Shift of gold pricing power to Shanghai inevitable

The New York gold price closed at $1,071.70 down from $1,072.70 on yesterday’s close.  In Asia prices held at the same level then the dollar strengthened to 97.90 up from 97.67 on the dollar Index. The euro is at $1.0956 down from $1.0975 yesterday against the dollar. The London a.m. LBMA gold price was set at $1,067.20 down from $1,072.00, on Thursday.  In the euro the fixing was €972.79 down from yesterday’s $979.00. Ahead of New York’s opening, the gold price was trading at $1,064.40 and in the euro at €970.33.  

The silver price in New York closed at $14.11 down 4 cents. Ahead of New York’s opening the silver price stood at $13.92.

Price Drivers

The big news of the day is the announcement that the Yuan gold Fix, based on a 1 kilo bar of gold will begin in April. It had been expected by the year’s end but now we have a firm date.  It will be based on physical demand and supply, not on futures positioning as on COMEX.

We do see it having a major impact on global gold prices despite London and New York basing prices on ounces, not kilos [to move from one to the other would require re-refining]. Nevertheless, we do expect arbitrage activity to smooth out prices across the world. With suppliers moving their gold more towards the physical markets in Asia and re-refining gold bars into kilos, new supplies will veer more to the metric measurements than ounces. Over time, we do expect both London and New York to accept kilos as well as ounce sized bars and coins. It is the dealing in gold that matters not the weights they are dealt in, that impacts price. Therefore, the shift in pricing power to Shanghai is inevitable.

In the meantime, the flow of re-refined kilo bars continues to rise to Asia and in particular China. The shift is inexorable as Chinese middle classes continue to grow at the expense of those in the developed world. It is only a matter of time before physical deals overwhelm futures and options trading in determining prices.

As we wrote this we saw speculators coming into the market to attack the gold price once more taking the price away from currency moves.

(Correction: The Fed’s announcement is due on Wednesday of next week, not Monday, after the 2-day meeting of the FOMC. So, we expect little drama in the markets until then. This applies to all the world’s financial markets.)

Once again, we saw no sales from the SPDR gold ETF and nothing from the Gold Trust, on Thursday. The holdings of the two gold ETFs, the SPDR gold ETF and the Gold Trust remain at 634.63 tonnes in the SPDR gold ETF and at 157.07 in the Gold Trust.

Julian D.W. Phillips for the Gold & Silver Forecasters – and


Another 49 t withdrawn from China’s SGE in week 46 – huge 2,362 t YTD

China’s Shanghai Gold Exchange withdrawals continue strong with another 49 tonnes taken out in the week ended November 27th bringing the year to date total to just over 2,362 tonnes.  For comparison the previous full year record total achieved in 2013 has already been exceeded by around  180 tonnes, with just over a month to go until this year end.  We are downgrading our full year forecast to 2,580 tonnes from the previous 2,600 tonnes plus, but this would still be 18% higher than the previous record – and around 23% higher than last year’s total withdrawal figure.

Much is made in the West of the downturn in the Chinese economy – but this is a reduction in percentage growth – not a recession.  Sometimes the two seem to be confused by the media.  The Chinese middle classes are continuing to grow and employment is being pushed in the government’s economic reboot to the services and domestic consumption sectors which tend to pay higher wages than manufacturing and thus the disposable wealth within this ever growing population segment is growing rather than diminishing.

As one of the speakers at this week’s Mines & Money conference in London pointed out, for thousands of years China and India were the world’s richest countries – a position they mostly lost in the 19th and 20th centuries.  They are becoming so again – a return to the status quo ante perhaps – and with their huge inherent disposition to accumulate gold (which has served their people well over the centuries as a store of wealth and protector against economic downturns and inflation) we can only see the gold acquisition trend continuing to build.

We are already close to the crunch situation in the supply/demand equation for gold and again, as a number of highly respected speakers suggested at Mines & Money, the gold price will go up, and likely go up very sharply, although none would really commit themselves on a timescale for this to occur.  Perhaps the nearest was Pierre Lassonde who reckoned the U.S. Fed has talked itself into virtually having to start raising rates this month, or lose all credibility, but that it will be forced to backtrack before the middle of next year, cutting rates again – or even implementing QE4 – and this would be the trigger for the start of a gold perception resurgence.  Grant Williams (no relation) talking at the same event somewhat concurred and commented that when gold does rise it will likely move rapidly and comfortably take out the previous all-time price high.  Good fodder for the remaining gold bulls!

Events gold positive once markets settle

On Tuesday New York closed at $1,139.50 down $13.60. The dollar was stronger at $1.1496 this morning up from 1.1539, against the euro, with the dollar Index stronger at 94.10 up from 93.39 yesterday. This morning the LBMA gold price was set at $1,134.40 down $19.85. The euro equivalent was €990.05 down €12.16. Ahead of New York’s opening, gold was trading at $1,124.70 and in the euro at €984.42.  

The silver price closed at $14.64 down 14 cents over Tuesday’s close in New York. Ahead of New York’s opening today it was trading at $14.15.

Price Drivers

The Shanghai equity market is trying to stabilize, after the People’s Bank of China cut interest rates. There was a lot of short covering there as the market got over its shock of being ‘let loose’ by the government and the Yuan acclimatized to a floating exchange rate.

The Fed has been right to take note of the global economy when deciding to raise rates as we can now see just how the global economy and financial markets are able to affect each other. As global liquidity is tightening [despite QE] volatility is instantly contagious. Even a small Fed rate hike could have the same impact on markets and particularly foreign exchanges. More to the point, these are out of the control of central banks. Volatility can be an expression of that lack of control as we have seen last week and this. As we head towards a different monetary system inclusive of the Yuan [which will not be directed by the U.S.] we expect such volatility to rise, damaging confidence in the monetary system even more.

Let’s be clear on this, the great fall of China sent waves even through U.S. markets, due to structural faults and were not a brief shakeup to be followed by calm for the foreseeable future. We see it as a sign of things to come.

But, the Fed will act in the interests of the U.S. as mandated, so a rate rise could still ignore the potential impact on the rest of the world’s financial markets?

During the last week the gold price has remained steady to slightly lower, despite large amounts of buying into the SPDR gold ETF. We feel the last week’s events will turn out positively for gold once markets have settled. There were no purchases or sales into or from the SPDR gold ETF or the Gold Trust yesterday. This leaves the holdings of the SPDR gold ETF at 681.105 tonnes and 162.07 tonnes in the Gold Trust.

Julian D.W. Phillips for the Gold & Silver Forecasters – and

SGE gold withdrawals an enormous 1464 tonnes so far this year

While physical gold withdrawals from the Shanghai Gold Exchange (SGE) in the latest reported week were lower than the massive 72 tonnes a week earlier at 53 tonnes it remains high for the time of year.  But the key to what has been happening with Chinese demand as represented by SGE withdrawals is where the total for the year to end-July stands compared with previous years.

Looking at this metric we can see from the chart below that SGE withdrawals this year so far have totalled a massive 1,464 tonnes – which is running around 116 tonnes ahead of the huge record 2013 year at the same time and an enormous 370 tonnes ahead of the 2014 figure at the end of July when the annual total came to 2,136 tonnes.  If the average monthly withdrawal level (49 tonnes a month so far) for the current year keeps up we will be looking at annual withdrawals totalling more than 2,500 tonnes for the full year – and with Chinese demand tending to be strongest in the last four months and the first two months of the year this level could indeed be a possibility.

If we compare this potential level of annual demand with the likely total of new mined gold this year, China would account for around 75% of the yearly total on its own!

sge jul


Chart from Nick Laird’s excellent website

These high SGE withdrawal levels do not necessarily mean that the gold price will pick up accordingly, as witness what happened in 2013 when the SGE figure hit a then record 2,186 tonnes, yet the gold price collapsed from $1681.50 at the beginning of the year to $1201.50 by the year end.  However what we are seeing are continuing huge gold flows from West to East (Indian gold imports too are predicted to hit over 1,000 tonnes again this year) which will continue to run down gold inventories in the West, where the price tends to be set.  At some stage any loosely held Western physical gold holdings will be depleted to the extent that the low levels will almost certainly have a positive impact on the gold price – although by that time it may well be China which is setting the price anyway.

ETF gold sales used in Chinese take-down

New York closed at $1,103.20 down $30.70 on Monday it closed at $1,100.20 on Tuesday. This morning in Asia the gold price fell again to $1,094.  The dollar was weaker at $1.0940 down from $1.0854 against the euro, with the dollar Index down to 97.28 from 97.89.  The LBMA gold price was set this morning at $1,096.80 down $11.20. The euro equivalent was €1,002.74 down from €1,029.31 yesterday. Ahead of New York’s opening, gold was trading in London at $1,094.00 and in the euro at €1,001.33.

The silver price rose to $14.81 up 10 cents in New York. Ahead of New York’s opening it was trading at $14.77.

On Monday there was a sale of over 11 tonnes of gold in the SPDR gold ETF [GLD], which was arbitraged across into the Chinese market on Monday morning. Once again at the close yesterday a large amount of gold was sold out of the SPDR gold ETF of 4.77 tonnes and sold into the Chinese market overnight, pushing prices down there. The holdings of the SPDR gold ETF are at 689.693 tonnes and 167.76 tonnes in the Gold Trust.

Until demand jumps up in China such sales will push prices down. What does this mean? HSBC is the Custodian of the SPDR gold ETF and so responsible for sales and purchases of gold to the fund from the gold market. They have to be able to do that easily, so as not to be caught with stock on its own books and so risking moves in the gold price itself. It may also act on its own account too. But it needs to ‘set off’ its risks [or support the ‘bear raid’] and be able to dispose or acquire gold to match moves by its clients. In the heavy selling in Asia following the sale from the SPDR ETF the U.S. HSBC [et al] ‘laid off’ this position in Shanghai. This shows that western banks can and do ‘arbitrage’ gold into China immediately. The Chinese market is seeing this for the first time.  For more –

These sales are a well coordinated ‘bear raid’, which has made the market emotional, as support levels are broken and have turned into resistance. We do expect Asian demand to return, as prices they have not seen for years are offered. They need time to factor in what is happening and react. So it is pertinent to ask, “Is this a final sell-off?” These sales are not currency related. Investors are wise to use calm forethought before acting.

For the first time in years the silver price has refused to follow gold down showing that traders believe that while gold is being hit hard, it may well recover just as fast as it fell. Silver rose when gold fell again. Investors should ask why?

Julian D.W. Phillips for the Gold & Silver Forecasters – and