Six recent posts by Lawrie on sharpspixley.com

I’ve been a little lax about linking here to my articles published on the Sharps Pixley website but here are links to six I have published so far this month.  They look at the gold and silver markets as well as pgms.  Click on the titles to read the full articles.  To keep up with my thoughts on precious metals, and a whole host of other precious metals news stories from around the world, take a regular look at info.sharpspixley.com

Indian gold imports: High but ignore the hype!

13 Jul 2017 – Indian gold imports this year have already surpassed the full year 2016 level, but its probably best to ignore some of the year on year growth media hype given how low the figures were for H1 2016.

Implications for silver of Tahoe’s Escobal shutdown

12 Jul 2017 – Any impact on the supposedly temporary enforced closure of Tahoe Resources’ Escobal mine, the world’s second largest primary silver mine by Guatemala’s supreme court may only have a very limited impact on global silver fundamentals and the metal price.

Palladium closing gap on platinum – but neither great long term

11 Jul 2017 – In the past year the palladium price has moved up and platinum down and there is a real prospect of the former overtaking the latter in the near future.

So what’s happening to gold – and silver?

10 Jul 2017 – Gold, which had been showing signs of strength saw some huge trading volumes late last week which prompted a price slump, while silver fared even worse with the GSR rising to almost 80.

Gold overall H1 performance matches dollar index decline

04 Jul 2017 – H1 commodity price changes very positive for palladium while gold rise pretty well matches fall in dollar index. Silver disappoints. Iron ore worst performer.

 

Chinese gold demand up a little y-o-y but still well down on 2015

04 Jul 2017 – After a blip in May, Chinese gold demand as represented by Shanghai Gold Exchange withdrawals is now a little higher than at the same time a year ago, but still well down on the record 2015 figure.

 

 

Greenspan, Inflation and China boost gold

By Frank Holmes – CEO and Chief Investment Officer US Global Investors

With U.S. inflation rising, a March rate hike now looks all but imminent. Many economists—including the Goldman Sachs economists I had the pleasure to hear speak this week—expect to see at least three such hikes this year alone.

US Inflation Zooms up 5 Year High
click to enlarge

Gold responded accordingly, closing above $1,240 for the first time since soon after the November election. Below you can see the gold price charted against the inflation-adjusted 10-year Treasury yield, which is now in subzero territory.

US Inflation Zooms up 5 Year High
click to enlarge

The question I have is: Why would an investor deliberately choose to lose money? But that’s precisely what’s happening now with inflation where it is.

2-Year 3-Year 10-Year
Treasury Yield 1.22% 1.95% 2.45%
Consumer Price Index 2.50% 2.50% 2.50%
Real Yield -1.28% -0.55% -0.05%
As of February 16
Source: Federal Reserve, U.S. Global Investors

These were among some of the topics addressed by former Fed Chair Alan Greenspan, who spoke with the World Gold Council (WGC) for the winter edition of its “Gold Investor.”

Gold primary global currency

“Significant increases in inflation will ultimately increase the price of gold,” Greenspan said. “Investment in gold now is insurance. It’s not for short-term gain, but for long-term protection.”

He also reiterated his view, which I share, that gold is much more than just a metal but a currency:

I view gold as the primary global currency. It is the only currency, along with silver, that does not require a counterparty signature. Gold, however, has always been far more valuable per ounce than silver. No one refuses gold as payment to discharge an obligation. Credit instruments and fiat currency depend on the credit worthiness of a counterparty. Gold, along with silver, is one of the only currencies that has an intrinsic value. It has always been that way. No one questions its value, and it has always been a valuable commodity, first coined in Asia Minor in 600 BC.

Although major stock indices continue to hit fresh all-time highs on hopes of tax reform and fiscal stimulus, it’s important to temper the exuberance with a little prudence. The bull market, currently in its eighth year, is facing some significant geopolitical and macroeconomic uncertainty, and we could be getting late in the economic cycle. This makes gold’s investment case even more attractive. For the 10-year period, the yellow metal has shown an inverse correlation to risk assets such as stocks and high-yield bonds. It might be time to ensure that your portfolio has the recommended 10 percent in gold—that includes 5 percent in gold coins and jewelry, the other 5 percent in quality gold equities and mutual funds.

China and India to Lead World Economy by 2050

The long-term investment case for gold looks just as compelling following bullish reports last week from PricewaterhouseCoopers (PwC) and Morgan Stanley. China and India are the world’s top two consumers of gold, and both countries are expected to make huge economic gains in the next few decades. This is likely to boost gold demand even more, which has a high correlation with discretionary income growth.

China alone consumed approximately 2,000 metric tons in 2016, or roughly 60 percent of all the new gold that was mined during the year, according to veteran mining commentator Lawrie Williams, who based his estimates partially on calculations made by BullionStar’s Koos Jansen. The 2,000 metric tons is a much higher figure than what analysts and the media have been telling us, but I’ve always suspected China’s annual consumption to run higher than “official” numbers.

According to PwC’s models, China and India should become the world’s number one and number two largest economies by 2050 based on purchasing power parity (PPP). China, of course, is already the largest economy by that measure, but PwC sees the Asian giant surpassing the U.S. economy on an absolute basis by as early as 2030.

Top 10 Economies Dominated Emerging Markets 2050
click to enlarge

As for India, it “currently comprises 7 percent of world GDP at PPP, which we project to rise steadily to over 15 percent by 2050,” PwC writes. “This is a remarkable increase of 8 percentage points, gaining the most ground of any of the countries we modeled.”

I think it’s also worth highlighting Indonesia, which is expected to replace Japan as the fourth-largest economy by midcentury. E7 economies, in fact, could end up dominating the top 10, with Mexico moving up to number seven and France dropping off. You can see the full list on PwC’s site.

China Set to Become High Income by 2027

Then there’s Morgan Stanley’s 118-page report, “Why we are bullish on China.” The investment bank sees a number of dramatic changes over the coming years, the most significant being China’s transition from a middle-income nation to a prosperous, high-income nation sometime between 2024 and 2027. (The high-income threshold is a gross national income (GNI) of around $12,500 per capita.) This would make China one of only three countries with populations over 20 million that have managed to accomplish this feat in the past 30 years, the other two being South Korea and Poland.

Top 10 Economies Dominated Emerging Markets 2050
click to enlarge

This trajectory is supported by a number of expectations, including, most importantly, Morgan Stanley’s confidence that China will manage to avoid a debt-related financial crisis, as some investors might now believe is forthcoming. The bank’s view is that the Chinese government will successfully provide “adequate policy buffers and deft management of the policy cycle” to ensure the growth of per capita incomes.

Other key transitions will additionally need to take place for the country to reach high-income status by 2027, including transitioning from a high investment economic model to high consumption and implementing meaningful state-owned enterprise reform. Although China is currently transitioning from a manufacturing economy to one that’s focused on consumption and services, the country will also need to emphasize high value-added manufacturing.

chineseshoppers

 In addition, since President Donald Trump has officially withdrawn the U.S. from the Trans-Pacific Partnership (TPP), China could very well use this as an opportunity to take the lead in global trade, Morgan Stanley writes. This view aligns with comments I’ve previously made. China is already reportedly weighing its options with two alternative free-trade agreements (FTAs), one that includes the U.S. (the Free Trade Area of the Asia Pacific) and one that does not (the Regional Comprehensive Economic Partnership). It’s probably safe to say, however, that given Trump’s opposition to FTAs, trade negotiations involving the U.S. are unlikely to happen anytime soon.

Investors Underweight China

Taken together, this is all good news for gold. Again, when incomes rise in China and India, gold demand has historically benefited.

But it also makes China a compelling place to invest in. And yet investors have tended to be shy, underweighting the country for at least a decade in relation to the broader emerging markets universe.

Time Reverse Course China Stocks 2050
click to enlarge

This, despite the fact that China has largely outperformed emerging markets for the last 15 years. According to Morgan Stanley, the MSCI China Index has delivered a compound annual growth rate (CAGR) of 13 percent for the 15-year period, versus the MSCI Emerging Markets Index’s CAGR of 10 percent over the same period.

Major divergence between SGE and London gold benchmarks

Readers of lawrieongold will be well aware that I have not been posting articles here during my recent nearly 8-week hospitalisation.  I am happy to say that I am now recuperating at home – still very shaky on my feet so not getting out much, but fully intend to get back writing again, so here is an edited version of an article I published on the Sharps Pixley website yesterday.  To read the original article click here

The principal additional comment I’d like to make here is to note the almost 20 hour time difference between the Shanghai and London PM ‘fixes’.  In a rapidly moving gold market this can account for a significant price change and some days will indeed have seen that, but in general terms this won’t have accounted for nearly all the difference.  There has definitely been a sharp anomaly between Shanghai and London prices as can be noted from the Shanghai fixes and the Western spot prices as noted by sites like kitco.com at the same time, and in all cases the Shanghai price has been significantly higher.  Do read the article bearing this in mind.  It follows below:

Few seem to have commented on what appears to be an increasing trend towards large anomalies appearing between the Shanghai and London gold benchmark prices.  Up until the beginning of November prices were pretty much in sync give or take a few dollars – a variation based on trading activity during the day, and, in some cases due to a difference between the gold tenor quality required under the two systems.  The SGE specification is for 99.99% gold content or better, while London works to LBMA Good Delivery specifications where the requirement is only 99.5%.  But on one ounce of gold this should only make for a maximum difference in price of around $5-6 at around a $1200 gold spot price.

But recently – as the table below comparing SGE and LBMA (London) PM price benchmarks for the past month makes very obvious the price difference – virtually always strongly in favour of the SGE benchmark since early in the month.  This has been consistently $10-20 or more (often $20-30) – even rising as high as $46 on November 23rd, although a significant part of this difference on that day was due to the sharp intra-day fall in the London gold price,  (as noted in the introductory paragraph above) as will also have been the case on November 9th when there was a somewhat similar $45 difference.

Note that this morning the Shanghai set benchmark price at $1,197.17 was around $24 higher than the prevailing spot gold price on the international market at the same time!

SGE and London PM Gold ‘Fixes’ (US$

Date SGE PM Gold Price London PM Gold Price Price diffce. SGE PM over London
Nov 1st 1283.95 1288.45 -4.50
Nov 2nd 1296.08 1303.75 -7.67
Nov 3rd 1306.66 1301.00 +5.66
Nov 4th 1300.75 1302.80 – 2.05
Nov 7th 1293.91 1283.05 +10.86
Nov 8th 1290.17 1282.35 +7.82
Nov 9th 1326.88 1281.40 +45.48
Nov 10th 1293.91 1267.50 +26.41
Nov 11th 1267.47 1236.45 +31.02
Nov 14th 1227.97 1213.60 +14.37
Nov 15th 1236.99 1226.95 +10.04
Nov 16th 1241.65 1229.20 +15.45
Nov 17th 1237.30 1226.75 +10.55
Nov 18th 1219.26 1211.00 +8.26
Nov 21st 1224.54 1214.25 +10.29
Nov 22nd 1235.43 1212.25 +23.18
Nov 23rd 1231.70 1185.35 +46.35
Nov 24th 1212.41 1186.10 +26.31
Nov 25th 1200.91 1187.70 +13.21
Nov 28th 1218.64 1187.00 +31.64
Nov 29th 1216.15 1186.55 +29.60
Nov 30th 1210.24 1178.10 +32.14
Dec 1st 1199.35 1161.85 +37.50

Source: www.Kitco.com

As we pointed out here yesterday a part of the reasoning behind the higher SGE benchmark price levels is something of a squeeze on Chinese gold supply which is local market specific – particularly now that gold traders and fabricators may be looking to build stocks ahead of anticipated additional demand from the Chinese New Year holiday, and a reported reduction in gold import quotas by the Chinese Government to curb capital outflows. But part may also be due to Shanghai looking to establish itself as the true gold price setting exchange and thus usurping the still dominant position of COMEX and the LBMA.  As China is the world’s biggest physical gold market, while COMEX and London are largely paper markets, it is probably only a matter of time before this comes to pass but for the moment the Western markets look to still be calling the tune as far as the accepted global gold price is concerned despite some hugely anomalous movements from time to time which many observers put down to manipulation.  The latest such was only yesterday when a rise in U.S. jobless claims, which might normally be considered gold positive, saw the price marked down sharply after an initial small rise.

Gold Taking a Breather … Is this the time to buy?

By Frank Holmes
CEO and Chief Investment Officer
U.S. Global Investors

It makes a great deal of sense to own gold. Billionaire hedge fund manager, Paul Singer

First it was Stan Druckenmiller, now it’s George Soros. Following billionaire former hedge fund manager Druckenmiller’s announcement that gold was his family office fund’s largest currency allocation, we learned last week that his old boss, billionaire investor George Soros, purchased a $264 million stake in Barrick Gold, the world’s largest gold producer, after liquidating $3.5 billion in U.S.-listed stocks. Additionally, he disclosed owning call options on a gold ETF.

Soros’ investment can be held up as further proof that sentiment toward gold has decidedly shifted positive, following the challenging last three years.

London-based precious metals consultancy Metals Focus just released its Gold Focus 2016 report in which the group calls an end to the gold bear market that began in late 2011, after the metal hit its all-time high of $1,900 per ounce. “We are optimistic about gold over the rest of this year and our projections see it peaking at $1,350 in the fourth quarter,” the group writes. Global negative interest rate policy fears have reawakened investors’ confidence in gold as a reliable currency and store of value.

The group adds: “In the near term, there may well be some liquidations of tactical positions.” This is to be expected, especially around the start of summer, based on historical precedent

Will Gold Follow Its Short or Long-Term Trading Pattern?

We’ve noticed that mining companies which have deleveraged their balance sheets this year have been some of the biggest gainers. Barrick, now Soros’s largest U.S.-listed allocation, started 18 months ago.

Glencore, Teck Resources and higher-risk junior producers such as Gran Colombia bounced off the canvas after being knocked down.

Gold equities always have a higher beta than bullion. Usually a ±1 percent move translates into 2 to 3 percent in gold stocks.

Regardless of it being a bull or bear market, there are still fairly predictable intra-year trends in the price of gold. Below is an updated composite chart of the metal’s historical yearly patterns over the last five, 15 and 30 years, courtesy of Moore Research.

lucara diamond at a nine-year high

click to enlarge

In all periods, gold contracted in May to early summer, then rallied in anticipation of Ramadan—this year beginning June 4—and India’s festival of lights and wedding season. India has one of the largest Muslim populations in the world, and for at least 5,000 years they’ve adhered to the tradition of giving gold as gifts during religious and other celebrations. .

Predictably so, the yellow metal has retreated somewhat this month, following its best start to a year in 30 years and its best-ever first quarter for demand. As I told Daniela Cambone during last week’s Gold Game Film, this pullback provides an attractive buying opportunity

The five-year period decoupled from the other two starting in mid-autumn, but the annual losses in 2013 (when the yellow metal fell 28 percent), 2014 and 2015 skewed the data. Metals Focus sees gold following its more typical trading pattern this year, possibly climbing to as high as $1,350 an ounce

lucara diamond at a nine-year high

click to enlarge

In the near-term, gold is threatened by a rate hike, possibly as early as next month’s Federal Open Market Committee meeting. The metal fell to a three-week low this week on hawkish Fed minutes. If the Fed ends up delaying a hike, it could give gold the chance to take off.

Analysts See a Possible 25 Percent Depreciation in China’s Currency

One of the concerns the Fed has right now is the depreciation of the Chinese renminbi. In a special report, CLSA estimates it could fall as much as 25 percent before rebounding somewhat. Because the trade volume with China is so massive, the fear is that it could affect the U.S. economy

lucara diamond at a nine-year high

click to enlarge

This would have many obvious negative consequences. For one, because China’s oil contracts with the Middle East are denominated in renminbi, not dollars, Middle East suppliers would be hurt.

CLSA points to several winners, however, including investors. The devaluation could very well “represent the best opportunity to buy Chinese assets that investors have had since the financial crisis,” the investment banking firm writes. China’s materials sector, local exporting producers and mainland gold producers should also benefit. The renminbi will “inevitably” fall, CLSA says, “irrespective of economic fundamentals, as a free market works out what it is worth.”

It’s little wonder then that, in the meantime, the country’s consumption of gold has skyrocketed in recent years as it vies to become one of the world’s key gold price makers. (Remember, China just introduced a new renminbi-denominated gold fix price.)

lucara diamond at a nine-year high

click to enlarge

In addition, it was reported last week that Chinese bank ICBC Standard just purchased one of Europe’s largest gold vaults from Barclays, located in London, for $90 billion. This will help give the country greater control over gold transactions around the world, about $5 trillion of which are cleared in London every year

Should They Stay or Should They Go?

Likely to help gold this summer are geopolitical events, specifically the potential “Brexit” next month when U.K. voters decide on whether to remain members of or leave the European Union.

former libertarian vice presedential nominee wayne allyn root whose latest book is the power of relenetless

Various analysts have warned that such an event could trigger a crisis with both the euro and pound, which might spread to other economies. A recentBank of America Merrill Lynch survey found, in fact, that the idea of a Brexit has risen to the top of global investors’ worries. What’s more, no consensus was reached during a meeting among G7 nations this past weekend on how to deal with fiscal policy, other than to take a “go your own way” approach.

In the past, gold has been used as a hedge against the risk of not only negative interest rates but also inflation.

High inflation might also be coming to the U.S. thanks to the Labor Department’s new regulation on overtime pay, which doubles the eligibility threshold from $23,660 a year to $47,476 a year, on condition that the worker puts in more than 40 hours a week. It’s estimated that the ruling will affect 2.2 million retail and restaurant workers, among others.

President Barack Obama’s heart is certainly in the right place by wanting to boost workers’ wages. But it’s important to be aware of the unintended consequences that have often accompanied such sweeping edicts throughout history. We could end up with rampant inflation as companies will have little choice but to raise prices to offset the increased expense. Again, having part of your portfolio invested in gold and gold stocks, as much as 10 percent, could help counterbalance inflationary pressures on your wealth.

Extraordinary developments in the Gold Market: China pulling it down!

Gold Today The New York gold price closed Friday at $1,238.20 down from $1,244.20 as the market took a breather after the stunning rise of last week. On Monday, with China [open after the week long holiday] prices were pulled back to $1,212, ahead of London’s opening. Then the LBMA set it at $1,208.45 down from $1,239.50 down $31.05 with the dollar index stronger at 96.36 up from Friday’s 95.70.

The dollar is stronger against the euro at $1.1203 up from $1.1283 on Friday. The gold price in the euro was set at €1,078.68 down from €1,098.56.

Early afternoon in London, the gold price was trading at $1,209.35 and in the euro at €1,079.01.  

Silver Today –The silver price in New York closed at $15.72 up 2 cents on Friday.  Early London’s afternoon the silver price stood at $15.30.

Price Drivers

We see an extraordinary situation in the gold market first thing Monday morning.

China has re-opened and New York is closed today. When the Chinese went on holiday at the end of the week before last the gold price was fixed in London’s pm at $1,150.35. Now they return to hear that gold actually hit $1,250+, $100 higher than when they left on holiday.  On top of that, they were ready for a weaker Yuan, but return to find a huge trade surplus and a Yuan stronger by 1%. But the Chinese middle classes don’t move gold for such a small reason. It is more likely that while there will be a ‘shunt-effect’ in gold prices, gold investors there, need to get back in gear before their opinion on prices feeds through.

Of course speculating traders would think it was time to take a profit or so dealers would expect. So prices were pulled back in expectation of this. With New York closed today, U.S. demand is out of the way, leaving the Chinese to get used to these much higher prices until the U.S. returns.

Contributing to the fall in the gold price is the strengthening dollar causing dealers to mark gold prices down.

When the U.S. returns they will be used to prices at the $1,240 area. This will provide a measure of the either disjoint or efficiency of arbitrage to smooth prices in the two markets. Just how far apart are these two markets and just how far can arbitrageurs remove the differences? This will tell us just how global, the gold market is.

Bear in mind the Chinese market has just accepted a $62 rise [with gold prices at $1,212] today and not driven it lower. It may lead to a quick acceptance by them of higher prices this week. Nevertheless, such a correction back to support just above $1,200 is healthy and needed for the gold price to be able to rise solidly.

Friday saw understandable profit taking with a sale of 5.057 tonnes from the SPDR gold ETF but a relatively huge purchase of 4.41 tonnes into the Gold Trust. The holdings of the SPDR gold ETF are now at 710.954 tonnes and at 179.19 tonnes in the Gold Trust. The net result was relatively gold price neutral in New York. The move into the much smaller Gold Trust was the highest one day purchase we have ever seen. We expect the U.S. investors to be buyers when they return tomorrow.

China’s equity market is now in a bear market and with Japan reporting a 1.4% GDP shrinkage, the market opinion is that Abenomics is not working.  Adding to the gloom the rally in the oil price is going to be undermined by the first shipment to Europe of oil this week from Iran.

While the silver price is retreating, it is holding onto the bulk of its gains and clinging close to the gold price still.

 

Julian D.W. Phillips

GoldForecaster.com | SilverForecaster.com | StockBridge Management Alliance

Chinese central bank buys another 19 tonnes of gold in December

China is something of a contradiction at the moment.  Its stock market has been plummeting again – another 7% was wiped off the Shanghai Composite Index in this morning’s trade – a fall (although not as debilitating in percentage terms) which seems to have transferred itself yet again to other Asian markets, European ones and in early trading in New York with the Dow, S&P 500 and Nasdaq all opening sharply lower.  The Yuan has also been weakening against the US Dollar despite signs that the Peoples Bank of China (PBoC) has been attempting to slow any decline given a sharp fall in its forex reserves  (although given the enormous size of these reserves this seems just to have been perhaps more of a controlled Yuan devaluation.)

Meanwhile the PBoC has been continuing to bolster its officially announced gold reserves with an uptick of 19 more tonnes in December bringing them to 1,762.323 tonnes.  As we have pointed out beforehand, though, although China supposedly came clean on its official reserve figures back in June this year, and has been announcing monthly increases since in the interests of transparency in line with its pending inclusion in the SDR currency basket, it is still widely believed the total reserve figure is, in reality, hugely understated, as may well be the size of the announced monthly purchases.

With the Russian central bank also continuing to increase its gold reserves there is an anticipation that 2016 could well see a continuation of the good level of overall central bank purchases we have been seeing over the past couple of years.  However Russian forex reserves are not nearly as robust as those of China and any need to protect a continuation of the ruble downturn could be limiting.  But with Russia relying so much on oil and gas exports, ruble devaluation is at least helping those companies involved in the resource sector stay afloat. Russia is less reliant on imports from countries whose currencies are not tied to the ruble anyway than many western economies would be in a similar situation.  The lower ruble thus has less effect on the general populace than many in the west might surmise.

Regarding its gold reserves, China may well be unwilling to report its full total and monthly purchase figures in order to keep the gold market ticking over at a level which suits its long term financial aims.  A major rise in the gold price, which would likely ensue should it report far higher monthly purchases and a possible tripling or quadrupling of its total reserve figure. may not be in its best interests.  There is no auditing process on the level of gold reserves reported to the IMF on a monthly basis so, in effect, a country can just report these as it may suit its political and economic aims.  It is known that China considers gold to be a key element in the future world currency and economic power scenario, and at the moment it may well just be keen to be seen to carry on raising its gold reserves at a rate which won’t make future purchases raise any red flags among economic analysts.

That gold plays such a huge part in the Chinese psyche – as it does in that of many other nations, particularly in Asia – is already evident in the enormous level of withdrawals from the Shanghai Gold Exchange this year.  By December 25th these had reached 2,555 tonnes (See:Chinese 2015 gold demand equates to around 80% of total global gold output– already a huge new record – and by the year end will have almost certainly reached a fraction short of 2,600 tonnes.  Whether SGE withdrawals are an accurate representation of the nation’s actual gold demand or not (there are conflicting opinions on this), the record levels involved are certainly a great indicator of the national sentiment towards the yellow metal.

With the PBoC and its wholly-owned Shanghai Gold Exchange (SGE) planning to launch a Yuan denominated daily gold benchmarking price system, to rival that of the LBMA in London, currently reckoned to come into being in April, we are likely to see yet another crack in current gold price setting which is largely a New York and London process and very much COMEX paper gold market influenced.  This may ultimately lead to  a more physical gold-related system but, for those who believe the current process, and the resultant gold price, is manipulated/suppressed by Western central banks and their bullion bank allies, we could be just replacing a Western dominated system with a Chinese one and what that outcome would result in as far as the gold price itself is very much an unknown.  With the huge amounts of gold which have found their way into very diverse Chinese personal savings over the past few years, one suspects China would do its best to eliminate any substantial downside risk since keeping its citizenry onside is a key policy aim.  But how it would handle any upside movement is rather less certain.  The greater its gold reserve build-up, perhaps the less likely it might be to interfere on the upside, assuming it does see gold as some kind of financial weapon in future global economic positioning which does seem to be the case.

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.

UK gold exports to mainland China dwarf those to Hong Kong

Latest UK gold export figures released coverin August show gold exports to China plus Hong Kong went 74% direct to the chinese mainland bypassing Hong Kong altogether.  This is yet another hugely significant indicator that Honk Kong net gold exports to China can no longer be an accurate guide to total Chinese imports as much of the world’s media – and some analysts who should know better – seem to assume.  See graphic below from www.sharelynx.com 

ukaug1

To read more on this click on August UK gold exports direct to mainland China dwarf Hong Kong

Hong Kong gold exports ever less relevant to Chinese SGE demand

An interesting graphic from Nick Laird’s www.sharelynx.com group of websites.  This one shows net monthly Hong Kong gold exports to China, Shanghai Gold Exchange (SGE) withdrawals and the correlation between the two.  This is hugely relevant in the context of how significant the Hong Kong net gold export figures are in relation to overall Chinese demand as represented by SGE withdrawals.

hksge

What can be seen from the charts was that there was a much more significant correlation between the Hong Kong exports and SGE withdrawals up to Q1 2014, but after that the Hong Kong percentage has been mostly declining and was down to only 23% for the latest month for which figures are available (August).  June and July figures were even lower.   This shows that Hong Kong gold export figures are very definitely no longer the proxy for Chinese gold demand they used to be despite some analysts, and the media, assuming, or implying, that they are.

The reason for this is that Hong Kong is becoming less and less important as a supply route for gold into mainland China due to gold import regulation changes.  We have already pointed out that two of the biggest supply routes for gold into China – via Switzerland and the UK – are now shipping very significant percentages to the Chinese mainland directly, whereas prior to 2014 nearly all their gold export traffic was via Hong Kong.  (See: What is China’s real gold demand?).

We can glean these statistics directly from the Swiss and UK export figures as China publishes no direct data on gold imports to the mainland.  Whereas some gold was always going direct to the mainland and bypassing Hong Kong, a relaxation on which ports of entry and who could import gold directly has significantly moved the goalposts and undoubtedly some sources of Chinese gold imports may be moving 100% of their gold directly into the Chinese mainland as opposed to the circa 40% we are already seeing  across the major import routes from countries which do publish the relevant data.

Of course the other significant source of Chinese gold is from that mined on the mainland itself, and as a byproduct from the big base metals smelting and refining sector- possibly as much as 480 tonnes this year, up from around 460 tonnes in 2014.  This comes to around 20% of China’s likely 2015 total gold demand.

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….

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What is China’s real gold demand?

There is a huge disparity between what the Chinese Central Bank apparently sees as gold demand and that estimated/calculated by the global analytical community. The figures seem to be continually diverging and here we utilise known official data to draw our own conclusions as to what the real figures might be.

As a base we are assuming that supply to the market is roughly balanced by demand.  There is an element of well substantiated data from Chinese and non-Chinese sources available which may give us a fairly good idea of the minimum supply levels potentially available to Chinese consumers. But given China’s non-reporting of direct gold imports this certainly does not present anything like a full picture.

First we have China’s domestic gold output which this year is estimated to reach perhaps 480 tonnes. Secondly we have net gold imports via Hong Kong. The Hong Kong Statistical office reports these on a monthly basis in a throwback to the Special Administrative Region’s former British-based bureaucracy, and net exports from this source to the Chinese mainland by the end of August totalled 485 tonnes, and given the tail end of the year usually produces some strong figures, a conservative estimate for this year’s total net gold imports from Hong Kong would be around 650 tonnes.

But there’s more. Switzerland exports gold both to Hong Kong and directly to mainland China, as does the UK. Recent changes in China’s permitted import routes for gold also mean that nowadays an important part of the gold exports from these countries does go directly to the Chinese mainland, bypassing Hong Kong altogether. For example, the UK started exporting gold directly to mainland China from April last year and through to the year end sent a little over 110 tonnes by this route. This year, after zero exports in January and February, it has exported around another 110 tonnes in the following four months to end June so it would not be unreasonable to assume that around 250 tonnes, perhaps more, will flow by this route into mainland China over the full year.

Likewise Switzerland has exported a little over 145 tonnes of gold directly to the Chinese mainland in the seven months to end July this year – again suggesting a full year total of around 250 tonnes.

So, if we add together the total of net projected Chinese gold imports for FY 2015 from Hong Kong, Switzerland and the UK and add in China’s own estimated domestic production for the year we are already seeing a total of 1,630 tonnes. Add to this unquantified direct imports from other nations and additional supply from domestic scrap we are probably coming up with a figure of perhaps closer to 2,000 tonnes, which is far nearer the SGE withdrawals figures than the mainstream analysts’ figures might suggest.

The big question is, though, is a significant proportion of the Chinese available new gold supply going into the Central Bank rather than in to retail consumption? Chinese officials tell us that the People’s Bank of China does not source gold from the SGE – but the country is also currently announcing perhaps an intake of around 14 tonnes a month since it began reporting these figures 3 months ago. If this is indicative of likely central bank purchases over the full year then this would total around 170 tonnes, which presumably is coming from somewhere.

And western analysts are dubious about levels of Chinese government purchases of gold anyway, mostly assuming them to be far higher than officially stated with gold being held in other government accounts not reported to the IMF. Additional monetary gold, which is not reported in export statistics from countries like the UK, could also be going to China directly – see Koos Jansen’s latest article on this: The London Float And PBOC Gold Purchases.

If we ignore for the moment possible direct imports by the PBoC, the amount of available ‘new’ gold to the Chinese market would be the 2,000 tonnes estimated above and the analysts’ estimates of Chinese gold consumption currently of around less than half this level leaves ca. 1,000 tonnes plus of supplied gold unaccounted for, some of which may be going into the financial sector, which does not tend to be recorded in analysts’ figures for consumption. But again this is probably a relatively small amount. So the question is where is this excess gold all going? This suggests the analyst figures are substantially under-estimating true Chinese consumption. With the SGE figures indicating an even wider discrepancy there are even more questions about total Chinese gold inflows unanswered. Perhaps there are indeed elements of double counting in the SGE figures, but probably not sufficient to account for the huge differences being seen.

But whatever the real figures are, known gold exports into China plus the country’s own production, account for probably at least 50% more gold than the analysts reckon China is consuming – and these totals almost certainly under-estimate the true picture. And what matters to the gold marketplace in terms of supply/demand fundamentals is the total amount of gold flowing into China from the West – not just whatever the analysts classify as consumption.

The COMEX Warehouse situation: While there may indeed be no shortage of physical metal in the overall COMEX gold warehousing system, the registered stocks (i.e. immediately available amount of physical metal) have indeed diminished and are currently down to around 5 tonnes only. As Jeff Christian has pointed out recently, though, this low number is not an immediate cause for concern as COMEX is primarily a futures market and little actual physical gold passes through it, while there are still big ‘eligible’ stocks held by the bullion banks some of which could be transferred to meet commitments if necessary. But the low registered stock level is yet another probable indicator of continuing gold flows from West to East. It should also perhaps be pointed out that the numbers here are actually quite small compared with overall gold trade with the total fall in eligible plus registered stocks only down around a little over 30 tonnes year to date. Given continuing gold inflows into the COMEX warehousing system, of course, the total gross outflow will have been considerably higher, but reports of a pending supply squeeze should perhaps be disregarded given the overall total holdings of eligible plus registered stocks in the COMEX warehouses.

Chinese faith in gold as a foundational asset for financial security

On Monday New York closed at $1,135.50 up $1.10. The dollar was stronger at $1.1335 at the close up from $1.1496, against the euro, with the dollar Index weaker at 95.94 down from 96.07 from Monday. The LBMA gold price was set at $1,141.90 today. The euro equivalent was €1,o14.26. Ahead of New York’s opening, gold was trading at $1,143.55 and in the euro at €1,015.54. The silver price closed at $14.64 up 5 cents over Monday’s close in New York. Ahead of New York’s opening today it was trading at $14.63.

Price Drivers

Today London re-opens after the Bank Holiday weekend and we see the beginning of the ‘gold season’. Sometimes it takes a little time before it sparks into life but with European holiday makers back at their desks with carefully nurtured sun tans, the focus turns to the festive season and preparations for it.

In India the harvesting is under way bringing tax free profits that find their way into property and gold.

Today saw Asia take gold up $7 before London opened. As we detailed yesterday, the gold and silver markets have fundamentals which are going to take it in a direction that is different from most global financial markets. While we do expect the balance of the year to see volatility throughout global financial markets, we see these two precious metals acting very differently.  

With confidence in currencies and market stability waning gold & silver performed well in currencies other than the U.S. dollar. This pattern is expected to continue.

China wants the Yuan to gain the reputation the dollar currently has, as a central global currency. To that end they have now made it expensive to speculate on the Yuan. With all the controls the Chinese authorities have imposed on their markets, all they have done is to inadvertently reinforce the Chinese faith in gold as a foundational asset for financial security.

A lesson from the past shows that in 1933 gold was not confiscated because of the need to boost money supply but to prevent it competing with the dollar, inside the U.S. Today, one government cannot dominate the gold market, leading to a situation where gold is needed as an alternative to currencies in global dealings. As volatility in exchange rates continue, this need will grow!

Yesterday saw no sales or purchases into or from the SPDR gold ETF but a sale of 0.9 of a tonne from the Gold Trust

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

As markets and dollar fall, gold is back on a rising path

On Friday New York closed at $1,159.40 up $26.70. The dollar was weaker at $1.1444 down from $1.1062 on Thursday with the dollar Index weaker at 94.94 down from 96.50 on Friday. It opened on Monday at 94.54. Asia took the price down on Monday to $1,154 as global equity markets slid. This morning the LBMA gold price was set at $1,153.50 up $5.55. The euro equivalent was €1,006.11 down €13.42 as the euro surged. Ahead of New York’s opening, gold was trading at $1,159.50 and in the euro at €1,007.65.  

The silver price closed at $15.28 up 2 cents over Friday’s close in New York. Ahead of New York’s opening today it was trading at $15.00.

Last week and this morning, saw different factors across the world knock equity markets down heavily. In China, the conciliatory statement to the IMF that the government would move more to allowing markets to move according to market forces saw those who were still allowed to sell, do so, knocking the Shanghai market down another 10% on the day.

In the U.S. where markets have risen because better yields can be found in equity markets than in the bond markets, the Dow continued to fall through support as a rate rise will come from the Fed in September or before the end of the year. Cash is the safest place to be unless the international cash aspects of gold are used. To validate that we see the dollar has sunk against the euro, the Yen and sterling while the Yuan has fallen against the dollar. This week will see heavy volatility in global financial markets.

Gold was rising against the dollar ahead of New York’s opening today.  To that end there were purchases of the large amount of 5.96 tonnes into the SPDR gold ETF and o.6 of a tonne bought into the Gold Trust on Friday. This leaves the holdings of the SPDR gold ETF at 677.827 tonnes and 161.62 tonnes in the Gold Trust.  

While the fundamentals of markets may not drive prices all the time they do so eventually. The greatest driver of equity markets is sentiment, which eventually will respond to fundamentals. It is in the nature of investors and the media to put a positive ‘spin’ on factors, but when smart investors are joined by the crowd the response to fundamentals becomes strong and emotional as we are seeing now. That ‘thundering herd’ can become unstoppable. But what’s different today is that global equity markets are joining the herd. –

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

Shanghai’s gold pricing power ever-growing

On Friday New York closed at $1,092.10 up $2.80. The dollar is down more than half a cent at €1.0976, with the dollar Index weaker initially before rising to 97.85 down from 97.90. This morning the LBMA gold price was set at $1,094.80 up $3.45. The euro equivalent was €1,001.01 up €3.25. Ahead of New York’s opening, gold was trading in London above $1,094.30 and in the euro at €1,000.50.

The silver price closed at $14.77 up 12 cents in New York. Ahead of New York’s opening it was trading at $14.94.

There were sales from the SPDR gold ETF of 0.24 of a tonne but none from the Gold Trust on Friday. The holdings of the SPDR gold ETF are at 667.694 tonnes and 161.83 tonnes in the Gold Trust. With so little sold from these gold ETFs the gold price floated higher and in Asia it started to accelerate higher to $1,098 before pulling back in London’s morning.

As you can see from New York’s close the ‘bear raid has stopped, it seems, with less than quarter of a tonne sold from the SPDR gold ETF. If the market believes the selling has stopped there is only one way the market can go apart from sideways. It would take a headstrong seller to enter the market now unless he had a hefty amount of physical gold to sell. Meanwhile, the first buyer to break cover may find himself leading a herd?

Chinese demand is there solidly, as this morning’s price testifies and we are three weeks from the beginning of the gold season. Europe is on holiday until then, thereafter entering the busiest time in the developed world’s gold season too. We watch to see if instead of seeing the developed world unloading gold into Asia Shanghai comes to the developed world to take more gold from there to eliminate the premium? This would tell us just how far the evolution of the gold market has come this year and just how far Shanghai’s pricing power has grown.

The news out of the U.S. on Friday was good for the economy and the prospect of a rate hike either in September or December seems certain. But this did not prompt gold sales in the U.S. or London. Has the rate hike been discounted in the gold price? Friday’s behavior tells us, yes it has.

Oh, just in case you had forgotten Greece, it must have a bailout solution before August 20 or it will miss a payout to the ECB. The fact that a nation must borrow to service debt could not be a louder signal of its bankruptcy.

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

China’s gold dilemma

On Tuesday New York closed at $1,095.60 up $1.60. The dollar was almost unchanged at $1.1064, with the dollar Index slightly down at 96.64 down from 96.77. This morning the LBMA gold price was set at $1,096.75 up $1.15. The euro equivalent was €991.23 up €0.63 yesterday. Ahead of New York’s opening, gold was trading in London at $1,096.20 and in the euro at €991.63.

The silver price closed at $14.68 up 12 cents in New York. Ahead of New York’s opening it was trading at $14.63.

The gold market barely moved in the last day with the dollar slightly weaker and the dollar index almost static. The gold market is waiting to see if the sales out of the U.S. have finished or simply pausing to see if there will be a bounce. Our question is, “Are they finished with the ‘bear raid’ or are they waiting to continue after a bounce?” It really does depend on how much physical gold they can sell or are they physically shorting the market?

As to news warranting continuing such a raid, we don’t believe there has been a change since the raids began 12 days ago. We mention, again, the event that caused the selling to stop and that was the two days when around six tonnes of gold were sold from the SPDR gold ETF in two days but saw the gold price lift in China. With so many speculative short positions and so few Commercial short positions there, we are ready for short covering, but a decent move, either way, in the gold price is needed before that happens.

The holdings of the SPDR gold ETF are at 680.154 tonnes and 163.55 tonnes [down 0.30 of a tonne] in the Gold Trust.

China has a dilemma. Not only can it not afford to see an equity meltdown, it cannot afford to see a gold price meltdown. With gold an integral part of its financial system a heavy drop in the value of gold attacks margins and the use of gold as collateral, which is common practice! But is this enough to warrant intervening in the Chinese gold market? We suspect, it is, if done ‘invisibly’. This would only be seen in the failure of the gold price to fall further, in China.

With the Fed in the second day of its two day meeting we expect markets are waiting for a change in language, but not a rate hike. The markets are waiting to see if the hike will happen in September or December.

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

China wants healthy gold market. Is it intervening?

On Monday New York closed at $1,094 down $6. The dollar was almost unchanged at $1.1062, with the dollar Index slightly higher at 96.77 from 96.72. This morning the LBMA gold price was set at $1,095.60.  The euro equivalent was €990.60 down from €992.50 yesterday. Ahead of New York’s opening, gold was trading in London at $1,092.60 and in the euro at €990.57.

The silver price closed at $14.56 down 13 cents in New York. Ahead of New York’s opening it was trading at $14.61.

The ‘bear raid’ is either finished or pausing today, as no gold was sold from the SPDR gold ETF or the Gold Trust yesterday. As we have said many times before, Asia does not chase prices, but in the developed world there have never been so many short positions and a dearth of longs in COMEX.

The holdings of the SPDR gold ETF are at 680.154 tonnes and 163.85 tonnes in the Gold Trust.  Meanwhile dealers are moving prices in line with the moves of the euro against the dollar.

What did happen in China in the last day was the equity market plunged 8% despite the measures put in place by the government there. In the West the acceptance of the separation of the financial system from the political system is taken for granted, but in China the government controls everything. The financial system is controlled through the People’s Bank of China including the Shanghai Gold Exchange.

With the government there nurturing the financial system to maturity, such collapses or bear raids are taken as an attack on government as well. This is particularly so now that the government has been extremely high profile in trying to protect the equity market from further falls. These have failed to prevent further falls.  We expect measures to attempt to halt further falls in the equity market and by extension perhaps the gold price?

It is more than likely that an agent of the PBoC is taking off any dumped gold from New York and sold down in Shanghai [seen at the opening in the SGE] which appears to have happened this week. We need at least the rest of this week to see if this is really happening. Bear in mind China wants healthy financial and gold markets because they have visibly encouraged ownership of gold, so they will ensure the Yuan gold price will not go the way of the equity market.

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