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Investing the Claim "Gold Demand Slumps to a 10-Year Low"

A Fox Business report states demand for gold is at a 10-year low. What's the real story?

For gold investors, the rising market volatility is no match for the currently growing economy, with gold holdings slumping to a decade low, according to the World Gold Council (WGC).

The WGC reported that global gold demand fell to its lowest first-quarter level since 2008, falling to 973 metric tons in the first quarter of 2018, a 7% drop compared to the 1,047 metric tons in the first quarter of 2017.

More Luster in Stock Markets

U.S. retail investors are losing their appetite for physical gold as buoyant stock markets offer tempting alternatives, sending sales of newly minted coins to their lowest in a decade.

More and more coins are also being sold back onto the market, further eroding demand for newly minted products.

Gold American Eagle bullion coin sales from the U.S. Mint slumped to a third of the previous year’s level in 2017, their weakest since 2007.

They were down nearly 60 percent year on year in the first quarter. Sales so far this month, at 2,500 ounces, are less than half last April’s total, and a fraction of the 105,500 ounces sold in April 2016.

Contrary Indicator

For starters. retail investors dumping gold coins is a contrary indicator. And if they are dumping gold coins to buy Bitcoin or stock that is a contrary indicator for Bitcoin and Stocks.

What About Demand?

Actually, demand for gold bottomed in December of 2015.

How do I know? By looking at the price.

Gold Demand

As noted by the chart, demand for gold peaked in September of 2011. Demand bottomed in December of 2015.

Wait a second, you say, those are prices!

Yes, exactly.

Unlike silver, which is used up industrially, nearly every ounce of gold ever mined is available for sale.

Someone has to own those ounces. The price of gold represents the demand for gold.

Gold Up 31%, Retail Selling

Gold is up 31% but retail investors are selling their coins. That's a major contrary indicator.

Driver for Gold

The primary driver for the price of gold is faith in central banks. In 2011, there were worries the Eurozone would break up.

In 2012, ECB president Mario Draghi made a famous speech, declaring, "Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough."

Curiously, he did not do a thing at the time. The speech restored faith.

Gold vs. Faith in Central Banks

Faith on the Wane

Some believe the Fed is way behind the curve. Others thinks a deflationary bust is coming and the Fed will engage in more QE.

Pick your reason, but faith in central banks is on the wane.

Deflationary Bust

Given the amount of global financial leverage, I strongly suggest a deflationary bust is the most likely outcome looking ahead.

"If I were trying to create a deflationary bust, I would do exact exactly what the world’s central bankers have been doing the last six years," said Stanley Druckenmiller.

For details of Druckenmiller's excellent speech, please see Can We Please Try Capitalism? Just Once?

How will the Fed respond to a deflationary bust?

The obvious answer is more printing and more QE. I expect a move higher in gold similar to the move from 2009-2011.

Mike "Mish" Shedlock

"I expect a move higher in gold similar to the move from 2009-2011." I don't know. In 2009, everyone was expecting a total economic collapse similar to the Great Depression. Moving money out of financial assets into gold made a lot of sense. Of course, folks didn't have any idea the Fed would step in and make the banks whole on their bad investments, thereby just creating a nasty recession. Lots of folks got burned buying up that gold and may never see their money back. If we get another financial bust, I'm betting folks will use that opportunity to sell gold and buy stocks. It's what worked last time.

" If we get another financial bust, I'm betting folks will use that opportunity to sell gold and buy stocks. It's what worked last time."

That is perhaps the reason why some expect the next bear to be similar to the 2000-02 bear market and not like the 2008 crash. Ordinary investors will keep buying stocks all the way down.

Great article. Thanks. But I wonder why was gold up 100% between end of year 1999 and 2007 ? Faith in central banks was quite good I think. What do you think Mish ?

Powell appears different so the old narrative may not apply but I would and do still hold just short of 10% gold.

Just shy of 10% gold.

We had a dotcom bust bailout in 2001, followed by a huge housing bubble. I suspect Gold was responding to the housing bubble signal.

Doesn't gold tend to fall during every recession? As least it does briefly along with most anything else. During that 1-2 year crash period where assets deflate the steepest. Post recession seems like a good buying opportunity.

@mish, yes,2001 was a very good year for going “all in” Au ;-) as the stuff went way below the cost of production.

Aside, I’m posting this with my iPad because this blog won’t let me post any longer using Microsoft with Firefox. Hat tip, hmk on that. Thanks.

In the "next financial bust", there will be so many high-profile corporate bankruptcies (due to hyper-leveraged balance sheets) that stocks will be the LAST thing you would want to own.

There is also a VERY good chance that the "next financial bust" will be the one that ultimately breaks once and for all the abomination known as the "Post-Bretton Woods"
monetary system.

There is also a VERY good chance that the "next financial bust" will be the one that ultimately breaks once and for all the abomination known as the "Post-Bretton Woods"
monetary system. - BINGO

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What do you want to hold, a barbarous relic, which is illiquid, or a stock certificate that goes up 10% a year?

More and more coins are also being sold back onto the market, as those people have nothing of value left that could be sold.

Riten: I think you pegged it, this economy is crucifying the poor and middle class, tent cities are springing up everywhere

Do you seriously think gold is illiquid? Never has happened in all of history. Stock certificates? Temporary, risky value.

And if not, isn't that going to just make the price of gold cheaper (at least temporarily while people adjust their viewpoints)? So far, the huge piles of QE have made the economic system work differently than in the past.

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