Switzerland is Key to Global Gold
How Switzerland Fits in the Gold MarketThe small (in area and population) European nation of Switzerland is the location of four of the world’s largest gold refineries – Argor-Heraeus, Metalor, Produits Artistiques Metaux Precieux (PAMP) and Valcambi. Between them they refine annually a volume of gold equivalent to more than half global new mined gold output – sometimes far more when Asian demand is running particularly high, as in 2013, and when supply is plentiful (2013 saw huge disinvestment out of the major gold ETFs). That year Swiss refineries processed, and exported, around 2,600 tons of gold equivalent to about 80% of global new mined gold output. According to Singapore based precious metals website, www.bullionstar.com, which undertakes considerable research into global gold flows, in a normal year the Swiss refineries account for around 65-70% of global gold refining capacity. Switzerland has a population of only around 8 million people and a GDP of around US$700 billion – compared with the USA’s 320 million and $18 trillion respectively – thus this small European nation produces well above its weight in terms of global gold flows. And, in a normal year around 80% of this gold is exported to Asia and the Middle East – in particular to the world’s two biggest gold consuming nations – China and India where most of the gold (all of it in the case of mainland China) ends up in firm hands, not to be released back on the global open market.
A Dominant Power in the Gold MarketWhy are the Swiss refineries so dominant? A mixture of years of history and their specialty which is re-refining gold bars of the standard 0.995 purity as held by most central banks and produced by most other refineries and outputting the smaller higher purity (0.9999) bar sizes and wafers in demand in the eastern markets. (A standard good delivery gold bar, as defined by the London Bullion Market Association (LBMA), weighs between 350 and 430 troy ounces with a minimum acceptable fineness of 995 parts per thousand pure gold (0.995). The refineries also process scrap gold from a variety of sources, and doré bullion received direct from mining companies. (Doré bullion is a semi-pure alloy of gold and silver, usually created at a mine site. The proportions of silver and gold can vary widely. Doré bars weigh as much as 25 kg – or up to around 800 troy ounces.) Over the past three months alone, Switzerland imported some 606 metric tons – or tonnes - (1 ton weighs 2024.6 pounds and is thus equivalent to 1.1 US tons) of gold and exported 496 tons. For the full 2016 year Swiss gold imports totalled 2,087 tonnes and exports 2,151.5 tonnes – equivalent to around two thirds of global new mined gold output. However 2016 was an anomalous year as it saw something of a reversal of gold flows in and out of Switzerland due to slow demand in the traditional Asian and Middle Eastern markets which prompted a degree of destocking to take advantage of higher gold prices. Flows had just about come back to normality by the end of the year – so we’ve tabulated below figures for the first two months of the current year, which are nearer normality, showing the primary destinations, and make-up of Swiss gold exports over the two month period. Table: Swiss gold exports by country January/February 2017 (tons)
|Destination Country||Tonnes exported||Percentage of total|
|United Arab Emirates||5.6||2.7%|
|Rest of Asia/Middle East||10.5||5.0%|
|Rest of World||27.8||13.3%|
A Leading Indicator of the Flow of GoldSo Swiss gold flow figures are extremely significant when it comes to working out where most of today’s new gold supply is actually going. It is true Chinese gold demand looks weak, as does Indian at the moment, but even weak gold demand in these two nations will account for more than half of the global new mined supply. And little of this will ever come back on the global market. The West keeps churning out gold and the East absorbs most of it and keeps it. This becomes even more relevant given that the likelihood is that the supply of global new mined gold is nearing a peak (more of that in a future article) and may be just about to start turning down – slowly at first, but likely to accelerate given the ongoing impact of the fall back of the gold price from late 2011 to early 2016 which has reduced new mine building and gold exploration. We may not see what could be described as a gold shortage given the huge size of above-ground stocks, but certainly a tightening of available supply and the Swiss re-refined gold export figures exemplify this in a way few other statistics can. The center of gravity of gold demand is inexorably moving eastwards. As an example, the two biggest central bank gold buyers over the past few years have been Russia and China who see the yellow metal as having an increasingly important role to play in future currency status as the huge US debt position gradually destroys confidence in the mighty dollar as THE global reserve currency and alternate trading options are slowly put in place.
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