Posts on Sharps Pixley: Tubthumping gold and; Chinese Gold Reserves: Playing the old game

I posted the two articles following on the Sharps Pixley website yesterday and are reproduced here in a lightly edited form:

Tubthumping gold

Those of us who remember 1990s pop music may well recall the Brit anarchic rock band Chumbawumba whose one major hit was called Tubthumping.  Its refrain, which actually comprised most of the song was the repeated over and over – ‘I get knocked down but I get up again.  You are never going to keep me down.’ which could well be the anthem for the gold price in recent months.

A gold ‘knockdown’ happened again yesterday (*th August) when gold appeared to be in freefall once more just after the New York market opened, but the extremely sharp drop, which took it down over $10, in a matter of minutes, managed to reverse itself yet again and the yellow metal managed to end the day just about where it had started – at a little over $1,260 and so far today (9th August) has moved upwards further – to close to $1,270 at the time of writing, although some of this overnight increase will have been due to increased geopolitical tensions involving North Korea.  Since then it has risen to breach $1,280 although this could be reversed once New York opens.

If these ‘knockdowns’ had happened just the once one could put that down to normal trading with data driven gold being spooked by occasional bouts of adverse news. But this keeps on occurring.  The drops and flash crashes have nearly all been very steep indeed, which does suggest some kind of external influence putting big paper transactions into play. But each time gold has made a recovery mostly back to prior levels, although the overall effect of the knockdowns may well have been to exert a kind of price control.

The strange recent big sales out of America’s GLD, the world’s largest gold ETF, when no similar sales seem to have been made out of IAU – America’s second largest gold ETF – also look as though they may have been designed to keep the gold price under control.  The fact that these appear to have had little impact in actually depressing gold prices, but may have well helped prevent price rises in the light of continuing strong Asian demand for physical gold, could well suggest that gold is building up strength for an upwards breakout.

The anticipated fall-off in Indian demand after the pre-GST restocking is reportedly not taking place – at least not to the extent analysts had expected – and Chinese demand appears to be holding up to, or slightly bettering, last year’s levels.  These facts, coupled with a small decrease in new mined supply, suggest the portents gold has the potential to again threaten the $1,300 level through the rest of what is normally a weak northern summer.  The American Labor Day holiday (Sept 4th this year), which is traditionally the end of the North American summer holiday period, often seems to be a game-changing date for the gold price.  It will be interesting to see what is in store for us in this respect this year.

For those interested here’s a link to youtube of Chumbawumba’s appearance on the David Letterman show: Chumbawamba – Tubthumping (Live at David Letterman Late Show)

Chinese gold reserves: Playing the old game

According to its reporting to the IMF, China has now not officially added to its gold reserves for nine months in a row.  Indeed these gold reserves have remained static, as far as official disclosures go, ever since the yuan (renminbi) was admitted as a constituent of the IMF’s Special Drawing Right in October last year.  Prior to that the country had been reporting monthly increases to its gold reserves from July 2015, apparently in the interests of transparency – but before that had only reported increases at five or six year intervals in the meantime keeping up the pretense of not adding to its reserves at all on a month-by-month basis.  It definitely looks as though, now that the yuan is a constituent part of the SDR any suggestion of even limited transparency in China’s gold reserve building process has again fallen by the wayside.  Secrecy reigns.

China achieves this by holding gold in accounts it says it does not need to report to the IMF rather than within its official Forex Reserve figures.  Given the nation’s often-stated affinity to gold’s role in any global financial restructuring which may lie ahead it indeed seems highly unlikely that the country is not again surreptitiously adding to its gold reserves.  Indeed it poses the question as to whether what it has been reporting as its total reserve figure is in reality in any way representative of what it truly holds in gold in terms of its total gold reserve.  Mind you this policy could well apply to other nations too as most national gold holdings are not audited on any kind of consistent basis.  The IMF relies totally on what its constituent nations tell it – it does not check their accuracy.

Many believe that China’s ultimate aim is to hold more gold than the USA does – officially reported at 8,133.6 tonnes.  China’s current reported total gold holding is 1,842.6 tonnes, but few believe that this is the true total with estimates out there of a realistic total of 4,000 tonnes or even higher.  If the 4,000 tonne estimate is correct then that would put China in second place among national holders of gold – more than Germany, currently in second place, which reports some 3,374 tonnes (For the latest reported world gold holdings click on WORLD OFFICIAL GOLD HOLDINGS).

For example – re. Chinese holdings, a recent note on that country’s www.globaltimes.cn website stated: ‘Although the People’s Bank of China (PBC), the country’s central bank, has not publicly disclosed plans to increase gold reserves since October 2016, some market analysts, based on calculations on domestic gold output and imports in recent years, estimated that the country’s above-ground gold reserves totaled 20,193 tons as of June, according to a report published by domestic industry website cnfol.com over the weekend.  While about 16,193 tons of gold are owned by Chinese citizens, the remaining 4,000 tons are held by the country’s central bank, said the report.’

While such figures are only analysts’ estimates, it does indeed seem likely that the nation’s gold reserves are higher than officially stated – almost certainly substantially so, but whether they are double the current figure , or several times this, remains conjecture until China comes clean with an  accurate figure.

There has been the suggestion that China is not announcing its true gold reserve figure, nor any monthly build-up, with a view towards not boosting the gold price, which might rise substantially if it were to do so, in order for it to keep on buying at what it sees as relatively low prices in an ongoing process of reducing the US dollar component of its forex holdings.

It may also, though, have an interest in not knocking the gold price back due to the reported holdings by Chinese citizens (see above) – it may well thus have an agenda to control the price on their behalf, but without letting it rise uncontrollably for the time being – but also not allowing it to fall back – as it continues to work towards a build-up in domestic demand as its main economic driver, rather than continue to rely on exports to keep the wheels of its manufacturing sector turning.

As a fully state-controlled economy, and as the world’s biggest known producer and importer of physical gold China does have the power to control the gold price if it so wishes to.  If it sees a potential domestic benefit in allowing the price to rise and thus boost the wealth and the spending power of its gold-holding citizens it is well capable of doing so.  Yet another possible factor in the gold price manipulation theories that abound.

SGE still trying to push gold higher as yuan drifts lower

Gold TodayNew York closed at $1,251.40 on Friday after the previous close of $1,258.10.  London opened at $1,255.00.

    • The $: € was stronger at $1.0097: €1 from $1.1016: €1 Friday.
    • The Dollar index was stronger at 97.94 from 97.86 Friday.
    • The Yen was stronger at 104.10: $1 from 104.26: $1 Friday against the dollar.
    • The Yuan was weaker at 6.7388: $1 from 6.7246: $1 Friday.

 

  • The Pound Sterling was weaker at $1.2179: £1 from Friday’s $1.2210: £1.

 

Yuan Gold Fix

Trade Date Contract Benchmark Price AM 1 gm Benchmark Price PM 1 gm
     2016  10  17

     2016  10  14

SHAU

SHAU

272.53

272.91

273.03

272.68

Dollar equivalent

1 oz @ $1: 6.7388

$1: 6.7246

$1257.88

$1,262.30

$1,260.19

$1,261.23

Please note that the Shanghai Fixes are for 1 gm of gold. From the Middle Eat eastward metric measurements are used against 0.9999 quality gold.

Shanghai is holding the gold price higher than both London and New York. After New York’s close on Friday Shanghai lifted it $8.5 as the Yuan weakened. It remains in a very narrow trading band around $1,260. This morning London pulled it back in the morning to $1,252 before turning it higher. We continue on the brink of a strong move either way.

LBMA price setting:  The LBMA gold price setting was at $1,252.70 against Friday’s $1,256.15. The gold price in the euro was set higher at €1,139.85 against Friday’s €1,144.04.

Ahead of the opening of New York the gold price was trading at $1,254.30 and in the euro at €1,140.69.  At the same time, the silver price was trading again at $17.47.

Silver Today –The silver price fell to $17.45 at New York’s close Friday from $17.54, Thursday.  

Price Drivers

In India, gold prices have moved to a premium from the discount they have been standing at for most of this year. This tells us that smuggler’s stocks have been absorbed and stock levels in the wholesaler’s hands have fallen, allowing this premium on the price. Demand is now strong and likely to stay that way until prices are much higher.

Chinese demand as you can see above remains strong as it sits at higher levels than seen in London.

The current gold prices are low when set against the background of the earlier part of the year. The question is, “Will they rise now?” We are in the gold season and have been since September. September gold prices were a disappointment and despite some solid demand for gold by gold ETFs prices have been pushed lower in the U.S. But London continues to let New York prices rule, despite a 37% rise in Pound gold prices and the fact it is the developed world’s physical gold hub. Shanghai is walking its own road at higher prices than London, but not by that much and despite it being the globe’s physical gold hub and despite one of its leading gold banks being a market maker in London and again despite the Yuan steadily falling against the dollar. Meanwhile gold continues to hover in a very narrow trading range in the dollar.

Gold ETFs – There were purchases of 3.856 tonnes into the SPDR gold ETF and purchases of 0.33 of a tonne into the Gold Trust, leaving their respective holdings at 965.428 tonnes and 227.56 tonnes.  This was a large set of purchases which prevented any further falls in the gold price on Friday. Again, U.S. investment demand remains positive and is serving to stabilize prices at current levels.

Since January 4th this year, the holdings of these two gold ETFs have risen by 392.009 tonnes.

Silver – Silver prices continue to mark time alongside gold waiting for the breakout one way or the other.

Julian D.W. Phillips

GoldForecaster.com | SilverForecaster.com | StockBridge Management Alliance 

The Chinese hold their gold reserves through their people

Gold TodayNew York closed yesterday at $1,337.50 yesterday.  London opened at $1,335.80.

    • The $: € was slightly weaker at $1.1271 down from $1.1267 yesterday.
    • The Dollar index was stronger at 94.94 from 94.78 yesterday.
    • The Yen was weaker at 102.12 down from 101.62 yesterday against the dollar.
    • The Yuan was weaker at 6.6798 from 6.6640 yesterday.

 

  • The Pound Sterling was weaker at $1.3297 from yesterday’s $1.3348.

 

Yuan Gold Fix

Trade Date Contract Benchmark Price AM Benchmark Price PM
     2016  09  9

     2016  09  8

SHAU

SHAU

287.79

289.20

287.75

289.35

Dollar equivalent @ $1: 6.6798

$1: 6.6640

$1,340.05

$1,349.81

$1,339.86

$1,350.51

Shanghai was roughly in line with New York’s close and London slipping a little lower.

When it comes to measuring either the increase in Chinese gold reserves or the gold imports to China we must say that the information provided by the Chinese is only what they want us to know. With last month’s announcement of a 5 tonne increase in official gold reserves we read into it that they want all to know they are continuing to increase their reserves but not at a visibly aggressive rate. There are several ways they can increase their reserves but not take them onto their books, ‘officially’.

We remind readers that they “own gold through their people”. That includes all gold currently inside their borders but primarily directly through state controlled institutions.

LBMA price setting:  The LBMA gold price setting on Friday was at $1,335.65. Yesterday it was at set at $1,348.00.

The gold price in the euro was set on Friday at €1,185.61 against yesterday’s 1,194.08.

Ahead of the opening of New York the gold price was trading at $1,336.55 and in the euro at €1,188.20.  At the same time, the silver price was trading at $19.48.

Silver Today –The silver price was pulled back to $19.62 at New York’s close down from $19.78, yesterday.  

Price Drivers

Yesterday did not see any purchases of gold into the gold ETFs and a small sale. As a result the gold price slipped back a little. All was quiet on the currency fronts leaving both silver and gold to mark time today. Physical demand of good sizes drives the gold price with dealers translating gold prices in line with exchange rate movements.

Gold ETFs – There was a small sale of 1.187 tonnes from the SPDR gold ETF but no change in the holdings of the Gold Trust, leaving their respective holdings at 951.811 tonnes and 225.39 tonnes.

Silver – The silver price followed gold lower to close at $19.62 yesterday and will be sensitive  to gold slippage.

Julian D.W. Phillips

GoldForecaster.com | SilverForecaster.com | StockBridge Management Alliance

Central bank gold buying – what the media reports don’t really tell you

There’s been a fair amount of media coverage of the reduction in net central bank gold purchases seen so far this year, but the writers of these seem to treat all central banks as one.  The implied suggestion as a whole is that this group of gold holders are all cutting back on purchases.  But this has, in reality, been the case all along.  There have only been three central banks which have consistently added to their gold reserves on a regular basis over the past couple of years – Russia, China and, to a smaller but significant in total effect, extent Kazakhstan.  Since China began publishing its monthly gold purchase data in July last year it has, according to IMF data, added 174 tonnes of gold, while Russia has added even more at 230 tonnes.  Kazakhstan has added some 35 tonnes.

While observers will point out that the number of central banks adding gold into their reserves has diminished, this is largely irrelevant as, apart from the three central banks mentioned above, movements of gold into other individual central bank reserves has pretty well been minimal over the past two to three years.

The fly in the ointment is Venezuela, which over the same period has reduced its gold reserves by over 100 tonnes to help it meet its foreign debt commitments and given its dire financial position may well continue to liquidate gold from its reserves, which used to be Latin America’s largest.  But its capability for continuing to liquidate at this kind of rate will become more and more limited as its reserves are run down.

While Russia’s and China’s monthly reserve additions appear to have been being cut back of late, one can’t really read too much into this in terms of a concerted reduction in central bank gold buying given the somewhat erratic nature of their month by month reserve increases in the past.  Russian monthly reserve increases, for example, have varied from zero in January and February 2015 to 34.5 tonnes in September last year.  China too has demonstrated sharp ups and downs in its reported reserve increases – from zero in May this year to just short of 21 tonnes in November last.

Of course prior to June last year China was officially reporting zero month by month additions for the prior 6 years before announcing a massive 604 tonne increase that month alone.  In the past, when it has also increased its reported reserve size substantially after several years of reporting no increases, it has said that this gold was held in a separate government account and thus non-reportable to the IMF.  Perhaps this is still the case.

There has thus been much speculation over the true level of Chinese government-controlled gold reserves given announced  data changes like those of last June.  In a country where all major institutions, and even the commercial banks, are effectively totally subservient to the state, there is a likelihood that gold reserves effectively under state control are very substantially higher than the latest official figure of 1,823 tonnes.  Many speculate that  gold effectively under Chinese government control, including that held in the SGE, commercial bank vaults and perhaps in other government accounts, could well amount to 5,000 tonnes or more.  Some speculate they could even exceed the officially reported holdings of the U.S.A. which are at 8,133.5 tonnes.

China is set on full internationalisation of the yuan (renminbi) and feels that its gold holdings could help it achieve this.  It is already well on its way with the yuan becoming an integral part of the IMF’s Special Drawing Right (SDR) on October 1st.  This will give it effective status as A global reserve currency, although not THE global reserve currency.  If any country’s currency can be said to be THE reserve currency that would still have to be the U.S. dollar, but it looks as though China is trying to chip away at this status, giving, as it does, certain economic advantages in world trade.

Lightly edited version of article published by me yesterday on the info.sharpspixley.com website

Chinese central bank gold buying is back

After a buying hiatus in May, which had caused us to reconsider the overall volume of central bank gold buying this year, the Peoples Bank of China has reported adding 15 tonnes of gold to its reserves in June.  This has been the largest monthly addition to its gold reserves since January this year and interestingly coincides with a big rise in the gold price, although the gold will mostly have been added when prices were well below the latest peaks.  It also coincides with a significant weakening of the Yuan against the U.S. dollar.  China seems to have used the Brexit vote, and the subsequent rise in the Dollar Index, to allow its currency to decline in value thus making its goods ever more competitive in global markets.  It has also meant an even bigger price rise for gold in the domestic currency than in the dollar.

According to IMF statistics, the Chinese and Russian central banks have been the only really major purchasers of gold on a regular basis over the past few years, followed perhaps by Kazakhstan at a somewhat lower level.  In May, China did not increase its stated gold reserves at all and Russia only added 3 tonnes leading to fears that central bank buying was going to take a major dip this year.  The latest Chinese announcement will allay these fears to an extent, although Russia’s next monthly announcement will be significant in this respect too.

Overall now China’s officially reported gold reserves sit at around 1,823 tonnes, but its true gold holdings are still a cause for some debate with some analysts convinced that the true figure is far higher, with more gold being held in non-reported accounts.  There is also an opinion that gold held in the commercial banking system in China is also being held on behalf of the government given that the commercial banks are ultimately state owned and controlled.  These gold holdings are extensive and have been estimated to be at around 2,500 tonnes or more – officially to be used as collateral in certain financial transactions.

While a monthly purchase of 15 tonnes of gold might be considered as important in terms of China’s continued diversification of assets away from its U.S. dollar related holdings, it only accounts for around half a percent of global gold production, and pales into insignificance in relation to the rise in ETF gold holdings this year of around 500 tonnes plus.

Central bank gold purchases holding up – but only 3 significant regular buyers

The World Gold Council (WGC) has now released the latest figures for national central bank gold holdings for November, and while the total level of gold purchases remains at a significant level overall, it should be recognised that the vast majority of the reserve increases is only coming from three countries – China, Russia and, to a lesser extent, Kazakhstan.  Few other countries are reporting any changes at all, and those that are doing so are effectively insignificant in the scheme of things.

Over the past six months, both China and Russia have been buying in the order of between 30 and 45 tonnes per month between them.  Kazakhstan’s pace of purchase is rather smaller at around 2-3 tonnes  a month.  Over the five months to November (China was not reporting monthly increases prior to this), these three nations alone have accounted for around 90% of the global reported gold reserves increase.  And of the other 10%, Turkey accounts for around 4%, but its figures are not strictly comparable as they include that country’s policy of including gold in its reserve requirements from commercial banks, which is anomalous in relation to other nations’ reporting practices, and prone to comparatively large monthly fluctuations.

So while we do anticipate the scale of central bank purchasing to continue (China has already noted it bought around 19 tonnes in December), it does look to be particularly vulnerable to any change in purchasing policy from either of the two big buyers.  Russia in particular is a little more erratic in its month-by-month purchasing – last year for example it bought no gold in the first two months of the calendar year (and no doubt if the same happens this year the mainstream media will tell us central bank purchases are collapsing!), yet in the 11 months so far reported by the WGC, Russia has actually been the largest buyer with a total of 185 tonnes.  If it matches its December 2014 purchase of 20.73 tonnes that will bring the annual total to just over 200 tonnes – a well up on the 163 tonnes it purchased in 2014, but its month to month purchase figures can be erratic.

One should note that the figures quoted above are as reported by the individual nations to the IMF – they are not audited – and most nations just report the same numbers year in year out.  There have been doubts cast in the past on China’s reporting in particular – doubts that were shown to be correct when the Asian dragon out of the blue reported a massive 604 tonnes gold reserve increase in June, apparently accumulated over the prior 6 years, but not reported at the time.  There are thus continuing doubts about the true level of Chinese reserves, some estimates putting them considerably higher than the current figure of around 1,740 tonnes, which only comprises around 1.8% of its total forex holdings, while the top Western countries apparently manage 60-70% of their forex holdings in gold.  But these figures and levels may be equally dubious.  It isn’t only China which is believed to falsify its reported holdings to the IMF.

Both China and Russia do currently have stated policies to accumulate gold into their reserves so we do expect their purchases – and those of Kazakhstan – to continue at or around current stated levels, but the oft repeated analysts mantra that central banks are buying gold is only true in part and could be considered misleading.  It is only around the three countries noted in this article which are increasing their gold holdings on any kind of regular basis.  The rest are, at least officially, neutral in this respect.

China ups gold reserves 20.8 tonnes in November

Analysts at Bloomberg have calculated that China’s gold reserves have grown from 55.38 million ounces (1,722.5 tonnes)  at end October to 56.05 million ounces (1,743.3 tonnes) at end-November by taking the announced gold reserve figures in U.S. dollars for the two months and applying the LBMA gold price prevailing at the end of each month to make their estimate.  The figures thus suggest that China increased its reserves by 20.8 tonnes over the period – the highest monthly increase in its gold reserves since it started announcing monthly reserve figures back in July.

There still remain doubts about the true levels of Chinese gold holdings, with many analysts believing these are still being understated, as they have been in the past when there were large time gaps – five or six years – between reserve increase announcements.  China’s gold reserves are seen as of political significance with the country only letting the world know what it wishes it to believe!

Writing on www.bullionstar.com this week, Koos Jansen, who undertakes perhaps the most comprehensive research on Chinese gold policy and gold holdings of anyone, came up with his view that much of the 1,750 tonnes that have mysteriously vanished from the London Bullion Market (left London without being disclosed in UK customs statistics) in between 2011 and early 2015 went to China. This supports the analysis the PBOC is buying at a pace of 500 tonnes a year in the international OTC market (not through the SGE) and owns approximately 4,000 tonnes by now.  See Koos’ blog post: Renminbi Internationalization And China’s Gold Strategy.  Some commentators put the figure higher yet, as noted above, the latest official figure is less than half Jansen’s estimate.

China adds another 14 tonnes to its gold reserve in October

The title here is self-explanatory.  China has continued to announce small monthly increases in its gold reserves as part of its new transparency of reporting following on from its big upgrading of its reserve by some 600 tonnes back in June (supposedly six years of accumulated gold purchases).  Thus China has been reporting supposed month-by month purchases since and these appear to have settled down to around 14 tonnes a month with an October increase at 14.01 tonnes.

But many Western analysts remain sceptical regarding the true levels of the Chinese monthly purchases – indeed of the the real total level of the country’s gold reserves suggesting that they both may be far larger than is being reported.  China doesn’t want to rock the gold price boat is the theory, so it can continue accumulating a massive gold reserve which it sees as vital in cementing its place in the global economic hierarchy.  First it wants the Yuan to become part of the IMF’s Special Drawing Right (SDR), which would effectively give it reserve currency status, and a decision on this is anticipated shortly.  One suspects that the U.S., which dominates the IMF, will eventually have to capitulate and let the Yuan in, despite the threat this poses for current U.S. Dollar global hegemony.

China’s past record in hiding the real level of its gold reserves suggests it may still be doing so and, at a suitable time, will unveil them – or at least yet another substantial addition – but the first goal is the SDR.  once the Yuan becomes part of this the next phase of Chinese economic policy could come about.  The Chinese always have played their economic cards very close to the chest and one suspects they may well be continuing to do so until their ultimate aim of having the dominant global currency, with all the trade advantagesthat brings, becomes reality,  It is already the world’s largest resource consuming nation and it may be only a matter of time before the petroyuan replaces the petrodollarand the Yuan the Dollar as the world’s pre-eminent rserve currency.  Time will tell.

Chinese Gold Reserves Up Another 15 t as Forex Reserves Tumble $43bn

Lawrie Williams

Latest gold reserve figures from the Chinese central bank show that the country added another 15.01 tonnes in September.  At September’s average gold price that will have equated to around a little under US$600 million in value.  But total Chinese forex reserves dived by a massive $43.3 billion to their lowest level in over two years, so the official gold purchase figure – if it is to be believed – forms only a very small part of this.

Some see the additional gold taken into the bank’s coffers as yet another indication of China’s intent to diversify its forex reserves out of the dollar, but the amounts are tiny relative to the size of the country’s overall forex reserves which still sit at a massive $3.5 trillion! The big September fall (1.2%) in the latter either suggests a huge programme of mostly dollar denominated sales in order to maintain the country’s current currency relationship with the greenback and to help prop up the domestic economy, or perhaps some other unknown transactions involved – or a combination of both.

We can speculate that one such other transaction could be that China is buying much more gold than it is saying and holding it in other accounts which it doesn’t feel the need to report to the IMF as part of its official gold reserves….

This article has been published on the sharpspixley.com website.  Please note that the news and price sections on the Sharps Pixley site are now accessed via info.sharpspixley.com.  To read the above article in full CLICK HERE

Chinese central bank now reporting buying gold on monthly basis

On Monday New York was closed. Gold finished in London at $1,120 and the euro at $1.1200.  This morning the dollar index started the day at 96.11. The LBMA gold price was set at $1,120.85 down 15 cents from Monday. The euro equivalent was €1,004.75 up 54 cents. Ahead of New York’s opening gold was trading at $1,120.00 and in the euro at €1,003.90.  

The silver price was unchanged at the close of London of $14.58. Ahead of New York’s opening silver was trading at $14.66.

The chart picture indicated a fall to around $1,100, but instead the gold price has been stuck at $1,120 so far this week apparently not wanting to fall lower. We saw yesterday that neither China nor London wanted to take it lower.

China is doing its best to please the IMF ahead of what it hopes will be the acceptance of the Yuan as a currency that is one that makes up the Special Drawing Right of the IMF. As part of this acceptance it is now reporting its official purchases of gold. After the 600 tonne addition of gold to its reserves in June it is now reporting its monthly purchases. In July it bought 19 tonnes during the month and in August 16 and reported the purchases to the IMF. The statement that it does not expect a longer term devaluation of the Yuan appears to be part of this program of cooperation, despite the reality that the Yuan went 8% higher with the dollar, when there were few reasons for it to keep the ‘peg’ alignment. This cooperation is likely to continue until at least September 2016 when it is hoped it will be accepted by the IMF in this role.

Of importance to gold investors is that the PBoC is now continuously buying gold for the reserves and at this rate will acquire 210 tonnes over the next year. But the opaque nature of China’s gold policy does not tell us that this was from local sources or from overseas. When it raised gold reserves initially it stated that the gold came from overseas as well as from local sources. We are of the opinion that the tonnage bought now on a monthly basis was from overseas not from the 430 tonnes produced annually inside China. As we said yesterday, “Demand as reported by the Shanghai Gold Exchange is far ahead of the record 2013 demand levels to date. As we reported last week, add this to Indian demand and there is nothing left for the rest of the world, and yet London and New York are taking prices lower and currently holding them there.”-

There were no sales or purchases of gold into or from the SPDR gold ETF or the Gold Trust, on Monday. This leaves the holdings of the SPDR gold ETF at 682.354 tonnes and 160.77 tonnes in the Gold Trust.

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

3 Reasons Why Gold Isn’t Behaving Like Gold Right Now

By Frank Holmes, CEO and Chief Investment Officer, U.S. Global Investors – www.usfunds.com

July 27, 2015

Green-Gold

As many of you know, I was in San Francisco the week before last where I had been invited to speak at the MoneyShow, one of the biggest, most preeminent investor conferences in the world. Over the past couple of decades, I’ve spoken at many MoneyShows all around the country and have covered many different topics. Gold investing is one that often draws a big crowd. Not this year. Guess which natural resource stole the show?

The commodity that attracted attendees’ attention is one that until pretty recently could only be grown and harvested under the shroud of secrecy. Marijuana. Currently legal in 23 states and the District of Columbia, medical marijuana generated $2.7 billion in 2014 and is expected to bring in $3.4 billion this year. Investors are taking notice. The cash crop is even starting to change intranational migration. Whereas many retired seniors flock to warmer climates in which to live out their golden years, others now factor in whether a state will permit them to self-medicate in order to treat their arthritis, according to a recent Time article.

Investors themselves who might have suffered from arthritis attended the pot presentation at their own risk, as it was standing room only. They couldn’t have been pulled away even to sit comfortably in the scarcely occupied room next door. Sentiment toward gold was indeed very bearish at the MoneyShow, as it is around the world right now.

Gold Hits the Reset Button

Gold is universally recognized as a safe-haven investment, a go-to asset class when others look uncertain. Following the 2008 financial crisis, for instance, the metal’s price surged, eventually topping out at $1,900 per ounce in August 2011.

But last week proved to be a particularly rocky one for the metal, even with Greece and Puerto Rico’s debt dilemmas, not to mention the recent Shanghai stock market decline, fresh in investors’ minds. Gold traded down for 10 straight sessions to end the week at $1,099 per ounce, its lowest point in more than five years. Commodities in general dropped to a 13-year low.

Commodities-Drop-to-a-13-Year-Low
click to enlarge

Gold stocks, as expressed by the XAU, also tumbled.

gold-stocks-slide-to-a-multi-year-low
click to enlarge

The selloff was given a huge push when China, for the first time in six years, revealed the amount of gold its central bank holds. Although the number jumped nearly 60 percent since 2009 to 1,658 tonnes, markets were underwhelmed, as they had expected to see double the amount.

Then in the early hours last Monday, gold experienced a “mini flash-crash” after five tonnes appeared on the Asian market. Initially this might not sound like a lot, but five tonnes equates to 176,370 ounces, or about $2.7 billion. It also represents about a fifth of a normal day’s trading volume. Suffice it to say, price discovery was effectively disrupted. In a matter of seconds, gold fell 4 percent before bouncing back somewhat.

Reflecting on the trading session, widely-respected market analyst Keith Fitz-Gerald noted: “Far from being a one-day crash, this could represent one of the best gold-buying opportunities of the year.”

The last time the metal descended this quickly was 18 months ago, on January 6, 2014, when someone brought a massive gold sell order on the market before retracting it in a high-frequency trading tactic called “quote stuffing.” Last month I shared with you that we now know who might have been responsible for the action—and many others that preceded it—and pointed out that the accused party’s penalty of $200,000 was grossly inadequate. Last Monday I told Daniela Cambone during the Gold Game Film that such downward price manipulation seems to result in little more than a slap on the wrist. But if manipulation is done on the upside, traders could get into serious trouble.

Besides apparent price manipulation, other factors are affecting gold’s behavior right now, three in particular.

1. Strong U.S. Dollar

Like crude oil, gold around the world is priced in U.S. dollars. This means that when the greenback gains in strength, the yellow metal becomes more expensive for overseas buyers. With the U.S. economy on the mend after the recession, the dollar index remains steady at a 12-year high.

It’s important to recognize, though, that gold is still strong in other world currencies, including the Canadian dollar. As such, our precious metals funds have hedged Canadian dollar exposure for Canadian gold stocks, which has benefited our overall performance.

2. Interest Rates on the Rise?

Federal Reserve Chair Janet Yellen continues to hint that interest rates might be hiked sometime this year, perhaps even as early as September. When rates move higher, non-yielding assets such as gold often take a hit.

As you can see, the 10-year Treasury bond yield and gold have an inverse relationship. When the yield starts to rise, investors might find bonds a more attractive asset class.

Inverse-Relationship-Between-Gold-and-the-10-Year-Treasury-Bond-Yield
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3. Slowing Manufacturing Activity

Earlier this month I wrote about the downtrend in manufacturing activity across the globe. As many loyal readers are well aware, we closely monitor the global purchasing manager’s index (PMI) because, as our research has shown, when the one-month reading has fallen below the three-month moving average, select commodity prices have receded six months later.

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China is the 800-pound commodity gorilla, and its own PMI has remained below the important 50 threshold for the last three months, indicating contraction. The preliminary flash PMI, released last Friday, shows that manufacturing has dipped to 48.2, a 15-month low. For gold and other commodities to recover, it’s crucial that China jumpstart its economy.

In the meantime, we’re encouraged by news that the slump in prices has accelerated retail demand in both China and India, which, when combined, account for half of the world’s gold consumption.

Battening Down the Hatches

They say that a smooth sea never made a skillful sailor. No one embodies this more than Ralph Aldis, portfolio manager of our precious metals funds. He and our talented team of analysts are doing a commendable job weathering this storm. We’re invested in strong, reliable companies, and when commodities eventually turn around, we should be in a good position to catch the wind.

We look forward to the second half of the year, when gold prices have historically seen a bump in anticipation of Diwali, which falls on November 11 this year, and the Chinese New Year. As you can see, average monthly gold performance has ramped up starting in September.

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 “Gold is down 15 to 25 percent below production levels,” Ralph says. “That might cause some companies to halt production.”

And, in so doing, help prices find firmer footing.

China shocks bullion market with small gold reserve increase

Here’s Ross Norman of London Bullion Dealer Sharps Pixley’s interesting quick commentary on today’s Chinese increased gold reserves announcement.  While the initial reaction on markets was muted, as the news sunk in gold was being marked down quite sharply.  Ross is one of the smartest gold commentators out there.

‘China shocked the bullion market by declaring today its official gold holdings for the first time in 6 years – the surprise was less that they had done so, and more at the incredibly small figure which is less than half the market consensus. China last reported a figure of 1,054 tonnes in April 2009 which has risen to only 1,658 tonnes today – we don’t believe the figure, but we struggle to understand the motivation for down-playing it.

With only 1658 tonnes of gold reserves this would put China in 5th position behind the US (8133 tonnes), Germany (3383 tonnes), Italy (2451 tonnes) and France (2435 tonnes). As a country with the world’s largest economy by some measures, one would have expected they would be well north of the German figure really. So what is at play here …

China is seeking a place at top table in financial markets by having its currency accepted under IMF rules (the so-called Special Drawing Rights) at a meeting to be held in October – in other words, to have the Yuan included by Central banks around the world as a reserve currency. As part of this process, China would need to fully declare its gold reserves ; in that sense the timing is as expected – its just the amount that makes no sense.

Secondly, China is struggling with an equity market in freefall and some have suggested that the timing of the declaration is to give comfort to domestic investors that their reserves are sizeable … but that makes no sense either, because they aren’t !

The third explanation – and here we move into the under-world of conspiracies, is that China wants to downplay gold as part of its reserves – especially as they are world’s top buyers both for domestic jewellery and to top up their official reserves (yes they are also the top producers but they are significant net buyers). This is to say that China may be adopting the reverse of the UK policy of the late 1990’s where it telegraphed in advance to the world its intentions to sell most of its gold reserves – thereby prompting a fall in prices to a 21 year low … thank you Gordon Brown.

I would suspect a decision has already been made by the IMF in principle about the Yuan joining the US dollar as a reserve currency (although I have no proof of that), effectively seeking to fill a void in reserves as Central Banks desert the Euro … and it does therefore need to update its gold holdings.

There is an apocryphal story about the Chinese Premier on a state visit to Paris who was asked what he thought about the French Revolution … “Too early to say” was his reply … which caused a guffaw amongst observers who were aware of China having an uber-long term view on things (actually he misunderstood the question !) … perhaps they are playing the long game both with regards to the economy and with regards to declaring its hand fully and openly on gold.

 

Ross Norman

ross.norman@sharpspixley.com

China ups gold reserves at last – gold bulls disappointed

China has announced a long awaited update to its gold reserves but its figures will disappoint.  In the event, after reporting the same 1,054 tonnes for the past six years, the People’s Bank of China has now announced a paltry 604 tonne rise to 1,658 tonnes.  While this official figure enables China to leapfrog Russia to again become the world’s 5th largest gold holder according to IMF figures, the size of the uprating of the reserve, although by what might seem a significant 57%, will have come as a huge disappointment to gold bulls who had been predicting a very much larger figure.

Top 10 National Gold Reserves updated

Rank Country Gold Reserve (t)
1. USA 8,133.5
2. Germany 3,383.4
3. Italy 2,451.8
4. France 2,435.4
5. China 1,658.4
6. Russia 1,250.9
7. Switzerland 1,040.0
8. Japan     765.2
9. Netherlands     612.5
10. India     557.7

Source: World Gold council, IMF, lawrieongold

Indeed even the more conservative China followers, almost unanimous recently in the view that China had again surreptitiously been increasing its gold holdings, had been looking for a figure of virtually double that of the Chinese Central Bank’s latest announcement, while the ardent gold bulls had been looking for a figure of perhaps 5,000 tonnes or more.  But to an extent the new increase does at least demonstrate that China continues to manipulate its own gold holdings figure without reporting the actual levels to the IMF until it chooses a specific moment to do so. And even then is this really a true reflection of China’s actual gold holdings.   Thus speculation will continue that the country’s true gold reserves will still be far higher than those stated and the latest announcement will not really have changed anything, apart perhaps from sentiment.

China’s own gold production over the past six years has totalled somewhere around 2,500 tonnes and many will have seen this as being the absolute minimum level of accumulation by the nation’s Central Bank – which would tie in pretty well with the more conservative analysts’ predictions.

There had been recent additional speculation that the Chinese desire to have the Yuan as part of the make-up of the IMF’s Special Drawing Right would indeed lead to an official uprating of the nation’s gold reserves, perhaps bringing them more in line with top gold holders like the U.S. and Germany, but the latest increase falls far short of the levels necessary to accomplish this.

It looked as though initial gold price reaction to the PBoC announcement was muted, the market treating it as something of a non-event – which in reality it is.  However expectations of a much higher Chinese gold reserve level could be seen as being dashed by the announcement and this could have an adverse impact on gold holders who had been banking on something more.  As the details sunk in gold was being marked down.

 

Yuan/Dollar unpegging to SDR to PBOC’s Gold – the relationships are becoming interesting

In a move to further internationalise the use of its currency in global trade, China appears to be seeking to have the yuan included in the basket of currencies that make up the IMF’s Special Drawing Right.  Currently the US Dollar, the Euro, The British Pound Sterling and the Japanese yen in varying percentages form the current SDR basket, but this is due for review this year with initial meetings to be held next month and a final decision on any changes to the basket should be made by October.

Why is all this suddenly seen as so significant?  China has already had some considerable success in internationalising the use of the yuan through bilateral deals but the general consensus is that it would like it to be recognised as A global reserve currency.  Perhaps not THE global reserve currency – yet – but to rank alongside the dollar in particular given it sees that the U.S. has gained huge advantages over the years from its position as being the de facto global reserve unit of trade.  Thus China sees its inclusion in the SDR currency basket as being a key factor en route to this ultimate goal.

But – and it would seem to be a big but – currently the yuan is directly pegged to the U.S. dollar in the global exchange rate system.  Given the SDR make-up is designed to balance out upwards and downwards movements in the currencies which make it up, to have two significant currencies in its composition which are effectively tied directly to one another would seem to defeat the balance objective.  While there is little doubt that China, as the world’s second biggest economy by GDP – or the largest based on purchasing power parity (PPP) – should be included, can this decision be reached while it is still dollar pegged?  We feel that this would be seen as an insuperable objection.

This brings us down to the question as to how important inclusion in the SDR is to China.  Is it sufficiently so for the Chinese to drop the dollar peg and probably allow the yuan to rise  accordingly (much as the Swiss Franc did against the Euro when it dropped its peg to the pan European unit)?  Remember the shock the Swiss decision had on the gold market, albeit a relatively shortlived one.  But the dropping of the Yuan peg to the US Dollar could have far greater ramifications in global financial markets.

This could be further exacerbated by a possible revisiting of the Chinese gold reserve figure.  there has been enormous speculation in the West that Chinese gold reserves are in fact far greater than the 1,054 tonnes it has reported to the IMF for the past six years and that it would further enhance the yuan’s standing if these were shown to be far greater than they appeat to be officially now.  Even the more conservative estimates suggest China may announce that its gold reserves are in fact some 2,500 tonnes greater than the currently reported level would suggest, moving it up to second place in global gold holding rankings.  Others suggest the level could even be far higher.  Thus a twin announcement of the unpegging of the yuan to the dollar and a substantial uprating of Chinese gold reserves could give the gold price an enormous fillip – and one which those who appear to have been playing the futures market to keep the gold price under control could not counter – unless of course it is China itself which has been keeping the gold price subdued so it can continue to purchase the yellow metal at low prices!  These theories would seem to have no end!

If indeed its true gold reserves have reached a level with which China feels comfortable, it would have the power to drive the price higher, which it might consider  doing for internal market reasons, given the amount of gold believed to be held by its citizenry, while its own incentive for perhaps keeping the price down while it was in purchasing mode, would have fallen away.  More speculative theory!

But theory or no, the feeling is that all this is driving towards the key inflection point and it is the Chinese desire to have the yuan a part of the SDR which is the vital element.  And if this is so these decisions and changes could all occur within the next few months.  If any of these should happen then gold would almost certainly benefit positively – and if all three take place over a short period of time then the sky could be the limit as far as gold price is concerned.  This would tie in nicely with the Elliott Wave forecasting suggesting a massive precious metals price surge is due (See: Elliott Wave analysis: Gold and silver now in major long term uptrend).

It is all very well theorising in this manner, but with gold’s downside seen by virtually all as extremely limited at current levels, then perhaps some credence in the possibility of these events occurring might colour one’s investment policies with little risk involved.

Does China have 30,000 tonnes of gold stashed away?

A highly respected analyst quotes research suggesting that China built up a huge stash of gold between 1979 and 2003, and has been adding to it recently – and all without declaring this to the IMF.

Lawrence Williams

A note from very well respected analyst and China watcher, Simon Hunt*, has come up with the intriguing suggestion that China may actually have as much as 30,000 tonnes of gold hidden away in various accounts rather than the 1,054.6 tonnes it declares to the IMF.  It is widely believed that China has indeed been accumulating additional gold for its reserves secretly over the last few years, but Hunt’s note also cites research by Alasdair Macleod of Gold Money published last year that China has accumulated some 25,000 tonnes of gold when the gold price was very low between 1983 and 2002.  Hunt rates Macleod’s research very highly, referring to him as the world’s top gold analyst.

Hunt goes on to state that China is planning to link its currency to gold within the next three years, but first will have to make some swingeing internal financial reforms which will have a strong impact on global financial markets – and not a positive impact!

He also comments that his dealings with the Chinese suggest that the country does not wish the yuan to become THE or A global reserve currency, but just wishes to be able to trade directly in yuan rather than via a dollar route – a process which is already under way as it has set up bilateral trade deals in yuan  with around 28 countries already and has established a trading hub in Zurich.

I’ve gone into this in a bit more detail in an article published on Mineweb.com – See: Could China actually have 30,000 tonnes of gold in reserves?.

This suggestion may seem a bit far fetched, but China has a penchant for ultra long term planning as a centrally planned economy, and certainly had the wherewithal, and perhaps the incentive, to achieve this given its huge trade surpluses and a desire to be less reliant on what it has seen as a vulnerable  U.S. dollar in its foreign currency reserves.

As an added note though, well known gold analyst Martin Murenbeeld reckons these huge stock figures should perhaps just be classified as wild estimates.  He says the question that needs to be asked is where the supply might have come from?  “Did GFMS, CPM, etc all miss the supply side – assuming the 30,000 tonne demand stockpile is correct?” he says.  “In short, the data tabulators didn’t just miss the demand side of the market, they also missed the supply side. How likely is that?”

*Simon Hunt has been in the commodity analysis business for many years.  He was one of the two founders of hugely respected metals commodities consultancy Brook Hunt which nowadays has been absorbed into Wood Mackenzie and nowadays runs his own commodities advisory service in Simon Hunt Strategic Services – www.shss.com