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

Advertisements

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

Gold, silver, pgms crash on overnight Shanghai trades

While Chinese volumes may have been seen as lending support to gold and other precious metals prices through continuing high gold withdrawals on the Shanghai Gold Exchange and strong import levels, today the reverse has been true.  A reported sale of 5 tonnes of gold into the SGE has really rocked the markets, at one time driving the spot gold price down below the $1100 level, although European trading brought it back up again – but still well down on the previous day’s levels.  Julian Phillips writing here suggests that the bear raid commenced in New York, while John Meyer at London broker/banker S.P. Angel noted the Chinese element was thought to have been made into China’s smaller gold market half an hour after the market opened to take advantage of the lower liquidity and fragile market environment.

Overall, uncertainty about what prompted this big gold sale is rife.  Could it be for a liquidity necessity following the big recent Chinese stock market crash, or could it be the Chinese falling out of love with gold?  Or could it be a big gold dump on the SGE international section, tied in with a big sale out of the gold ETFs on Friday?  The evidence suggests it may well be the latter. One supposes time will tell.

Germany’s Commerzbank in its daily commentary reported it thus: “Crash on the gold market – as the new week gets underway, the price of one troy ounce plunged for a time by up to 5% or around $50 to just over $1,080 during the course of early trading, thus hitting its lowest level since February 2010. It has meanwhile recouped over half of these losses again. In euro terms, gold dipped temporarily to a 6½-month low of a good €1,000 per troy ounce.

“The price slide was triggered by high selling volumes on the gold exchange in Shanghai. According to figures from Reuters, over a million lots were traded there in one key contract. Apparently, the average figure so far in July had been below 30,000 lots….

“All other precious metals are also under pressure in gold’s slipstream: silver has been trading for a time at a 7½-month low of $14.5 per troy ounce, while platinum dropped for a while to a 6½-year low of less than $950 per troy ounce and palladium hit its lowest level since October 2012 (a good $600 per troy ounce).”

Commerzbank also noted increased pessimism on precious metals on COMEX, a further retreat by gold ETF investors who, according to Bloomberg, sold out of 15.7 tonnes on Friday – the biggest daily decline in 2 years, while it sees the Greek situation and China’s lower than expected new gold as being of relatively little significance.

Huge latest week SGE gold withdrawal figure – 62 tonnes

While the upwards restating on Friday of China’s gold reserve position at a much lower level than the market had been anticipating may have disappointed gold investors (China ups gold reserves at last – gold bulls disappointed and China shocks bullion market with small gold reserve increase), the latest reported volume of gold withdrawals from the Shanghai Gold Exchange (SGE) should provide counter encouragement.

We keep on reading in the mainstream media that Chinese (and Indian) gold demand is weak at the moment but this, in China at least, would seem to be belied by the recent levels of SGE gold withdrawals at what is usually a very weak time of year.  And the latest figure out of the SGE for the week ended July 10th seems to have been truly exceptional for summer trading.  The figure was a fraction under 62 tonnes – the eight largest weekly total ever – at a time of year when SGE withdrawals are usually at the 20-30 tonne level – bringing the total for the year to date to 1,191 tonnes.  As I wrote in a recent article on Mineweb (China on track for new annual record gold deliveries), if the momentum keeps up into the usually stronger late third and fourth quarters, Chinese gold demand, as represented by SGE withdrawals, is heading for a comfortable new record exceeding the 2,186 tonnes of 2013.

It should be recognised here though that with China not everything is always as it seems on surface.  SGE withdrawal figures nowadays are muddied by the inclusion of withdrawals out of the Exchange’s International section – the SGEI – but these are not reported separately, but just in the cumulative total.  SGEI withdrawals do not necessarily have to be landed in China and while they are thought to have been small so far there’s always the possibility that these have been taking off thus compromising the domestic ones.  Also, as we have pointed out before western mainstream analysts dismiss the SGE withdrawal figures as not being a measure of true retail demand.  (This is partly a matter of what they see as included in demand or consumption which ignores some categories – particularly gold used in financial transactions and as collateral – as well as suggesting there could be a degree of double counting in the SGE statistics (although SGE rules should preclude this).

But as an indicator of Chinese sentiment towards gold, and of gold flows into and within what is still comfortably the world’s largest consumer, SGE withdrawal figures still have to provide the pre-eminent data.

Gold investors should remember too though, that in the previous record year for Chinese gold demand, 2013, the gold price plunged throughout the year with the huge gold flows from West to East seemingly being totally ignored by the markets which set the gold price in New York and London.  Prices are set as much – far more in fact – by sometimes dubious dealings on the futures markets than by supply/demand fundamentals.  Ultimately, gold pricing, along with most of the world’s available gold bullion, will move to the East but this may still be some time away, but with the probable launch of a Shanghai gold benchmark price setting system later this year, this would seem to be getting ever closer.

China hits new record H1 SGE gold demand figure

Latest figures out of the Shanghai Gold Exchange show that Chinese H1 gold withdrawals are running even higher than in the record 2013 year.

With a latest week (to June 26th) total of 46.167 tonnes of gold withdrawn from the Shanghai Gold Exchange – again a high level for the time of year – the total for the year to date has reached a massive 1,162 tonnes and assuming withdrawals from the SGE have continued at around the same rate in the final two trading days of the month, we can probably add another 18 tonnes to make gold demand for the full six month period, as represented by SGE withdrawals, 1,180 tonnes.  This will be comfortably a new record for the first half of the year – the previous record was in  2013 with just under 1,100 tonnes withdrawn in H1 and when the full year figure was 2,197 tonnes.

Consider that total global new mined gold supply for the half year period will have been only around 1,600 tonnes that gives a pretty good idea of the significance of Chinese gold demand in the world picture – accounting for around 74% of new primary supply on its own.  And China only accounts for less than half of global gold demand.  Lowish gold prices mean that recycled gold supply is weak and so far this year liquidations out of the gold ETFs are small in comparison to the previous two years.  And what is apparent is that Chinese demand continues to grow – and anecdotal evidence suggests that this is receiving a further boost as Chinese investors turn back to gold following a huge crash on the overbought Chinese stock markets.

There has thus been a huge demand for gold in China over the past three years in particular.  (See the chart below of weekly SGE withdrawals since 2010 from www.bullionstar.com website’s long term SGE gold withdrawals chart).  2013 was a record year for SGE trade and 2014 only a little smaller, and given that H2 SGE withdrawals tend to exceed the H1 figures in total, we could well be heading for a substantial new annual record, confirming the overall upwards trend.

bstar weekly

Koos Jansen, in his latest bullionstar.com blog, expresses considerable surprise that global financial turmoil, as overtly expressed by the ongoing Greek tragedy and the Chinese stock market collapse, and uncertainty on western markets too, has not led to a gold price surge.  “This smells like market rigging.” he writes. ”Surely the last thing the authorities need at this moment is gold on the move. Various media and bullion dealers report demand for physical gold in Europe is strong.”  Add to this something of a resurgence in demand from the world’s other massive gold consumer – India – and an apparent recovery in demand for gold and silver bullion coins in the U.S. and Europe alongside the Chinese demand noted above and indeed it is surprising that gold has been falling regardless.

 

As usual the media puts this down to the prospect of the U.S. Fed raising interest rates sooner rather than later, but by now this prospect should have been taken into account anyway in gold pricing given that the Fed will only implement a very cautious policy and, at least initially, rates are likely to remain effectively negative after any initial rises.  As we have said before there appears to be a concerted campaign to play down gold’s potential as a significantly rising gold price would indicate a loss in confidence in global fiat currencies, and governments and central banks can’t afford for this to happen and will doubtless continue to brief against it.

Chinese middle classes’ faith in gold being restored

Julian Phillips’  take on the drivers of the gold market ahead of the major US holiday.

New York closed at $1,165.60 down $2.90. Asia and London took it back up to $1,169.50. The dollar was 0.60 of a cent weaker at $1.1054 and the dollar Index was lower at 95.93 down from 96.37.  The LBMA gold price was set this morning at $1,168.25 up $3.95. The euro equivalent was €1,052.67 up €1.67 Ahead of New York’s opening, gold was trading in London at $1,168.60 and in the euro at €1,053.03.

The silver price fell to $15.65 up 6 cent in New York. Ahead of New York’s opening it was trading at $15.67.

Unbelievably the I.M.F. has put its foot in it! The report just issued clarifies that Greece needs to be given 40 yrs to repay its debt and needs lower interest rates and for a portion at least of its debt to be written off if it is to return to growth. Even then it will still have debt to GDP of 150%. For those Greeks who understand this, a No! vote to the past offer from the E.U. seems necessary to get the better deal one like that of the IMF’. So the story still has a long way to go. Nevertheless, the markets may react to the vote if a No! rules the day.

What is of greater importance to the gold and silver price is the behavior of the Chinese equity markets. After the hype that money may be finding its way from gold into the equity markets, that money is leaving the market in droves. The Chinese have always been gamblers and seem to have changed the equity market into a casino. The new rich middle classes are seeing a reinforcement of their faith in gold in a year that may see imports of gold higher than in 2013, their record year. As Chinese middle classes grow continuously, a good portion of their savings [and the Chinese are great savers] finds its way into gold. At some point, that demand will reach a level where it does spill over directly into London and New York and impacts the current low prices.

In India where the monsoons are now generous, there remains two months before their ‘gold seasons’ begin again.

Meanwhile, the gold price is bumping along on the bottom at the mercy of U.S. dealers and speculators. Yesterday the data on employment and on jobs was disappointing so they stepped back, at which point the gold price rose slightly.

On Thursday there were sales of 1.789 tonnes  of gold from the SPDR gold ETF and 0.39 of a tonne from the Gold Trust.  The holdings of the SPDR gold ETF are at 709.65 tonnes and at 167.40 tonnes in the Gold Trust.

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

 

Hong Kong to China gold trade and demand – the facts

This article was originally offered to Mineweb, but Mineweb has now asked me to cut back on gold and silver related commentary-type articles as not fitting in with the direction on which they want to take the site.  Consequently it has now already been published on sharpspixley.com  and as yet where my future precious metals commentary articles will be published, apart from here on lawrieongold.com, remains undecided.

Lawrie Williams

A great chart showing the big anomaly between Hong Kong gold exports to mainland China and SGE gold withdrawals raises further questions on media coverage on the significance of Hong Kong to China gold export figures.

We have mentioned before the considerable emphasis the global mainstream media has placed on Hong Kong gold exports to China as being indicative of the level of overall Chinese gold demand, while we have long averred that this is no longer the case with a large proportion of imported gold now going directly to China’s Shanghai Gold Exchange (SGE) through which it must pass, being delivered to other Chinese ports of entry.  We have been assuming that around 40% or more of Chinese gold imports have been coming in directly rather than via Hong Kong which means that Hong Kong can no longer be considered a proxy for overall Chinese gold imports.

But looking at the latest chart from Nick Lynn’s www.sharelynx.com website, published below, it appears we have maybe significantly underestimating the true level of gold imports directly into mainland China and bypassing Hong Kong altogether – at least calculated in terms of deliveries via Hong Kong and actual SGE gold withdrawals:

chk

Chart courtesy of sharelynx.com and goldchartsrus.com

As can be seen from the chart, for a considerable period now, SGE gold withdrawals have exceeded gold imports via Hong Kong by a very substantial amount – an amount which has fallen off dramatically since China loosened its import restrictions on gold coming in directly to mainland China ports of entry.  However it should be recognised that a significant part of the difference (just under 40 tonnes a month relates to gold production from China itself, which also passes through the SGE) but even taking this into account it definitely looks as though the proportion of gold coming in directly to the Chinese mainland continues to rise despite fluctuations in the amounts coming in via Hong Kong.  On the latest available figures, if we take the difference between imports from Hong Kong and SGE withdrawals, there is a shortfall of 123 tonnes.  If we subtract 40 tonnes of Chinese production from this, the discrepancy is still 83 tonnes suggesting 47% of the gold withdrawn from the SGE is coming in to China directly.

The Sharelynx chart also shows that so far this year this kind of percentage difference between Hong Kong gold exports to China and SGE withdrawals has been fairly consistent at the 40% or above level.

Now there is wriggle room in these statistical comparisons.  Chinese gold production tends to be lower at the beginning of the year than later on so the differences may well be even larger in Q1 and Q2 – while there may well additional stockpiled gold available within the SGE which  enables it to fill the currently high-for-the-time-of-year withdrawals even when inward gold flows may be lower than actual demand.  Nevertheless the figures are yet a further strong indicator that Hong Kong gold exports to the mainland are no longer a proxy for overall Chinese gold consumption.

Concerning the impact on the overall gold price, and thus on gold and gold stock investment, while total levels of Chinese imports in terms of physical gold flows from West to East should perhaps have an impact on the gold price, it is patently obvious that this can only be happening to a very limited extent, if at all.  Gold prices are still being set in New York and London regardless of the overall level of Eastern demand – See: Gold: The US sets the price but Asia does the buying.  This anomaly can only continue for so long (but this remains an indeterminate timescale), but with continuing Chinese moves to take part in the gold price setting process, the day when gold price control shifts to the East has to be drawing closer.  But whether Asian gold price control will be any more benign for the gold and gold stock investor remains to be seen!

Gold for the long haul – Now is the time!

Lawrie Williams

Gold should be part of every investor’s portfolio to protect against the host of geopolitical disaster scenarios that are looming on the horizon.

“Over the long haul, gold is the least risky and potentially most rewarding of all investment asset classes.”  So says New York-based specialist gold analyst, Jeff Nichols, in his latest Nicholsongold newsletter.  Admittedly Nichols falls into the gold bull camp, but is at the realistic end of gold analysis, seeing both potential upsides and downsides ahead.  His latest article is headed Gold: Now is the time, and in it he lays out the various factors which he sees as having the potential to drive the gold price in the medium to long term – and as noted in the first sentence of this article he sees a reasonable investment in physical gold (not gold derivatives) – perhaps 5% – 10% of an investment portfolio – as key to protecting one’s assets over time.

So what factors does he point to as being the likely positive points for investment in gold?  In truth he is primarily stating the obvious here, but it’s an ‘obvious’ which is often ignored by mainstream investors who seek more rapid returns than gold tends to offer.  But rapid returns are themselves risky – it’s all very well chasing the stock markets upwards but as investors have found to their cost, bull markets tend to be followed by a crash and investors are notoriously bad at recognising when a crash begins and by the time they try to take their profits it is usually too late.

But some of the factors which could very easily come into play could have both an adverse impact on the general stock markets and a positive impact on gold.

Primarily there are a significant geopolitical tensions which could easily escalate into something which is far more threatening.  Americans in particular tend to see these geopolitical risks as all being far away geographically and not having an impact on their domestic security – and it is America which is currently controlling the gold price, although with China exerting more and more influence on gold as time progresses this could well change.  While it might suit China to see the gold price stay at or around current levels as it, as most now believe, is building its own gold reserves on the cheap, it, and its citizens, now have such a vested interest in gold that it is unlikely to let the price drop much, if at all, below its current trading range.  We do seem to have been seeing a pattern here – the U.S. market appears to be intervening to prevent the gold price moving above the $1220 level, while Asian buying seems to be preventing it falling below $1180 with the $1200 mark being something of a happy medium.

But let’s look specifically at the geopolitical tensions. Most of which could have a strong impact on the global economy – and in this modern day and age the U.S. economic system cannot be immune to be being severely damaged by major economic difficulties in other parts of the world.

The Greek crisis continues to play out with neither side apparently willing to give ground.  The country’s Syriza political party, currently in government, came to office on a pledge to end ‘austerity’ – the current dirty word in European politics.  It can’t afford to back down on this and retain any domestic credibility.  Meanwhile the European Central Bank and the IMF are also unwilling to give ground on mitigating Greek debt and while the number of occasions Greece has appeared to be on the abyss of default are seemingly legion, this time around it cannot avoid this unless one side or the other gives up substantial ground.  Now maybe some kind of compromise will be reached – the economic aftermath of a Greek default could be devastating for some of the European banks which would likely have even more of an impact than the 2008 Lehmann Brothers collapse which precipitated the Global Financial Crisis of that year.  The U.S. markets would not be immune and could crash again accordingly – and the European markets even more so.  This next phase will play out this month.  We shall have to wait and see what materialises.

ISIS/ISIL continues to gain ground in the Middle East major oil producing region with huge swathes of Syria and Iraq falling under its draconian fundamentalist Islamic control.  This is potentially an enormously destabilising influence across the whole of the Middle East and parts of North Africa, and could spread much further afield into other Islamic religion-dominated areas in Asia and Eastern Europe.  While westerners cannot understand the appeal of a fundamentalist Islamic state and ‘jihad’, the principle obviously has a huge impact on religiously manipulated young Moslems in many other countries who may feel disenfranchised by their current domestic political systems.  9/11 demonstrated that even the U.S. is not completely immune to potentially economically destabilising terrorist attacks.

Ukraine continues to simmer.  Russia will not give Crimea back and will also probably not let the ethnic Russians in the country’s east be subsumed by what it sees as a fascist Ukraine  government intent on linking with Europe and wanting NATO to come in and ‘protect’ it.  Sanctions imposed on Russia seem to be hurting the Europeans at the sharp end as much as Russia itself, if not more so, while President Putin is increasing his trade links with former Soviet Union independent nations and with China forming an enormous economic bloc to rival U.S. global economic hegemony.  This may also lead to a major economic conflict which could strongly impact the currently U.S.-dominated global financial system.

And last, but certainly not least, is the overall role of China which is keen to take what it sees as its rightful place in the global economic hierarchy – a process which it feels the U.S. is trying to block through its effective voting domination of the IMF.  With its enormous foreign exchange reserves mostly held in U.S. treasuries, China is in a position to seriously damage the U.S. financial system should it wish to do so.  It is believed to be building huge gold reserves and taking moves to dominate global gold trading and pricing.  With gold price strength being seen as U.S. dollar weakness the Chinese could have another economic weapon to hand.  It might be wise for the U.S. not to tweak the dragon’s tail any further – and the possible South China Sea interventions by the U.S. might be seen as a step too far by the Chinese which see what happens there as none of America’s business.

Nichols does, however, point out in his article that any of these factors, and probably some other black swans out there, could initially trigger a swift tumble not only in equities, but also in the price of gold itself as some retail and institutional investors have to raise cash to cover losses in equity and other financial markets. We saw this in the 2008 financial crash, but gold was quickest to recover of all asset classes.   But Nichols goes on to say that any such retreat in the metal’s price should be seen as an opportunity for savvy investors to acquire more gold at bargain prices.

 

Gold pricing power will fall firmly into hands of the Chinese

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The New London Gold Fixing

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

The Heart of the Gold Price – The “Fix”

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

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

London – the Heart of the Gold Market

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

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

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

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

The rise of the Emerging World

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

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

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

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

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

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

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

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

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

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

Yuan Gold Fix this Year

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

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

Sensationalist headlines

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

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

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

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

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

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

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

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

Mind blowing stats: China consuming more gold than world producing

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

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

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

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

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

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

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

Can’t Keep Gold Down

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

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

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

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

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

Chinese and Indian Growth Has Spurred Gold Market
click to enlarge

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

New Visa Policy Promises Increased Chinese Tourism

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

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

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

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

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

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

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

Is China hiding central bank gold in commercial banks?

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

Excerpt from the Mineweb article:

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

To read full article on Mineweb, click on this link