Last week, we concluded our weekly update by stating that “market activity suggests that gold is not set for a huge rally unless a shortage develops in the physical market, something which we do consider very likely in the short run. Gold’s first challenge is to get back to normal levels of optimism/pessimism, avoid a breakdown, and start developing a pattern of higher highs and higher lows.”

We would like to clarify the situation surrounding the physical market. A shortage is not a “point in time” but rather a process. The point we made last week was that the physical market tightness has not reached a critical point yet, so the physical market is not at a stage where it could impact the gld price in the short run. However, we believe there is something big brewing in the physical market which could at least put a floor below the price decline. That could be the stage we are in right now.

Consider that the largest gold ETF, the SPDR Gold Trust, reported yesterday a rise in its physical gold holdings. It was the biggest increase at the fastest pace since July. The holdings are up almost 1% in December, after four straight months of losses.

But that is only a small piece of the puzzle. It could, however, become the proverbial tipping point. Why? Because the physical metal has been taken off the market by the Chinese at an astonishing rate in the last two years. China has overtaken India as the biggest gold consumer in the world in the summer of last year. The point here is that the Indian government started imposing restrictions in the gold market which truly smashed gold purchases in India.

Consider that, based on a recent report, Indian households spend approximately 8% of their daily consumption on gold jewellery and coins, which is slightly less than medical expenses and education. If a market with such an insatiable desire to buy and hold gold is being restricted, it obviously has global impacts. Conversely, the new Modi Government is more friendly towards India’s gold sector and those implications go far beyond the local gold market.

Indian households are estimated to hold 18 000 tonnes of gold, according to global research firm Macquarie.

Additionally, we should consider the recent trend of countries attempting to repratiate their gold, mostly from U.S. vaults, as evidenced by an increasing number of countries with significant gold holdings, including Germany, Belgium, the Netherlands, etc.

With China maintaining its recent high gold purchasing levels, a boost in gold demand by India, an increasing demand for repatriation, it should be clear that a return of Western gold demand could mean the tipping point. We are not there yet, but we could be much closer than gold bears believe. Time will tell, but the key data point to monitor is the movement of the Western gold ETF holdings, in particular the SPRD Gold Trust GLD.