With gold little is as it seems


A lightly edited rerun of another of my sharpspixley.com articles – well I do need to supplement my pension by writing for SP.  In it I endeavour to point to  various aspects of gold pricing and analysis  which set the yellow metal apart form other metals (except perhaps silver which tends to hang onto gold’s coattails.)  Gold is unique in being neither a true commodity – nor a wholly monetary metal although it falls far closer to the latter than the former.  So here goes:

The longer I have been associated with the gold mining sector – over 50 years since I worked as a junior mining engineer on what was then one of the world’s oldest and largest major gold mines – the more I recognise that the gold price itself frequently defies all logic.  Back then gold mining economics were easier to predict in many respects, although perhaps not for the miners which were feeling the squeeze from rising technical costs and a gold price which had been fixed at US$35 an ounce for around 30 years.

According to official U.S. inflation statistics, although these almost certainly understate the true position, $35 back then would be worth just under $300 today – not a level at which most, if any, gold miners could be profitable, but it should also be recognised in most gold producer domestic currencies the inflation rate will have been many times higher and the relative value of mined gold to the economics of gold mining will have changed drastically.  (Other estimates based on the fall in the purchasing power of the dollar suggest that $35 in 1960 is actually the equivalent of around $1,150  today – interestingly about where the gold price is now!)  Gold was thus probably underpriced 60 years ago and thus still is in today’s money.

Of course mining and mineral extraction technology has made huge advances since 1960 and global gold production has more than doubled, but calculations of gold supply and demand are fraught with argument, with some key analysts disputing the estimates from the major analytical consultancies, particularly in respect of Asian demand (See: Gold, GFMS, China Demand – Koos speaks out).  Global new mined gold output does seem to have peaked and looks likely to start reducing further in the years ahead.

Koos Jansen has also published some other analysis which goes much further than what was basically a critique of the way GFMS calculates Chinese gold demand in the face of some substantial – some would say irrefutable – evidence that published figures for gold flows  into China are more than double the GFMS figures for Chinese gold consumption, in part because of what GFMS defines as consumption.  And GFMS is not the only consultancy accused of publishing misleading statistics – its main competitors, Metals Focus and CPM Group also stand so accused.

In an earlier article Jansen goes further and pointed to major anomalies not only in gold demand statistics for China, but for the consultancies’ worldwide estimates too.  He sees the biggest anomalies arising because they tend to treat gold as a commodity and effectively ignore its parallel monetary role – See: The Great Physical Gold Supply & Demand Illusion.

Jansen comments as follows: “In reality gold is everlasting and cannot be consumed (used up), all that has ever been mined is still above ground carefully preserved in the form of bars, coins, jewelry, artifacts and industrial products. Partly because of this property the free market has chosen gold to be money thousands of years ago, and as money the majority of gold trade is conducted in above ground reserves.  Indisputably, total gold supply and demand is far in excess of mine production and retail demand.”

Jansen’s assertion certainly makes some of the seemingly strange goings on in terms of gold pricing perhaps a little more understandable, although not any more transparent –  indeed probably less so.

Meanwhile Deutsche Bank’s settlement of price rigging allegations (without actually admitting guilt) in the silver market, together with an apparent assertion that some other major global financial institutions have been doing likewise, is raising  a host of other questions regarding precious metals pricing.  Some commentators  have been suggesting that if manipulation of the silver market was rife then it is highly likely that the gold market has been similary rigged too which will hardly be a surprise to followers of these markets and justifies some of the accusations that GATA has been making for years.  What remains uncertain in the case of gold in particular is that if it indeed has been happening, which seems highly likely, whether the price rigging has just been conducted by the major financial institutions acting on their own, or whether with the support of government institutions and central banks (which is the GATA position).

What this all means, of course, is that the gold price moves in mysterious ways unfathomable to the person in the street.  With likely regulatory complicity we don’t see this situation ending in the near future unless stimulated by an equity market crash which overwhelms the power of the financial establishment to rein it back.  But then this latter is seen as being increasingly likely by many astute financial observers who see it as not a case of ‘if’, but ‘when’.


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