Physical Gold Demand Soars

(October 6,2022-Patrick A. Heller)

How do you know when gold demand is strong?

One solid indication is when there are lots of buyers willing to pay prices far above current so-called spot prices. The theoretical “spot price” is the price per unit at which a futures contract that matures in the current month (“on the spot”) changes hands. In the COMEX, most of the trading involves 100-ounce bars. In the London Bullion Market Association, gold contracts trade 400-ounce bars.

In most instances, gold is traded in large-size transactions around the world relatively close to these spot prices.

For instance, India is the world’s second largest gold-consuming nation after China. Currently it costs importers about $1 above the spot price to bring an ounce of gold into that country. Gold is highly prized as gifts in India. In the month of October, there are three major holidays, where gold demand for gift-giving is normally very strong: Dussehra, Diwali and Dhanteras.

To meet this seasonal demand, large quantities of gold are imported into India in advance of these holidays. However, it was revealed on Oct. 4 that vaults in India have less than 10 percent of the gold inventories than they held at the same time last year.

What happened?

It turns out that physical gold demand in China and Turkey is so strong that importers are paying significant premiums above the world gold spot price to secure supplies. In China, importers are paying $20-$45 per ounce over the spot prices. In Turkey, a nation ravaged with very high inflation, importers are paying $80 per ounce above the spot price.

Obviously, the suppliers of gold would rather sell their product where they receive the highest prices. India’s gold imports in September fell 30 percent from September 2021. In contrast, Chinese gold imports via Hong Kong in August (the most recent data available) rose 40 percent, the highest in four years. It was even more dramatic in Turkey, where gold imports in September soared 543 percent from the same month a year ago.

The recent shortage of gold imports into India could cause the prices to rise in that part of the world.

With such strong gold demand at prices higher than current so-called spot prices, there is a good prospect that the price will continue to rise through October. Stay tuned.