July 5, 2022

Gold Demand In Asia Remains Insatiable

As gold demand in Asia soars, vault companies are racing to keep up with storage demand.  In July, Gold and Silver Blog reported on a massive new gold vault being constructed in Hong Kong by Malca-Amit due to unrelenting physical demand for gold in Asia.  The new vault was designed to hold 1,000 metric tonnes of gold and as of July, had already taken in 2,400 tonnes of gold owned by gold exchange traded funds.

It turns out that Malca-Admit should have built a much larger vault.  As demand for physical gold continues to increase, other companies have joined the race to provide secure depositories for wealthy investors.  The Wall Street Journal reports that demand for high-security vault capacity in Asia is soaring in Singapore, Hong Kong and Shanghai.

Brink’s Co., for example, has increased its storage space for precious metals in Singapore more than threefold over the past year, to 200 square meters, and is building a bonded warehouse in Shanghai to store high-value consumer goods and precious metals.

“We are growing, and driving that growth is the storage of precious metals and also bank notes,” said Jos van Wegen, the company’s senior manager of global services in Singapore.

Comprehensive data on the volume of high-security storage capacity in the region isn’t available. But demand for gold is clearly rising.

China’s gold demand in the third quarter of this year was 176.8 tons—16% of global demand and up 47.1% from the same period three years ago, according to the World Gold Council. Hong Kong’s demand totaled 6.9 tons in the third quarter this year, up 56.8% from the third quarter of 2009.

Singapore imported 36.7 tons of gold in the first 10 months of this year, well down from 62 tons in the full year 2011. The government’s announcement in February that, in a bid to become a gold-trading hub, it would scrap a 7% goods and services tax on gold, silver and platinum hurt imports for much of the year. Fourth-quarter gold-import figures for Singapore are expected to be stronger, World Gold Council executives say.

While physical gold requires storage space, it does offer a lot of value in a relatively small package. At around $1,690 a troy ounce, a metric ton of gold is valued at $54.3 million, but would take up only slightly more space than a standard case of 12 wine bottles—though most gold is stored in ingots.

Malca-Amit, a company that stores and transports diamonds and precious metals, has lockups in Hong Kong and Singapore, and is preparing to open one in Shanghai in the first quarter next year. The Shanghai vault will also hold art and luxury goods such as high-value mobile phones and designer handbags.

Malca-Amit’s Singapore vault, capable of holding 600 tons of gold, is almost full, and the company is seeking more space. The amount of gold stored there has increased 200% from a year ago, it says.

Its recently opened Hong Kong vault can hold 1,000 tons of gold, which would be worth more than $54 billion. It is almost large enough to hold the official reserves of China, which total 1,054 tons, according to World Gold Council data.

Malca-Amit has gold-storage sites in New York and Zurich, but the focus of its expansion is firmly on Asia, executive director Joshua Rotbart said. Some Asian investors who are storing their gold in the U.S. and Europe are keen to move it closer to home as more storage space becomes available, he said.

The recent price weakness in gold is apparently viewed as a buying opportunity by sophisticated Asian investors seeking to protect their wealth from the torrential flood of printed money being produced on a global basis by central banks (see Central Banks Pledge Unlimited Money Printing).

On a recent visit to the Chinatown section of Bangkok, I witnessed first hand large crowds of customers in Chinatown’s numerous retail gold stores.  Gold has never defaulted on its promise as a means of wealth preservation, something clearly understood by the citizens of a country whose history goes back thousands of years.

Customers at Bangkok retail gold store

Chinese Gold

Chinese Gold

Chinese Seek To Buy Undervalued Gold Mining Company

China has been steadily adding to its gold reserves as it attempts to diversify its huge holdings of foreign currency.  From only 395 tonnes in 1988, the Chinese central bank has increased its gold reserves to 1,054 tonnes.  As the largest foreign holder of U.S. Treasury debt, the Chinese have complained loudly about America’s addiction to debt and the nonstop efforts of the Federal Reserve to debase the U.S. dollar.

Besides buying ever increasing amounts of gold bullion, the Chinese have now decided to add gold mining companies to their shopping list.  Given the incredible disconnect between the market value of gold mining companies compared to the value of gold bullion, the decision to buy gold mining companies should come as no surprise.   Many gold mining stocks are selling at a substantial discount to their net asset values of proven gold reserves.

As reported by Bloomberg, China’s second largest gold producer, Shandong Gold Group Co, Hunts for Brazilian Gold Acquisition.

Jaguar Mining Inc. (JAG), which is exploring its options after receiving acquisition proposals, is proving that even a record takeover premium for a gold company can be a bargain.

Shandong Gold Group Co., owner of China’s second-largest gold producer, offered to buy Jaguar for $785 million in cash, two people familiar with the deal said Nov. 16. The $9.30-a- share bid is 77 percent more than Jaguar’s prior 20-day average, the highest premium in a cash takeover of a gold miner greater than $500 million, according to data compiled by Bloomberg. Jaguar is still trading at a 3.5 percent discount to its net asset value, cheaper than 94 percent of comparable gold miners.

“Relative to their peers, Jaguar is trading at a pretty substantial discount,” Sachin Shah, a Jersey City, New Jersey- based special situations and merger arbitrage strategist at Tullett Prebon Plc, said in a telephone interview. “Even a $9.30 offer may be undervaluing the company. They could actually get a longer-term value asset at a cheap price. It’s the Brazilian assets that make Jaguar so appealing.”

After closing at $7.80 in New York on Nov. 16, Jaguar fell 3.5 percent yesterday to $7.53. The company is trading at 0.97 times its net asset value of $7.80 a share, based on the average of analysts’ estimates compiled by Bloomberg. That means it’s still cheaper than 16 of 17 other gold companies with similarly sized mines, the data show. Jaguar’s rivals are worth an average of 1.8 times the value of their underlying assets.

“The stock has lagged the group and generally underperformed, and as a result the company was ripe for the picking,” Mark Kellstrom, a senior partner at Summit, New Jersey-based Strategic Energy Research and Capital LLC, which focuses on energy and natural resources, said in a phone interview. “For a purchaser like Shandong, there’s a real opportunity here to buy gold reserves at cheaper valuations, improve the operating results and therefore reap a nice return.”

It was simply a matter of time before cheap gold mining companies became acquisition targets.  Gold mining companies have lagged far behind the gains of gold bullion and are selling at huge discounts to the value of their gold reserves.  A look at the comparative performance of the SPDR Gold Trust (GLD) to the PHLX Gold/Silver Index (XAU) shows that since 2008, gold has returned approximately 200% compared to a return of only 50% for the XAU.

The fundamental appeal of gold mining stocks is further bolstered by increasing demand for gold bullion.  The Gold Demand Trends released by the World Gold Council shows that global demand for gold increased by 6% in the third quarter.

 

Courtesy yahoo finance

Despite the recent volatility in gold prices, the long term fundamental case for gold remains intact and, in fact, grows stronger by the day as one sovereign nation after another stares into the abyss of debt default.  The move by the Chinese to acquire Jaguar Mining could be the spark that sets off a stampede to acquire undervalued gold mining companies.