In regard to the paper vs. physical argument and the evidence (as I see it) that physical supply from mining and scrap is not meeting demand the two graphs below are worth considering:
INR vs. USD
CNY vs. USD:
These two graphs, showing the loss of value of the currencies of India and China vs. the US will underpin the flow of physical gold into the two largest physical gold buying nations.
The recent CNY trend change is likely to be the start of a long term trend change and the Indian rupee has consistently lost value vs. the USD for a long time.
For those Chinese and Indians trying to preserve their wealth an obvious alternative would be for them to buy and hold USD - which I am sure many do (despite various capital controls). However, the cultural affinity, custom and availability of physical gold will, in my view, ensure that the flow from West to East continues to the point where an event occurs (physical supply becomes non-existent at currently prevailing prices).
To repeat myself:
(1) Indian physical gold imports in August 2015 were 126t
(2) Chinese SGE withdrawals of physical gold in August 2015 were 302t
We know that this gold wasn't solely sourced from mine and scrap supply as these numbers exceed it (not to mention physical demand from elsewhere in the world). We know it is not coming soley from SPDR Gold ETF (678t) or the Gold Trust (159t) as the outflows have decreased materially in the last couple of months:
I would also assume that as the total gold held in these ETF's gets lower it is becoming more 'sticky' too.
Anyway, I think this is quite interesting and worth watching given the state of play.
Cheers
John
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