China is Sucking Up the World's Physical Gold Supply...

If the World Gold Council (WGC), which is probably the only industry trade group on the planet that does nothing constructive to support the product it is supposed to promote, publishes a report that highlights the growing demand for physical gold in China, the real demand in China is likely at least 2-3 times greater than acknowledged by the WGC. Those who study the gold market have always had issues with the reliability of WGC, as it usually underestimates demand and overstates supply.

China's Central Bank has reported the accumulation of gold over the past few years, but there isn't really anyone who takes seriously the amount China reported last summer any more than anyone takes seriously the amount of gold held by the U.S. Treasury. Obviously, China is understating its gold holdings and the U.S. has refused to let anyone count the gold and verify quality since Eisenhower was in the White House, indicating that the U.S. substantially overstates the amount of gold it owns.

Zerohedge.com has posted the report from the WGC. They've pulled out the salient points and have linked the whole report. Here's an excerpt:

The World Gold Council (WGC) believes that gold consumption in China will continue to catch up with the rest of the world following the deregulation of the Chinese gold market in 2001. Demand from China’s two largest sectors (jewellery and investment) reached a combined total of 423 tonnes in 2009 but domestic mine supply contributed only 314 tonnes during the same year...

Here's the full link: China's Insatiable Demand for Gold. I would like to point out that the WGC report omits the amount of gold being accumulated by the Central Bank. We have no idea what that number is, anymore than we know how much U.S. gold is leased out by the Fed in any given year. Both are large and it's likely that the a large amount of the gold leased out by the Fed ulitmately ends up in the possession of China.

I would like to also remind readers that the Chinese Government recently implemented programs which enable the Chinese citizens to easily accumulate gold, including legalizing private ownership of silver. That will light a demand fuse that ultimately will drive the price of gold/silver much higher.

On another note, I noticed on Friday that spot gold started trading at a price higher than the June gold future "front month" contract. This state of backwardation, as it is known, when it occurs in commodity futures, is indicative of the demad for spot market deliveries exceeding spot market supplies, driving the spot price higher than the future price. And I'm not referring to the availability of coin dealer retail inventory. This refers to the global "big boy" gold, which is the 400 oz. LMBA (London bar market) bars, which are utilized by Central Banks and wealthy investors. Usually the condition of backwardation implies that we can expect higher prices until either demand subsides or supply arrives.

Given that increasing the supply of 400 oz. bars is difficult, especially now that Central Banks are net buyers rather than sellers, the big banks with large short positions in gold futures on Comex, and forwards in London,  better pray that the demand side of the equation subsides. There's no rush like a gold rush...