Gold to bounce off support; China launches interbank gold trading

The New York gold price closed Monday at $1,089.60 down from $1,095.00. In Asia it was moved down to $1,081.5 but London held it there and the LBMA price was set at $1,081.80 down from $1,094.85 with the dollar index higher at 99.25 up from 98.94 on Tuesday. The euro was at $1.0817 down from $1.0856 against the dollar. The gold price in the euro was set at €1,000.09 down from €1,008.52. Ahead of New York’s opening, the gold price was trading at $1,082.55 and in the euro at €1,000.51.  

The silver price in New York closed at $13.81 down 7 cents.  Ahead of New York’s opening the silver price stood at $13.83.

Price Drivers

Monday saw no purchases or sales into or from the SPDR gold ETF or the Gold Trust. The holdings of the SPDR gold ETF are now at 651.677 tonnes and at 160.17 tonnes in the Gold Trust.  

We find it extraordinary that the gold price can slip from over $1,100.00 to $1,081.00 with almost no physical gold sales! And this after a few weeks where strong gold purchases pushed the gold price through resistance. The gold price is now sitting on support that was previously resistance. If the market really does work, we expect to see gold bounce off support. Today, more and more attention is being brought to the currency world and exchange rates. The dollar is stronger today, which is why dealers marked the gold price down, but we reiterate that gold is moving in all currencies, both up and down.

There are moves afoot to adjust the malfunctioning of the global gold market structurally. We are waiting for the Chinese bank ICBC to be accepted as a Member of the LBMA price setting group of banks and for them to be accepted as a gold clearing bank. This may well bridge the divide between east and west in the gold market. We are curious to see just how long the LBMA takes to appoint the ICBC as members and clearers. Because of the implications to pricing power, we do expect the process to be dragged out. If it happens quickly, it is all credit to the LBMA. What may well weigh the speed of their appointment is the reality that London wants to remain the hub of Yuan trading in the west and likely keep it influence in the gold market intact.

China has launched interbank gold trading at the beginning of this year, in an effort to open up the country’s bullion market. It is aimed at increasing liquidity in interbank gold trading, and promote market making. Before the new mechanism, banks were not allowed to trade gold with each other and could only buy the precious metal through the Shanghai Gold Exchange, which is the world’s biggest physical trading platform for the metal.

The silver price will continue to be hesitant until gold resumes it rise.         

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

The joy of gold

The New York gold price closed Monday at $1,095.00 down from $1,102.50. In Asia it was moved to $1,095.2 but London held it there and the LBMA price was set at $1,094.85 down from $1,104.70 with the dollar index higher at 98.94 up from 98.52 on Monday. The euro was at $1.0856 down from $1.0895 up against the dollar. The gold price in the euro was set at €1,008.52 down from €1,013.95. Ahead of New York’s opening, the gold price was trading at $1,092.70 and in the euro at €1,006.31.  

The silver price in New York closed at $13.88 down 5 cents.  Ahead of New York’s opening the silver price stood at $13.87.

Price Drivers

Monday saw purchases of 2.083 tonnes into the SPDR gold ETF but none into the Gold Trust. The holdings of the SPDR gold ETF are now at 651.677 tonnes and at 160.17 tonnes in the Gold Trust.  The move into gold via these ETFs will continue as the volatile start to 2016 continues to create uncertainty in global markets.

When a respectable bank such as the Bank of Scotland tells its clients it foresees a deflationary crisis and a ‘cataclysmic year’ and they must ‘Sell Everything” except Treasuries and Bunds global investors have reason to become very alarmed and turn to gold.  

Why gold? Even Bunds are tied to the euro and Treasuries to the dollar. We see 2016 being “the year of unstable currency markets”. Analysts watch economies and expect these to translate through to exchange rates and then the global economy. What we see are exchange rates, independent of economies, moving dramatically and impacting the foundation of global economy, in which is deflationary forces are weakening the entire monetary system.

Make no mistake the start to 2016 seen so far, is only the beginning. The ‘race to the bottom’ by different currencies we saw in the last two years is going to come home to roost this year and onwards. We see greater attempts to control markets and manage them ‘in the interests of each nation’, far more than seen before.

It is against this backdrop that gold will perform. Let’s be clear, gold is both an asset and a currency. The joy of gold is that is tied to no national currency or government or economy and will move against all currencies just as it has done so far in 2016. We expect that 2016 will be like no other year since 2008!

What has gone under-reported is the news that the Chinese ICBC bank’s leasing of the Deutsche Bank London gold vaults and why. We see that as a huge piece of news.

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

China’s biggest commercial bank wants to join LBMA gold price benchmarking process

Julian Phillips’ latest outlook on global gold and silver markets and the factors driving them

New York closed at yesterday $1,174.40 down $3.20. Asia took it up $3 but London sent it back to New York’s closing level. The dollar was stronger at $1.1170 down 0.31 of a cent and the dollar Index was higher at 95.44 up from 95.20.  The gold price was set this morning at $1,174.60 down $1.15. The euro equivalent was €1,051.57 down €1.89. Ahead of New York’s opening, gold was trading in London at $1,173.45 and in the euro at €1,048.00.

The silver price rose to $15.90 up 7 cents in New York. Ahead of New York’s opening it was trading at $15.80.

China’s Industrial and Commercial Bank of China (ICBC) is interested in participating in the London gold price benchmarking process, the bank said during the LBMA bullion market forum. We believe that if they do we will see more Chinese banks joining. To what end? At the moment the Chinese banks are buying straight out of the Shanghai Gold Exchange which according to government there is an accurate reflection of total Chinese gold imports.

By joining the LBMA gold setting process China will find an alternative source of supply of physical gold, often at better prices than they can in China. Their operations will include arbitrage operations which will remove price disparities between the two markets. For instance, should a speculator short physical gold in London he may find his counterparty from China wants delivery. So to cover his position he may have to pay up for that gold to get it. We may see a considerable decline in such activity as a result as it will sap the liquidity of the London [and likely the New York] market. The gold price will then become a more accurate measure of demand and supply and give China a much bigger level of influence over the gold price.

The gold price in the last few days has been driven by speculative interests in a thin market. As we have said before, we do not see the Greek crisis, flip-flopping from expected deal to no expectations of a deal as presently influencing the price, but by speculators trying to drive the gold price up or down in a thin market where prices are more easily influence by smaller deals. Only when a substantive factor comes into the market will we see solid moves in the gold and silver prices.

There were purchases of 0.895 of a tonne into the SPDR but none into the Gold Trust on Wednesday. The holdings of the SPDR gold ETF are at 705.475 tonnes and at 167.79 tonnes in the Gold Trust.

Silver may show more resilience than gold, now.

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

The New London Gold Fixing

Julian D. W. Phillips of and 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.