China gold

Gold pricing power will fall firmly into hands of the Chinese

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Julian Phillips looks at what will happen to gold if and when the Chinese yuan becomes part of the SDR basket

The Technical picture for gold has shown a sideways movement from late 2013 until now, 18 months later. As we have pointed out during this time, Asian demand comes in at under $1,200. Although in China gold is priced in the Yuan, it has followed the same pattern there because the Yuan is ‘pegged’ to the dollar. We see this continuing until the Yuan is one of the currencies that makes up the SDR which cannot ‘officially’ happen until the 1st January 2016. At that time we believe that the pricing power over gold will be firmly in the hands of the Chinese.

Until then we expect the New York price to be at the mercy of traders and speculators. One would have thought that the Chinese would have jumped into New York to move the price up. But we have to ask why? Will that increase the amount of gold on offer long term? No. At current levels and in a market where the price seems to be tied in a limited trading area, supplies, overall, are at their best.

But this will sap production where many gold producers are losing money and where production is at maximum because lower prices are forcing higher production so that the mines remain profitable. So what will lift gold prices? It is when low areas of demand [primarily in the developed world] turn upwards because of some event, such as [as Jack Lew of the U.S. Treasury department indicated] a financial accident over Greece or the like. But as supplies are drained from the market at current prices to go eastwards, when developed world demand does come in they will find not only that there is little gold available but as prices rise and hold there the supplies will lessen, making prices go even higher.

You may say, “Won’t Asian demand back off?” Our answer will be to point to the determination of the Chinese to control pricing power and increase supplies to Shanghai [as the Silk Road Gold Fund indicates]. So if they have to move prices up, on condition that the current level of supply comes with it, they will do so.

Julian D.W. Phillips for the Gold & Silver Forecasters – www.goldforecaster.com and www.silverforecaster.com

Bank analysts predicting gold price and demand growth, but not nearly enough

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It is so frustrating when top bank analysts ignore the data from the Shanghai Gold Exchange (SGE) and instead rely totally on data from the World Gold Council as supplied by GFMS.  The WGC admits itself that its figure of Chinese gold consumption ignores an important proportion of the gold flows into China.  Thus in its latest analysis, Barclays comes up with the WGC line that China is back to being the world’s second largest gold consumer after India, having fallen from first place 1n 2013, and then bases its assumptions as to China’s gold consumption growth accordingly.  Barclays Bank analyst, Suki Cooper, continues on this path and states that perhaps by 2020 China could be consuming half the world’s gold output.  By our reckoning it already is – and more!

Last year’s withdrawals out of the SGE, which by law handles all China’s gold imports and domestic production, came to 2,102 tonnes – down from 2,197 tonnes in 2013 – which is already equivalent to around two-thirds of global new mined gold output.  Cooper relies on the WGC data for her analysis which puts Chinese consumption at a miserly 814 tonnes, but this ignores financial elements of demand and gold disappearing into the Chinese banking system which the WGC admits may be substantial.  If these are not elements of ‘Chinese consumption’ – a matter of semantic interpretation of what is ‘consumption’  – they are certainly relevant as gold flows, and it is gold flows into Chinese hands which have to be the most important statistical data in terms of the global gold market.

This myth about Chinese gold consumption is perpetuated by mainstream media outlets, such as Bloomberg which appears to treat Hong Kong net gold exports to China as the country’s total import figure.  Take this recent Bloomberg headline and read the article to understand what we are saying: China’s Gold Imports From Hong Kong Tumble 32% From Record.  Reading the article one would assume that China’s total gold imports fell by 32% in 2014.  But China moved the goalposts last year and allowed far more in previously controlled imports through other ports of entry.  If one reads Swiss and U.S. official statistics in detail these show that well over 30% of gold exports from these two nations (and Switzerland is by far the largest exporter of gold to China) are now going directly to the mainland rather than via Hong Kong, and that is all-change since 2013.  Indeed we reckon that perhaps as much as 36% or more of China’s gold imports are now coming in directly to the mainland rather than via Hong Kong.  China itself doesn’t report these flows and Hong Kong probably wouldn’t if it hadn’t maintained its monthly statistical import/export data from the time it was a British colony.  China remains a country of contradictions!  But does Bloomberg mention this in its article?  No!

We would guide you rather to analyses from China gold watcher Koos Jansen who writes for www.bullionstar.com and who works with what information is available directly from China including data published only in Chinese.  His latest estimate of Chinese gold IMPORTS, in 2014 was at least 1,250 tonnes to which must be added China’s own gold production of 452 tonnes, plus scrap supply.  On this estimate gold imports plus domestic production alone total at least 1,700 tonnes – still a little short of the SGE withdrawals of 2,102 tonnes for the year, but hugely in excess of the WGC consumption figure.  These imports PLUS domestic production are being absorbed within China – gold exports are prohibited – so if this doesn’t represent Chinese gold consumption, what is happening to the perhaps 1,000 tonnes of gold that can’t be accounted for over and above the WGC figures!

Note:  The WGC qualifies its data thus: “The flow of gold into China has far exceeded the amount needed to meet domestic jewellery and investment demand in recent years. The role of the commercial banks in using this gold for financing purposes has been well documented, including in our report, Understanding China’s gold market, and this activity expanded in 2014. To some extent, this helps explain why Shanghai Gold Exchange delivery figures are significantly higher than consumer demand.

Jansen sets much of this out, including other prior anomalies in WGC figures from the past in his recent examination of the WGC and SGE data in an article which is well worth reading entitled How The World Is Being Fooled About Chinese Gold Demand.

One additional anomaly, which is not specifically related to WGC figures but to virtually all analyses of Chinese consumption, is where should we place Hong Kong’s own consumption which may be tiny in comparison with that of mainland China, but is significant nonetheless.  After all Hong Kong is a Special Administrative Region of China, so surely its consumption should be lumped together with that of mainland China in assessing total Chinese demand?  The WGC put this at 39.1 tonnes in 2014 so even on WGC figures, which we feel hugely understate the picture anyway, Chinese consumption, including that of Hong Kong, does indeed come out greater than that of India!

But back to the start of this article, given that the Barclays analysis suggests ever growing demand, if one takes what we see as the true gold flow into China of 2,100 tonnes in 2014 and increases this at a conservative 5% a year, we have China alone taking in perhaps 90% of global new mined gold output by 2020 – not 50% as the Barclays analysis suggests.  Non-Chinese demand is perhaps around 2,500 tonnes a year, while global scrap supplies are currently around 1,100 tonnes.  Even assuming there is no growth in either of these figures over the next five years, they do suggest a very substantial global gold supply deficit ahead, and growing given there are virtually no big new gold mines in the pipeline to replace aging existing operations and ever-falling grades.  Even if this all stimulates a very significant gold price increase – far more than the $2,000 an ounce predicted in another report from ANZ bank analysts citing substantial Asian gold demand growth (doubling by 2030) – this can’t lead to substantial supply growth given the long lead times in bringing new operations on stream.  Indeed significantly higher gold prices could even lead to gold output falling initially as existing operators are able to mine lower grades to preserve mine lives before any totally new production can kick in.

But, we would suggest, that a $2,000 gold price by 2025 and $2,400 by 2030 as the ANZ analysts suggest, given the likely enormous deficit in gold supply suggested by their consumption growth figures, again hugely underestimates the price potential should these demand figures come about – and in our view these figures may themselves well prove to be conservative given the potential wealth growth in China and India, as well as in other gold-hungry nations over the next decade.

The New London Gold Fixing

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Julian D. W. Phillips of www.GoldForecaster.com and www.SilverForecaster.com gives us his thoughts on what will happen when the London gold ‘fixing’ system is changed on Friday this week

The Heart of the Gold Price – The “Fix”

The London Gold Fixing, the twice daily gold pricing mechanism at which the bulk of physical gold transactions take place is changing dramatically. In the past, five London-based gold bullion banks on a direct telephone link to their clients, established a price at which these transactions took place. This was an efficient way to establish an accurate price for gold deals done outside of the contracts used to supply the bulk of gold deals.

It is in this market that physical gold traders and speculators [we view the COMEX market as a financial market as only around 5% of its deals involve the movement of physical gold] also participated. By trading the marginal supplies of gold [outside of contracted sales of the bulk of gold supplies] a much smaller total, the influence of traders and speculators has had a disproportionate impact on the moment-to-moment gold prices. While the developed world received 80% of global cash flow [up to the year 2000] it also held power over the global gold market.

London – the Heart of the Gold Market

For centuries London has been the global hub of the gold market particularly during the Gold Standard, when London was importing South Africa’s over 1,000 tonnes of newly mined gold a year. London has been able to maintain its position as the world’s leading financial market and in particular its gold market. The high standards of gold and people involved in that market allow it to still dominate the physical gold market,

In the last few years there have been charges that the “Gold Fixing” system was outdated and the gold price manipulated by the gold bullion banks, often with government influence.  While this had an element of truth in it, it was not true of the overall London gold market’s individual professional operators.

The main gold price manipulation in the past came from 1933 [when the dollar was devalued against gold] and after 1985, when central banks encouraged the acceleration of gold production to swamp the gold market, while implying that they were willing to sell off their over 30,000 tonnes of gold into the gold market. Such manipulation came to a halt in 2009.  Since then individual traders have manipulated prices not only in the gold market but interest rate markets and remain under investigation for other incidents of manipulation in financial markets. But the perception has been that the gold market has been operated by professional, capable men and women, in general.

The main bullion banks that operated the gold markets have also been responsible for shipping gold bought there, to the global markets. As we have seen in the recent past, the banks can enjoy larger incomes from the inefficiencies of the distribution chains, which invite the establishment of premiums in markets such as Shanghai and India. These premiums accrued to the banks, so they did not encourage an improvement in the distribution system or the lowering of such premiums.

The rise of the Emerging World

By 2020, at the latest the emerging world will enjoy 65% of global cash flow and the developed world 35% of it. The shift of wealth and power eastwards has led to a very different global gold market. In the developed world the dollar-based currency system has sought to wean the developed world off gold and onto national currencies and has succeeded to date. The gold market appears to therefore have less relevance to financial life than it has had throughout history. With the development of markets trading in gold shares or other gold derivatives [futures and options] the bulk of the demand for actual gold has shrunk to very low levels in the west. This has made it far easier to influence gold prices more directly as new supplies have hit the ceiling they have now.

The result has been that the dominance of the major western banks over the gold markets and participants is almost complete. The sheer power of the volumes of money they can wield over all financial markets has allowed them and their traders to ‘make’ prices.

But as emerging markets have risen in wealth and power and gold production, the ability to ‘make’ prices should have moved away from the developed world eastwards reflecting the percentage of global gold demand China and India represent, alongside the Middle East, if markets had been efficient. But they haven’t as the institutions that operated the gold markets retained their power over distribution and markets.

Add demand from the Middle East to China and India and their demand represents around 75% of global gold demand. On top of that China at an annual production level or around 450 tonnes is now the largest gold producer on the planet. So why doesn’t the gold market reflect the fundamental changes in supply and demand?

It’s all about presence in the global gold market and the products on offer and the ease that they move across the different markets. China’s gold market is still developing on the pricing front. It has developed strongly in terms of gold used in its financial system and continues to expand its distribution system westwards in China, but has a long way to go to reach all corners of China. More importantly, its absence from the London gold market, in terms of participating directly in it, has prevented its gold market presence being felt. The same applies in India, where western banks continue to dominate distribution to the country.

It is apparent that China is no longer content to use London’s banks as its only source of foreign supplied gold. To that end it welcomes the redesign of the London Gold Fixing process and wants to join in. On March 20th the London Gold Fix changes to a new mechanism, the LBMA Gold Price,  involving global banks as well as the London Bullion Market banks that operate the Gold Fixing now. It is hoped that the new electronic mechanism will operate more efficiently and smooth out global prices as well as lower the influence of the current London banks on the gold price.

At the moment there is a $5 premium over and above the London gold price in Chinese gold markets. With the following Chinese banks; Bank of China Ltd, China Construction Bank Corp and ICBC now expected to join in the London Fixing, the pricing power of the Chinese gold market will hopefully, directly impact the gold price thereafter.

If we see the premium over the gold price, in China, disappear, this will have happened.  Bear in mind that Industrial and Commercial Bank of China has become the world’s largest gold retail bank already and will bring to bear its significant number of clients in China. Not only do we expect these banks to operate in a way that they will try to remove the gold price premium in China [which at the moment increases the profitability of the selling [mainly foreign] banks] but make the gold market more globally efficient.

With the Chinese gold market being a one-way street  [no legals export of gold is permitted] we expect the Chinese banks to create a ‘pool of liquidity’ where selling orders from China can take place in London without Chinese gold leaving China. Nevertheless, that ‘pool’ of gold liquidity in London that we expect to see, will facilitate arbitrage operations that smooth out global prices and make the Chinese gold market the two-way street it needs to be to reflect global demand and supply. In turn we will see a 24-hour gold market.

The swing to 1 kg bars from the 400 ounce ‘good delivery’ bars in London we are now seeing from the vast tonnages of gold being re-refined in Switzerland and elsewhere, will hopefully increase the fluidity of market products, globally. The presence of Chinese banks in London may well speed that process up.

Yuan Gold Fix this Year

The Chinese have announced that they will set up their own Gold Fix in the Yuan in Shanghai, later this year. We believe that, alongside the developments we described above, such a Fix will be taken to heart by the global gold market both in the developed emerging and developed world. The fact that the price will only be in Yuan, will ensure that the gold world will get used to the Chinese currency and be in a position to trade in the Yuan without having to go through the Dollar, the Euro and the Pound Sterling, which carry separate risks.

With the Chinese government encouraging the international use of the Yuan in global trade and financing, it will be a small step for foreign entities, including central banks, to hold Yuan in their reserves in the future. But this will not affect the gold market, simply the global currency markets. After all, gold is considered an alternative to all currencies.

Sensationalist headlines

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The media, and in this respect lawrieongold.com is certainly not blameless, has the tendency to come up with sensationalist headlines, if only to persuade people to read the ensuing article.  The headlines may not even accurately reflect the subsequent analysis – or may be reporting on analysis by third parties which are not necessarily the views of the writer.

So our apologies for two such headlines in the past week for which we have received a certain amount of adverse comment.

The first of these articles was titled  Does China have 30,000 tonnes of gold stashed away? in which we reported on a comment in a client newsletter from a highly respected analyst who has some very specific knowledge on China.  He has been very successful in predicting  that nation’s commodity markets trends and price movements that have often been at odds with many other analysts but have since proved to be correct, at least in part.  His judgements are in strong demand from clients.   He, in turn, drew on an analysis last year by another well thought of gold analyst that China had accumulated some 25,000 tonnes of gold between the years 1982 and 2003 under the radar – admittedly a highly speculative assessment given that it seems unlikely such huge flows would not have been picked up at least in part by the other mainstream gold analysts.  To this figure he added a far less controversial 5,000 tonnes of possible Chinese accumulations since 2003, which may even be seen as a conservative estimate by some many other followers of Chinese gold flows, and thus came up with the 30,000 tonne figure which was the genesis of the perhaps over-sensationalist headline.

In part this was a shame, as perhaps it detracted in some eyes from the rest of his comments which were looking at the restructuring of the Chinese economy over the next few years.  These suggested that some decisions being taken now which, as we put it,  would mean some swingeing internal financial reforms which will have a strong impact on global financial markets – and not a positive impact!  Some of the recent announcements out of China on financial restructuring suggest that this process is already under way and is already beginning to take a toll on Western markets as the country’s growth is continuing to slow and as it tries to consolidate the huge internal progress it has made on urbanisation and wealth building in its society.

He also noted, more controversially, that China has the intention to tie its currency in some way to gold over the next three years.  Less controversially he commented that it is trying to  further internationalise direct trade in yuan rather than having to work via the world’s primary reserve currency, the US dollar, which it feels has been used by the US hugely to the latter’s own advantage over the years.  He also noted that the Chinese do not want to make the yuan itself the new reserve currency – or even a reserve currency, but just simplify the direct trade aspects of yuan convertibility into other key currencies.

The second article which had perhaps an over-sensational headline was Could Apple Buy a Third of the World’s Gold? – Frank Holmes  in which Frank looked at the potential impact on the gold market of major sales of a gold-cased version Apple’s proposed new ‘iWatch’.  Frank drew on some other published data suggesting that the gold version of the watch might contain two ounces of gold (which we commented seemed to be an awful lot) and that it might sell millions, although that was perhaps a market assessment too far given the likely price of such a watch.

Two ounces of gold is indeed a lot.  The Rolex gold President watch does contain over two ounces of gold – but the biggest proportion of that is in the strap rather than in the case and there hasn’t been any indication that Apple is considering marketing the gold version of its new watch with anything but a leather strap.  The heaviest gold Rolex sells at about $60,000 and the take up is perhaps in hundreds rather than millions and there is again no indication that Apple is looking to quite such a high priced product so perhaps the assessments are somewhat away from reality.  But, as with all such articles one needs to read it and makes one’s own judgement.  We don’t think our readers are stupid and are quite capable of making their own deductions.

So what is the moral of this.  It is perhaps to view article headlines as not necessarily directly indicative of the actual views of the writer – particularly if they are followed by a ?, but as a device to draw the reader in and decide for him- or her- self.  The articles themselves may come up with counter arguments and may just be rapportage rather than the writer’s own comments.  They need to be viewed as such

Mind blowing stats: China consuming more gold than world producing

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Mind-Blowing: China Consumes More Gold Than the World Produces

Frank Holmes’ take on the huge pre-Chinese New Year demand figures as shown by the Shanghai Gold Exchange where withdrawals in the first six weeks of the year have totalled a ‘mind-blowing’ 374 tonnes.

Welcome to the year 4713. Or, if you prefer, the Year of the Ram.

The Chinese New Year, which kicks off today, is the largest and most widespread cultural event in mainland China, bringing with it massive consumer spending and gift-giving. During this week alone, an estimated 3.6 billion people in the China region travel by road, rail and air in the largest annual human migration.

Chinese New Year Spending Double That of U.S. Thanksgiving Spending in 2014Imagine half a dozen Thanksgivings and Christmases all rolled into one mega-holiday, and you might begin to get a sense of just how significant the Chinese New Year festivities and traditions are.

According to the National Retail Federation, China spent approximately $100 billion on retail and restaurants during the Chinese New Year in 2014. That’s double what Americans shelled out during the four-day Thanksgiving and Black Friday spending period.

As I’ve discussed on numerous occasions, one of the most popular gifts to give and receive during this time is gold—a prime example of the Love Trade.

Can’t Keep Gold Down

Most loyal readers of my Frank Talk blog know that China, along with India, leads the world in gold demand. This Chinese New Year is no exception. Official “Year of the Ram” gold coins sold out days ago, and since the beginning of January, withdrawals from the Shanghai Gold Exchange have grown to over 315 tonnes, exceeding the 300 tonnes of newly-mined gold around the globe during the same period. (Editor’s Note: Since Frank penned this article week 6 Chinese demand figures as presented by the Shanghai Gold Exchange surged by another 59 tonnes to total 374 tonnes in the six week runup to the Chinese New Year)

China, in other words, is consuming more gold than the world is producing.

What’s not so well-known—but just as amazing—is that China’s supply of the precious metal per capita is actually low compared to neighboring Asian countries such as Taiwan and Singapore.

The World Gold Council (WGC), in fact, calls China “a huge, relatively untapped reservoir of gold demand.”

This might all change as more and more Chinese citizens move up the socioeconomic ladder. Over the next five years, the country’s middle class is projected to swell from 300 million to 500 million—nearly 200 million more people than the entire population of the United States. This should help boost gold bullion and jewelry sales in China, which fell 33 percent from the previous year.

Chinese and Indian Growth Has Spurred Gold Market
click to enlarge

“I don’t see demand staying down because you have had structural changes,” commented WGC Head of Investment Research Juan Carlos Artigas in an interview with Hard Assets Investor. “One of them, emerging market demand from the likes of India and China, continues to grow, and we expect it to continue to grow as those economies develop further.”

New Visa Policy Promises Increased Chinese Tourism

The Year of the Ram has also ushered in a new visa policy, one that has the potential to draw many more Chinese tourists to American shores.

For years, Chinese citizens could receive only a one-year, multi-entry visa. Now, leisure and business travelers can obtain a visa that allows them to enter multiple times over a 10-year period. The visa application process has also been relaxed.

American companies to benefit from greater influx of Chinese touristsIn terms of overseas spending, Chinese tourists already sit in first place, just above their American counterparts. According to the United Nations World Tourism Organization, a record $129 billion was spent by Chinese travelers in 2013 alone. The average Chinese visitor spends between $6,000 and $7,200 per trip in the U.S.

This visa policy reform is an obvious boon to travel and leisure companies such as those held in our All American Equity Fund (GBTFX)—Walt Disney and Carnival Corp., for examples, not to mention retailers such as Kohl’s, Coach and The Gap.

Other beneficiaries include Chinese airlines such as Air China, which we own in our China Region Fund (USCOX). Global airline stocks are currently soaring as a result of low oil prices, increased seat capacity and more fuel-efficient aircraft. The new visa policy has the potential to give these stocks an even stronger boost.

On a lighter note, at least a couple of airports in North America are making the most of the Chinese New Year, hosting performances by Chinese musical artists and providing entertainment such as a lion dance through the terminal and calligraphy.

To our friends and shareholders here in the U.S. and abroad, I wish you all a Happy Chinese New Year!

Is China hiding central bank gold in commercial banks?

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Latest article on Mineweb asks whether the big discrepancy between SGE withdrawal figures and WGC/GFMS assessment of Chinese gold demand could be down to China’s central bank using the nation’s commercial banks to hold gold on its behalf so that it avoids reporting this to the IMF.

Excerpt from the Mineweb article:

… if, for argument’s sake, we take GFMS/WGC estimates of Chinese consumer demand as being largely correct – and to have been so over the past several years, but with SGE withdrawal figures showing the true picture of total overall Chinese offtake, then the commercial banks have been hoarding perhaps up to 1,000 tonnes of gold a year or more for the past few years.  This would tie in pretty well with the general perception of China substantially raising its gold reserve levels, but holding the additional gold in accounts which are not declarable for the moment to the IMF and thus retaining the fiction that it only holds 1,054.1 tonnes in its official gold reserves,,,,,

To read full article on Mineweb, click on this link

2015 global gold supply deficit could be substantial

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If we take the SGE gold withdrawal figures as being a more representative indicator of physical gold movement from the West to China, rather than the limited assessments by GFMS used in the latest WGC report, and add in Indian and other global demand then gold supply is already in deficit, with shortfalls becoming ever higher.

Lawrie Williams

Returning to the latest World Gold Council (WGC)/GFMS Gold Demand Trends report, which puts mainland Chinese 2014 consumer demand at a mere 814 tonnes  together with the Shanghai Gold Exchange (SGE) overall withdrawal figures (around 2,100 tonnes) – assuming both to be in essence correct, but looking at different parameters – the difference is explained in the Gold Demand Trends report as due to gold purchases by commercial banks, which it doesn’t include in its statistical calculations – see Chinese gold demand discrepancy explained?

In terms of physical gold flows, however, one has to see this apparent flood of gold into the Chinese commercial banks as a significant contributor to total global physical gold offtake and thus in our view should be added into the figure for total gold demand.  The actual figure for this ‘additional demand’ last year will have been around 1,200 to 1,300 tonnes – a huge amount and one wonders if this is actually perhaps a proxy for Chinese central bank offtake, or even an accounting mechanism whereby the Chinese central bank increases its effective gold reserves without having to report it to the IMF.  (This will be the subject of a following article).

What the WGC also noted in its latest report was the big recovery in Indian demand ahead of a widely anticipated relaxation of some of that nation’s gold import controls under the new more gold- and business-friendly Modi government.  This represents something of a change in perception within the huge gold jewellery and trading business in the world’s second largest gold consumer (by our reckoning) and bodes well for total global gold demand this year with China (if one uses the SGE withdrawal figures as being that country’s total offtake) and India alone between them consuming virtually all global gold supply.  This averaged around 82 tonnes per week last year from all sources including scrap supply (falling along with lower gold prices), sales out of gold ETFs (also falling), net hedging (perhaps rising but a small component) and new mined gold (expected to be flat this year).

Thus Chinese and Indian demand alone is probably exceeding total gold supply at the moment as sales out of gold ETFs so far this year are around zero to negative.  Meanwhile, of course, these two Asian nations are not the only global gold consumers as they account between them for around 56% of global total demand according to the WGC statistics (although as we’ve noted above they seem to ignore the gold being taken in by Chinese banks which would make the percentage rather larger, but still leave the rest of world consuming around another 35 tonnes a week!)

That all suggests a substantial total global gold supply deficit.  Indeed on this basis gold supply may have actually been in deficit over the past couple of years too, although this will have been mitigated by the big sales out of the gold ETFs.  If demand continues at current levels throughout the current year (which it most probably won’t) that would suggest a very large global gold supply deficit of somewhere around 1,800 tonnes.  But with the normal fall-off in Chinese and Indian demand through the middle months of the year that kind of deficit is unlikely, but the overall deficit figure would still likely be large – perhaps in the region of 1,000 tonnes of physical gold or more given ETF liquidations will likely be much lower this year unless there is a big further fall in the gold price.

With gold disappearing from the supply chain at this kind of rate one wonders how long the gold price can be held down at current levels, dependent as it is largely on financial dealings on the Western commodity markets.  New such markets are now springing up in the East – notably in Shanghai, Hong Kong and Singapore.  If they eventually succeed in wresting precious metals price control away from the West we could see a sea change occurring in gold and silver market valuations.  This is perhaps an inevitable process over time, but we don’t yet have a handle on how long this will take – but surely by the end of the decade, if not earlier?

Chinese gold demand discrepancy explained?

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The huge difference between what  the WGC/GFMS describes as Chinese gold demand and SGE figures, is all a question of statistics and how they are interpreted and what is actually classified as ‘consumption’ or ‘demand’

Lawrie Williams

For some time now there has appeared to be an enormous discrepancy between apparent Chinese estimated demand figures as calculated by bodies like the World Gold Council (WGC) and GFMS and the reality of Chinese gold withdrawals from the Shanghai Gold Exchange (SGE).  And it all seems to be down to the way the statistics are calculated and what is included in the words ‘consumption’ or ‘demand’ by the analysts.  To some extent this has been clarified in part by the latest Gold Demand Trends report from the WGC which comments as follows: “The flow of gold into China has far exceeded the amount needed to meet domestic jewellery and investment demand in recent years. The role of the commercial banks in using this gold for financing purposes has been well documented, including in our report, Understanding China’s gold market, and this activity expanded in 2014. To some extent, this helps explain why Shanghai Gold Exchange delivery figures are significantly higher than consumer demand.”

The apparent difference between what we will describe as Chinese ‘consumption’ and Chinese ‘total demand’ is thus huge.  WGC/GFMS calculates ‘consumption’ as being made up only of jewellery, technology and investment demand and in mainland China’s case this came to around 814 tonnes in 2014, around 38% down from that of 2013.  But with SGE withdrawals coming to a little over 2,100 tonnes in 2014 – which some equate to total Chinese demand – this leaves a tremendous gap of almost 1,300 tonnes in the two different calculations.  The WGC will tell you that there is an element of double counting in the SGE withdrawal figures, but admits this is probably small, only relating to some recycled gold,  and now suggests the balance is held by Chinese banks (which it classifies as stocks and therefore doesn’t include the figures in its demand classification).

So perhaps we should look at ‘gold flows’ rather than various definitions of ‘consumption’ or ‘demand’ and in this respect ‘gold flows’ from West to East – and into China in particular were very large indeed in 2014 – indeed may have been greater than in 2013 given the big recovery in Indian ‘demand’ which doesn’t appear to be distorted by bank inflows. If we use ‘gold flows’ as a measure the amount of gold ‘flowing’ into China hugely exceeds that ‘flowing’ into India, although on WGC ‘demand’ figures India seems to be interpreted by the media as having regained the world No. 1 spot.  In truth it probably hasn’t really been the No. 1 for three or four years already given this additional, but unconsidered, demand from the banks. Indeed even this year if one adds Hong Kong ‘demand’ into that of the mainland, Chinese demand as calculated by the WGC was still a little ahead of India’s.

The WGC is very excited by what it sees as a big turnaround in Indian jewellery demand, particularly in Q3 and Q4 last year.  It puts this very much down to a change in attitude in the Indian jewellery trade following the election of the Modi government which is, on the face of things, much more pro-gold than its predecessor.  There is a definite suggestion that gold import controls will be further reduced and there will have been some ability within the jewellery sector to respond ahead of likely tax changes.  There is also anecdotal evidence that the incidence of gold smuggling to avoid taxes and the prior 80:20 import restriction has fallen back too.

Speaking to the WGC’s Head of Communications, John Mulligan, at the big Cape Town Mining Indaba, and he was quick to point out that in addition to the big gold flows eastwards, an often overlooked statistic is that in Europe, German investment demand has been particularly strong.  He reckoned that, in fact, German gold investors have been buying more than their U.S. counterparts since 2008!

Other points from the latest Gold demand Trends report include comment that Central Bank purchases held up better than anticipated, largely due to buying from Russia and some other CIS states which between them accounted for around half of such purchases last year.

Sales out of gold ETFs were at a fraction of those of 2013 and while new mined gold production grew by a small 2%, the WGC thinks that this may well have now plateaued so perhaps peak gold is at last upon us.  There are few major new gold projects and expansions still in the pipeline, exploration has diminished drastically, while a number of older operations are facing closure through ore depletion, or because they can no longer mine profitably at current gold price levels and in many cases grades are falling.

To access the latest full 28-page Gold Demand Trends report click on www.gold.org

How much gold is now going directly to mainland China? 36%?

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By far the largest exporter of gold to China and to Hong Kong is Switzerland and its latest figures for 2014 suggest that 36% of Swiss gold exports are now going to mainland China directly

Lawrie Williams

Latest precious metals export data out of Switzerland for the full 2014 year suggest that in that year, taking gold specific exports only, around 36% of the gold exported to Hong Kong and China  combined actually went directly into China rather than via the former British Crown Colony.  As various reports in the media have suggested, India was the biggest recipient of Swiss gold at 471.2 tonnes, but China and Hong Kong, which after all is a special administrative region of China, together took in 590.4 tonnes, further suggesting China, contrary to some reports, remained the world’s biggest gold consumer last year..

Totals Swiss gold exports for the year were some 1,746 tonnes and the top 10 importers of Swiss gold in 2014 are set out in the table below.  Between them they account for over almost 90% of all Swiss gold exports.  The next three most significant importers of Swiss re-refined gold were France with 37 tonnes, the UK with 29.8 tonnes and Malaysia with 22.6 tonnes.

Table: Top 10 recipients of Swiss gold exports

Country Tonnes imported % of Swiss Gold exports
1.       India 471.2 27.0
2.       Hong Kong 377.2 21.6
3.       China (Mainland) 213.1 12.2
4.       Singapore 134.2 7.7
5.       Germany 88.9 5.1
6.       Turkey 69.1 4.0
7.       United Arab Emirates 66.3 3.8
8.       Saudi Arabia 60.5 3.5
9.       Thailand 44.4 2.5
10.   Italy 43.6 2.5

Source: Swiss Federal Administration

So what is the significance of this?  For many years very little gold was imported directly to mainland China.  Nearly all came in via Hong Kong.  So Hong Kong (which published its gold import/export data) was widely seen as a proxy for total Chinese gold imports.  China itself didn’t publish such data so what might have been coming in directly was widely disregarded by Western analysts as of no consequence.

But last year, China moved the goalposts, and eased the path of gold imports directly to the mainland from other countries than Hong Kong.  However because China doesn’t publish direct gold import data no-one really knows exactly how much gold is now flowing into China directly and although Hong Kong is now not the only significant import route Western mainstream media often imply the Hong Kong data still equates to Chinese demand – so the recent news that exports from Hong Kong to China fell 32% last year was widely seen as an indicator that Chinese consumption fell by a similar amount.

Thus the latest official export data from Switzerland (as do the latest figures for U.S. gold exports) show that for a large part at least of China’s gold imports, around a third are now going into China directly which makes the Hong Kong figures ever less indicative of the overall picture.

The other interesting point from the Swiss statistics is that this small nation takes in, re-refines and then exports a volume of gold equivalent to around 56% of the world’s newly mined annual gold supply.  The volumes of gold being exported to other countries than India and China/Hong Kong are also worthy of note – particularly imports into Singapore and Thailand being other key Asian gold consumers – and Saudi Arabia, Turkey and the United Arab Emirates, which between them accounted for  as being strong indicators of Middle Eastern demand.  Between them these three states imported 195 tonnes of Swiss re-refined gold – some of which was doubtless destined for Iran and Islamic State, both of which are cut off from direct gold supplies from normal sources.  Gold exports and imports can be a murky business at the extremes!

Upward pressure on gold close to overwhelming speculative liquidity

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Commentary by Julian Phillips yesterday which speculates that the vast volume of Asian gold demand is close to overwhelming the speculative activity in the paper futures markets which has been keeping prices weak.  Of course ‘close’ is an indeterminate length of time!

The gold price has pulled back to above support once again as gold continues to consolidate  but on low U.S. turnover.

With China taking more than is being supplied to the market from newly mined gold and scrap, a question has arisen as to how the price can fall in such an environment. It can happen when there is sufficient liquidity in the London market which continues to be the main hub for gold pricing. Over time as this liquidity is drained the upside pressure would be built to the point where such speculators and traders do not have the power to push prices down in such a market. The difference between short-term market moves and long-term moves is then described by such action.

We saw the same in 2005 when after two decades of falling and low prices the gold price brushed aside such downward pressures and surged to more than double the previous peak. Can such pressures exert themselves again? We believe they can as supply has now peaked from newly mined gold and scrap [until much higher prices are seen] and yet Asian demand is continuing to grow.

Bearing in mind that Asian demand is to find financial security by new buyers who are middle classes getting richer or from new entrants into the middle classes. Such demand is unlikely to fade or lessen for the foreseeable future. What we don’t know is when the upward pressure on the gold price will overwhelm speculative liquidity, but we know it is close.

The euro is recovering strongly at the moment while gold is slipping against the dollar. The move of the dollar and the gold price together is still happening.  With the euro rising to $1.1482 before London opened the 1% rise equates to a 1% fall in gold.

In his meeting with Germany’s Finance Minister, the Greek finance minister Yanis Varoufakis’ will propose the exchange of outstanding debt for new growth-linked bonds, running a permanent budget surplus and targeting tax dodgers. Furthermore, Mr. Varoufakis said Syriza would not seek a write-off of Greece’s €315 billion sovereign debt.

Julian D.W. Phillips for the Gold & Silver Forecasters – www.goldforecaster.com and www.silverforecaster.com

Gold supply continues in surplus this year – GFMS

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Gold supply continues in surplus this year – GFMS

As always the latest GFMS update on its Gold 2014 report makes for interesting, if somewhat controversial, reading.  Excerpt from commentary posted today on Mineweb.com – click on Mineweb.com to read full article.  It’s also notable that some commentators take the latest GFMS update to show that India has re-overtaken China as the world’s largest gold consumer.  We disagree – the figures just don’t add up!

Lawrence Williams

The latest update of the annual study by GFMS of world gold supply and demand makes for some interesting reading, and correspondingly interesting interpretations of the figures by the media.  Mineweb has reported one such analysis suggesting that India has re-overtaken China as the World No. 1 gold consumer and some figures published within the report suggest that this may be the case – but this may well depend on what the interpretation of consumption actually is.  The GFMS report suggests that Indian jewellery fabrication at 690 tonnes overtook that of China during the year, but appears to make no such bald statement that total Chinese demand fell back below that of India, although there are figures within the report which suggest this could be the case.

See: India overtakes China as world’s top gold consumer – GFMS

The GFMS report does note also, however, that Shanghai Gold Exchange (physical gold) withdrawals came in at just over 2,100 tonnes for the year and if this has not been ‘consumed’ one has to wonder where it is all going.  Indeed even published figures on gold exports from Hong Kong, plus GFMS estimates on China’s own gold output come to a total of over 1200 tonnes alone and we have demonstrated here that Hong Kong is losing its place as being a proxy for total Chinese gold importshttps://lawrieongold.com/files/tag/china-gold/page/.  this was shown by noting the published data from the usgs that 32% of u.s. gold exports in october went to mainland china directly rather than via hong kong – a pattern which started in september………

To read full article on Mineweb.com click on: Gold supply to continue in surplus this year – GFMS

Chinese gold demand 70 tonnes w/ending Jan 16th

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Lawrie Williams

Note:  More detailed article now up on  Mineweb.com

Latest figures from the Shanghai Gold Exchange show that just over 70 tonnes of gold were withdrawn from the SGE for the week ending Jan 16th.  This is the 3rd highest level of gold withdrawals ever recorded by the Exchange and suggests that Chinese gold demand remains extremely strong in the runup to the Chinese New Year which falls on Feb 19th this year.  With four weeks still to go until the actual New Year date, if this level of gold demand holds up given the higher gold price, China will show a very strong start to the year, buying up far more than the global total tonnage of newly mined gold over this period on its own.

Chart of SGE gold withdrawals over past six years courtesy of Nick Laird’s sharelynx.com website

SGE2

A more detailed analysis of what the latest figures imply may be viewed on the Mineweb.com website.

 

China 2014 gold consumption only down 3%

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China gold demand only down 3% in 2014

By Lawrence Williams

An update and complete rewrite of earlier article on China’s 2014 gold demand as recorded on the Shanghai Gold Exchange

Gold withdrawals from the Shanghai Gold Exchange (SGE) came to just under 58 tonnes for the week ending December 26th bringing the total for the year to that date to just short of the 2,100 tonnes we predicted back in November (see: China 2014 gold demand heading for 2,100 tonnes).   With three trading days still to be reported on it looks as if our predicted level will be exceeded.  With demand always strong in the runup to the Chinese New Year, January and early February figures are also likely to continue at a high level given the date of the Lunar New Year falls this year on February 19th, the second latest date possible in the Chinese calendar.

SGE withdrawals are seen by the Chinese as equating to that nation’s total gold demand. There is an argument that there may be a small element of double counting with respect to recycled gold, and the total figures have again been slightly muddied as they now include trade through the new international section of the SGE – the SGEI – which doesn’t necessarily move into Chinese hands, but these amounts are small at the moment and the overall figure still provides an excellent year on year comparison of true Chinese demand figures.  See charts below for comparisons with prior years from Nick Laird’s excellent www.sharelynx.com and www.goldchartsrus.com websites.  It shows that this year’s SGE withdrawals, due to a late surge, are getting remarkably close in total to last year’s record level and very significantly higher than in 2012 and earlier. Indeed the plots on the first chart indicate that if anything, Chinese demand in the final quarter of this year has actually been running stronger than in the same period in the record 2013 year following a substantially weaker middle section of the current year after a very strong start

Reports that India may have again overtaken China as the world’s largest gold consumer look to this observer to be a flight of fantasy……..

To read full article on Mineweb, click here

Where will gold end 2015 – $1,000, $1,325 or maybe $2,500 or …?

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A look at the prospects for gold and silver prices in 2015 – and predictions of end year price levels for the two key precious metals.  (An updated version of this article has now been published on Mineweb.com)

By Lawrence Williams

Well there’s nothing like being optimistic at the start of a New Year and there are certainly many factors to be optimistic about if you are a gold bull. Gold demand remains strong – notably in China and India with those countries alone probably accounting for 100% or more of new mined gold at the moment.  At the end of this article we will make some not very scientific predictions on the final levels for the gold and silver prices at year end 2015 – perhaps to have these totally shot down in flames when the year end comes. It is always easy to be wise after the event.

China (in the form of the Shanghai Gold Exchange) is looking to perhaps see full year demand fall around the 2,100 tonne plus mark, only a fraction below last year’s record of 2,181 tonnes. So much for the almost incessant mainstream media reports throughout 2014 of a collapse in the Chinese gold market!

India too has seen a remarkable pick-up in demand in the second half of 2014 despite the maintained imposition of 10% import duty on gold and silver – so much so that some commentators have reported that it may have become the world’s No. 1 gold consumer again, retaking this position from China. It hasn’t! But even so, if one takes smuggled gold into account to avoid the import restrictions, it could well have imported close to 1,000 tonnes in 2014 – maybe more – and with world newly mined gold output estimated as likely to be at perhaps just over 3,000 tonnes in 2014 then it definitely looks as though the two Asian giants will indeed have accounted for virtually all of this.

But of course China and India are not the only consumers of gold. Virtually every Asian and Middle Eastern nation has a propensity to accumulate gold, while there are also signs that the jewellery sector – the main non-investment gold consumption market – has also been picking up healthily in the U.S. in particular as the populace is fed a seemingly unending positive spin on a return to economic growth.

Geopolitical events are also impacting positively on safe haven demand for gold. The crisis in Ukraine and Crimea is still playing out and is likely to cause ever more strife moving forwards. Russia’s President Putin in his New Year address made it quite clear that Crimea is now again wholly part of Mother Russia, while Ukraine’s economic plight is dire and one finds it hard to see how it can continue without defaulting on its financial commitments. This could have a major adverse impact on creditor banks and nations, which in turn could have a knock-on effect on financial institutions globally. One can foresee runs on banks and domino bank and fund collapses as a result with the global financial system being so closely interlinked.

But Russia too has seen economic sanctions and low oil prices bite severely and it is also in somewhat of a financial imbroglio. But still it has been buying gold for its reserves which it sees as a stabilising influence. Russian banks are in financial trouble too as access to Western funds is cut off. What should worry the West is that Russia has the capability of itself imposing substantial financial damage on western economies by restricting oil and gas supplies, and possibly by cutting off wheat exports as well as restricting imports from countries imposing sanctions, among others. True this would further damage the Russian economy but the nation’s rulers may feel that is a worthwhile sacrifice – and no-one should doubt the Russian peoples’ capacity for absorbing economic pain, particularly if the internal political spin puts the problems all down to the wicked Americans and their European allies which it is doing very successfully at the moment.

And this all has the propensity for escalation from the current uneasy stand-off, to a resumption of the Cold War and even escalation into a limited Hot War should NATO move into Ukraine – a move President Putin sees as totally unacceptable. But increasingly hostile rhetoric and action on both sides could well lead to this taking place. That is indeed a scary scenario for Europe in general and former Soviet Union satellites in particular. Continued escalation on this front could well lead to an ‘insurance’ move back into gold and if financial institutions start to falter, or collapse altogether as a result of Western bank difficulties, the flow could become a flood.

Meanwhile there is no resolution in sight in Syria and Iraq with fundamentalist Islamic forces still firmly in place despite total Western air superiority. How long before the West has to put troops on the ground to hold back, or defeat, the fundamentalist forces? When religion is involved, defeat is perhaps not an apt word – attempted control may be better. Look at Muslim Afghanistan as an example. The Taliban has supposedly been defeated but still is capable of some horrendous day to day impacts, while the spillover into Pakistan and the rise of similar fundamentalist groups in parts of North Africa has to be deeply worrying. ISIS (or whatever it calls itself now) is unlikely to be able to build its Caliphate covering much of the Middle East, North Africa and even parts of southern Europe to emulate the Moorish empire of the past. However its fanatical support, now with access to oil revenues to provide finance to buy ever more sophisticated weaponry, may provide a military headache for the Western/Christian/Moderate Muslim alliances for many years to come.

New mined gold supply is peaking as pipeline projects come on stream and build up (but leaving very little new in the pipeline now to replace depleting and uneconomic resources). The industry’s unprecedented cost cutting exercises will have put back new mine developments by many years and pushed back possible expansion plans.

The other major source of gold for the markets comes from scrap, but the lower prices have put something of a dent in supplies from this source. And much will have also been drawn out in 2009/10/11 when the gold price appeared to be rising inexorably and calls for individuals to sell unwanted gold jewellery were at their peak. Probably much less such metal is available to the markets nowadays.

On the negative side for gold, the metal price has shown weakness for three years now despite many of the above factors already being in play. Chinese demand hit a record in 2013, yet the gold price plunged. Sales out of the big gold ETFs will have been a factor that year. In 2014 too there were some significant sales out of ETFs as well but at perhaps only around 15% of those in 2013 and while there could be more to come from this source the amounts will likely diminish further. Nonetheless there are forces working against the gold price – and these may be even more prevalent in the much smaller silver market. The markets for both precious metals appear to being driven by the paper futures markets with relatively little physical metal changing hands.

There is a theory out there – not one believed by all – that the big money bullion banks are manipulating the gold price for their own ends – either to buy and make enormous profits when the market turns again, or at the behest of the U.S. Fed and other central banks. These may feel that a strong gold price would be seen as yet a further indicator of substantial weakness in the global fiat currency system and would act as a destabilising factor in efforts to portray national economies as being stronger than they actually are. With major bank analysts mostly still bearish on gold – some more so than others – one does not know if this represents collusion with those seeing lower prices as in their best interests, or strongly held beliefs – but regardless of which these do tend to take the form of self-fulfilling prophecies as the big bank analysts will have very strong followings amongst the financial institutions in particular.

So there are strong pressures out there both for and against gold and it is difficult at this stage to predict which will win out in 2015, although one has a strong feeling that the long term future for the gold price is very positive – but then long term is a somewhat indefinite time period. So where will the gold price be 12 months from now. Here I’ll take a leaf out of Martin Murennbeeld’s book and come out with three price scenarios, and apply a weighting to each to come up with a final median prediction.

  1. The high price scenario (probability weighting perhaps 15%) – Gold at $2,500, silver at $55.
  2. Low price scenario (probability weighting 20%) – Gold at $1,000, silver at $12.50
  3. Middle price scenario (probability weighting 65%) – Gold at $1325, silver at $24.

If we average these out we get a final median figure of: Gold $1396.50, Silver $26.35. Well it’s probably as good a guess as any at this time of year!

 

 

 

Chinese gold demand already over 2,000 tonnes in 2014

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Chinese gold demand already over 2,000 tonnes in 2014

By Lawrence Williams

The latest weekly gold withdrawal figures from the Shanghai Gold Exchange suggest that Chinese demand is going to get far closer to last year’s annual figure than most mainstream news media would have you believe. (SGE withdrawals are the best available proxy for actual Chinese demand). The latest figure for the week ending December 19th was a large 60.67 tonnes bringing the year to date figure to 2,015.75 tonnes, only 165 tonnes short of last year’s 2,181 tonne record.  With 1 ½ weeks of SGE withdrawal figures still to go until the year end, if withdrawals continue at the current rate it will bring this year’s total to around 2,100 tonnes – only around 4% off last year’s record figure.

It is reckoned, perhaps arguably, that SGE withdrawals equate to total Chinese gold demand – but even if they don’t they do provide an excellent year on year comparison of true Chinese demand figures.  See chart below for comparisons with prior years from Nick Laird’s excellent www.sharelynx.com and www.goldchartsrus.com websites.

SGEdec19

Nick is a close follower of all kinds of global statistics which he publishes in graphical form and he and Koos Jansen on www.bullionstar.com are the most reliable followers of Chinese gold statistics.  Koos will probably see Chinese demand figures as a few tonnes lower as the SGE figures also include movement through the new International section of the Shanghai Exchange (the SGEI) where trade is not necessarily landed on the mainland, but currently volumes are thought to be very small so will make little difference to the overall picture.

Together with the huge recent gold import figures emanating out of India (see: Indian Summer for Gold and Silver.  Can it go on?  and reports of strong demand in European nations where there remain substantial doubts about economic recovery, there seems to be little doubt that currently gold demand is exceeding new supply – possibly comfortably.  There have been relatively high sales levels out of the gold ETFs in recent months which will have helped balance the figures but these have been nothing like last year’s bleed from this source.  With the weaker ETF holders falling away this will become a diminishing source of gold for the world markets.

So it looks as if global gold demand is ending the year on a strongish note.  The gold price yesterday kicked back close to the $1,200 mark after being taken down to the low $1,970s in thin trade just before Christmas.  There does seem to be good support in and around the $1,190s, although a decisive break back above $1,200, while on the cards, is proving difficult to achieve.

Path of the gold price is in China’s hands

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Path of the gold price is in China’s hands

This is an updated and almost completely re-written version of an article first published on Mineweb.com  immediately following the Swiss Gold Referendum at the beginning of December.  The general premise of the earlier article holds good.  To read the original on Mineweb click on this link:  China holds the gold price key

By: Lawrence Williams

The predictable ‘No’ vote in the Swiss gold referendum did indeed prompt a quick knee-jerk downwards reaction in the gold price, this was exceedingly shortlived, the result  having been already assumed by the markets, and an immediate bounceback took the gold price back above the $1200 level and the price has stayed within range of this figure for nearly a month now, although there has been some intra day volatility, perhaps due to short covering coupled with the big money players in the market seeming loath to allow any significant upwards breakout.

We said at the time on Mineweb that we could be in for a volatile few days, although we felt that we were perhaps beginning to see some positive momentum in gold, after its dip down to around $1160 in the referendum aftermath.  After its rapid recovery from this level we have been seeing $20-30 price moves up and down, but in general these have seen gold return to a trading range a few dollars above or below the $1200 level.

The question now though could gold fall yet further by the year-end or in early 2015?  Views are very mixed on this possibility among the major bank analysts.  What should be worrying for the gold bulls is that some of those predicting further falls, back perhaps to the $1000 level, are also analysts for entities with very deep pockets who could perhaps make this happen if they are so inclined to do. And they are not the only ones suggesting there could be a further big fall in price.  Will we perhaps get down to WaveTrack International’s predicted $1,100 level (although this also sees a rapid very strong gold price increase following on), or perhaps Goldman Sachs’ $1,050 or lower – an entity with the financial clout to make this happen.

See:  Elliott wave analyst sees big gold and silver price surge ahead

There are even those predicting even worse things for gold – my eyes were drawn to a prominent advertisement on kitco.com for a U.S. financial newsletter writer (Harry Dent) suggesting that the gold price could yet fall back to $700 an ounce.  (We don’t believe China will allow this to happen though.)

For gold mining companies most can survive (just) at $1200 gold.  But company executives will be reconsidering their options if the price should dip further – if indeed they have any. After all well-respected commentators have noted that much of the gold mining industry is already under water at $1,200, although the bigger ones are remedying this through effective cost cutting.  Lower oil prices will be helping here too.  But in reality costs can only be cut so far – and these may well adversely impact longer term profitability. Even those who have felt that using a gold price of only $1,000 to calculate whether their operations are viable or not at lower gold prices will be looking to re-assess where they stand at $900 gold. Some mostly smaller companies may well give up the battle to stay afloat.

Is there thus any hope out there for the gold investment sector? The pressures driving the gold price downwards have been enormous, although as we have pointed out on Mineweb on a number of occasions, demand already appears to be exceeding supply, probably comfortably – and at $1,100 gold or lower the supply gap is likely to continue to widen as scrap sales dwindle away, the lower price stimulates new purchases in the East and new mine production falls as some miners bow to the inevitable and have to shut down lossmaking operations.

It may not quite be that simple though. Those miners that may have high grade sections may concentrate on these and higher grades through the mill at full throughput means higher gold output. But the scope for this to be implemented becomes more and more difficult as time progresses and this can only be a short-term measure – and also leads to reducing values longer term for those which survive. And of course, the scope for high grading among many of today’s massive tonnage, low grade operations, and some others too, is strictly limited.

Is there any light at the end of the tunnel? Maybe. But is this just clutching at straws? Under the Goldman scenario, the answer is probably no until the bankers feel they have driven prices down sufficiently to buy back into the market and make mega profits on a reversal in the price trend. But this depends on how much of the recent strange activity in the gold futures markets is profit-driven, self-serving, or at the behest of higher anti-gold powers who see a rising gold price as a threat to the global economy. Certainly in the case of the Swiss referendum, the vast and totally unprecedented propaganda levels brought to bear on the population by the Swiss Executive and the Swiss National Bank, suggested that the prospect of a ‘Yes’ vote could just not be allowed to happen.

See: Harsh words on Swiss Gold Referendum from von Greyerz

But if WaveTrack International’s Peter Goodburn is correct in his analysis, a gold price fall back to $1,100 will be rapidly followed by perhaps a two- to three-year recovery taking gold, silver and the other precious metals to new highs, resulting in huge multiples in gains in gold stocks. This is all based on Elliott Wave data, which has been remarkably consistent over the years in matching price patterns for virtually any commodity. Although if this can hold true in the face of the current unprecedented interference in the gold futures markets obviously remains to be seen.

However, even the WaveTrack prediction probably needs something to kick-start the recovery process and we still feel China ultimately holds the key to the gold price. Despite the mainstream media keeping on telling us Chinese gold demand is diving, Chinese demand this year, as represented by withdrawals from the SGE, actually remains on track to reach over 2,000 tonnes. It’s already passed 1,900 tonnes and if the recent 50+ tonne/week average level is maintained until the year end should reach comfortably over 2,000 tonnes.  Indeed as the Chinese New Year approaches this tends to be a very strong time for Chinese gold purchases.

But should China want to make a specific impact on the gold price it has all the ammunition it needs to do so. There is a very strong belief among many analysts that China is building its gold reserves to at least match, or perhaps exceed those of the US, and if it is so doing and should come clean and announce a major increase in its gold reserves – the last time it did so was nearly six years ago – this would give an immediate massive fillip to the gold price and is a scenario those traders short gold must dread.

Or, even if this is not the case, should China wish to see the gold price rise in order to keep its citizens who have purchased gold happy (they were effectively encouraged to do so by the government-owned banks), or to embarrass the West, it has enormous foreign exchange reserves available to intervene in the market and buy physical gold sufficiently to turn the markets around strongly. We have just seen a rather remarkable drop in reported Chinese foreign exchange reserves despite the country maintaining a strong balance of trade surplus.  Could this be yet another sign that China is liquidating dollar holdings and buying, but not reporting, gold?

Gold is actually seen as in short supply anyway in the West, which is why the gold believers cannot understand recent price movements which seem to fly in the face of economic supply/demand logic and a China boost could have a very rapid strong upwards effect. India the other major player has also been reporting a huge surge in gold imports and between Indian and Chinese demand gold is continuing to move from weak hands in the West to much stronger hands in the East.

See: Indian summer for gold and silver.  Can it go on?

In the case of China Western governments may be wise not to tweak the tail of the dragon as it certainly has the wherewithal to play the gold card and throw global markets into turmoil, and drive the gold price ever higher.