Open Letter To World Gold Council: Stop Fudging Supply And Demand Statistics, Says Investment Firm Sprott Global

 @natrudy
on October 23 2013 3:50 PM
Gold Bars Zurich April 2013
Gold bars in the vault of the branch office of precious-metal trader Degussa in Zurich. Reuters

The World Gold Council, a trade body for gold mining companies, is misrepresenting the global landscape for gold supply and demand, according to allegations by investment firm Sprott Global Resource Investments Ltd. (TSE:SII) published in a recent letter.

“Demand statistics reported by the World Gold Council (WGC) consistently misrepresent reality, mostly with regard to demand from Asia,” reads the letter.

The letter makes the case that quarterly official council statistics, seen as a key measure of global gold demand, understate demand. It uses complex calculations based on government and industry group data.

For 2013, the letter’s author Eric Sprott estimates global gold demand of 5184 metric tons, for the full year, based on annualized rates.

But in the council’s latest quarterly report, from Aug. 15, the group estimates total gold demand in 2012 at 4382 tons, and 1848 tons for the first half of 2013.

Those figures don’t seem too far off Sprott’s calculations, though global demand for this year is likely to slip below last year’s. The World Gold Council told IBTimes in an email that they expect total demand of 4150 to 4250 tons for 2013 overall.

Still, for the first two quarters, Sprott puts global gold demand at 2890 tons, about 1,000 tons more than the council’s figures. It’s unclear where the extra tons are coming from, though Sprotts takes gold imports in five countries as equivalent to gold consumption.

Sprott also drags Thomson Reuters’ GFMS, a respected precious metals tracker, into the dispute. He called GFMS data gathering methods flawed and misleading to the marketplace.

GFMS couldn’t immediately be reached for comment. GFMS provides the basic data on which the World Gold Council relies.

In response, the World Gold Council said in a statement to IBTimes: “The World Gold Council and TR-GFMS have been collecting gold demand data for decades and place great emphasis on the quality of our data, taking great care to ensure that our methodologies and model are robust.”

“The use of import data as a proxy to measure gold demand is somewhat simplistic and does not take into account factors such as round-tripping and stocking/de-stocking. To effectively measure gold demand, a more detailed and holistic analysis is required.”

With falling production, recycled gold supply has grown to meet strong demand, said the council’s managing director, Marcus Grubb.  

The broader context of this little industry dispute is one where gold mining companies, like Canada’s Barrick Gold Corp. (TSE:ABX), have struggled to profit amid falling gold prices and high production costs.

Sprott flags this in his letter, writing at first: “…The business environment for gold producers has been extremely challenging over the past few years. While demand for physical gold remains extremely strong, prices on the COMEX have fallen precipitously. This contradictory situation is the single most important obstacle to a healthy gold mining industry.”

He ends the letter by accusing the council of undermining investor confidence in gold, by providing false data.

“This lack of quality information has certainly been one of the driving factors behind the lack of investors’ confidence towards gold as an investment,” wrote Sprott.

Which is odd, because the World Gold Council constantly promotes gold as a fundamentally sound investment, even in a year where prices plunged dramatically and several bank analysts turned bearish on gold.

Sprott, in turn, is radically bullish on gold, forecasting a $2,400/oz price within a year, according to Canada’s Globe and Mail newspaper. That compares to major bank forecasts, which range broadly from $1,000/oz to $1,500/oz for 2013 and 2014, on the upper end.

Sprott told the Globe and Mail that gold mining company stocks will grow “explosively.” Sprott’s company specializes in natural resources companies and commodities investments.

The council’s next quarterly report is due on Nov. 14.

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