record its first month of net inflows since December 2012, just prior to when U.S. investors began to exit this market.

And now for one final twist in our plot…

The central bank of Germany, the Bundesbank, plans to bring home half of the gold bullion it has stored at the central banks of France and the U.S. This amounts to 674 tons. But Germany was told it would take seven years to get the gold back to Germany!

Last year, the Bundesbank was only able to get back 37 tons. That was 32 tons from Paris and five tons from the Federal Reserve in New York. This year, it plans to repatriate another 30 to 50 tons from New York alone! Where the heck is New York going to get all that gold?

If you were thinking the COMEX – the largest gold exchange in North – remember that the COMEX is mainly a paper gold exchange. Recently, there were 60 potential claims on every ounce of physical gold on the COMEX. Sometimes it’s a lot higher.

On COMEX, only 5% of all gold contracts are delivered. It’s so rare that notice must be given to counterparties that delivery is expected.

Meanwhile, on the Shanghai Gold Exchange, buyers take delivery of the contract more than 90% of the time.

So, we have a situation where speculation on COMEX accounts for 95% of the contracts while more than 90% of Shanghai’s futures trade is physical.

Again, I ask: Who’s got the gold?

Gold has confounded many analysts this year, analysts who expected the metal to continue to trudge into the basement. And many of them are stubbornly sticking to bearish positions. Boy, that must be painful. Kind of like sitting on a spinning pineapple painful. When those bears finally jump, they’re going to be fast and they’re going to be loud.

Before that happens, I recommend you get long on gold and select miners.

Good investing,

Sean Brodrick

P.S. There is one country that’s planning to sell some of its gold reserves at a deep discount in the very near future. It’s not China. It’s not the U.S. In fact, it’s not on the list above.

This is a very unusual situation – and an incredible opportunity for gold buyers who act quickly. And I mean very quickly: In order to finance much-needed infrastructure projects, this nation plans to raise cash by selling a small amount of its gold reserves for $287 an ounce – that’s a ridiculous discount of 78%.

Who is it? I’ve drafted a detailed report that explains all the details. Click here to learn more.

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