Hong Kong an also-ran in latest Swiss gold export figures

Another of my articles on Sharpspixley.com emphasising the reduction in importance of Hong Kong as a conduit for gold flows into mainland China.  The latest gold export figures from Switzerland demonstrate this well.  For many year gold flows through Hong Kong were considered a proxy for those into China at which time ups and downs in the Hong Kong figures were indeed significant – but the Territory has for several years now been of diminishing importance in this respect but still some of the media considers them as the proxy for ups and downs in Chinese demand.  Such articles should thus be ignored as not presenting the true picture.

An excerpt from my Sharps Pixley article follows – and a link to the full article is available by clicking here:

Perhaps then biggest surprise was the enormous fall in gold exports to Hong Kong in the Ausuts Swiss gold export figures. The Chinese semi-autonomous administrative state imported only 3.4 tonnes of gold from Switzerland in August demonstrating in no uncertain terms that the Territory is being sidelined as an import routing for mainland Chinese gold imports in favour of mainland ports of entry like Beijing and Shanghai. Hong Kong gold imports can definitely no longer be considered a proxy for Chinese gold demand as we have been saying for some time, although global media still gives undue importance to the level of Hong Kong gold imports and to the Territory’s exposts to the Chinese mainland.

Mainland China was again the biggest recipient of Swiss gold in August at 45.2 tonnes, closely followed by India with 40 tonnes (see chart from Nick Laird’s www.goldchartsrus.com website below.), suggesting that gold demand in the two biggest gold consumers is holding up reasonably well, but perhaps the biggest surprises were the big rise in Swiss gold exports to Singapore (12.6 tonnes) and even more so Thailand (21.6 tonnes). Interestingly Turkey apparently imported no gold at all from Switzerland in August, but actually exported 12.8 tonnes to the small European nation at the centre of the global gold refining trade.

As usual, the Swiss figures show an ever-continuing flow of gold from West to East with Asia and the Middle East accounting for over 88% of the total export figures…..

To read the rest of the article and view a graphic of the latest country-by-country Swiss gold exports please click on this link

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Paranoid Americans may stymie some positive Trump policies

Donald Trump, assuming all is well, will receive the keys to the White House in a little under three weeks’ time and thereafter could change the face of US politics.  Some of his announced policies during the Presidential Election hustings, fill this distant observer with dread, and The Donald’s historical indiscretions and financial dealings may well come around to bite him in the bum and even put his likelihood of completing a full term in jeopardy, although if this is the case he would probably have to be forced out of office – his huge ego would likely prevent him from resigning.  What odds on a President Pence ahead?

However, among his proposals for revival of the US economy and in realigning some aspects of US foreign policy there are, in the writer’s opinion both positives and negatives, but what are the chances of some of what I see as positives being allowed to proceed by a Congress which may be opposed to some of them in principle – be they Democrat or Republican?

Principal among these Trump flagged intentions is a rapprochement with President Putin and Russia, whether or not there was Russian involvement in the hacking into Democratic National Committee emails.  Julian Assange, whose Wikileaks organisation publicised the emails, and certainly no fan of the US Administration, has denied Russian involvement and the President Obama accusation that President Putin may have been directly involved in authorising the alleged hacking smacks of opportunistic posturing by a Democratic President whose party had just lost the Presidential election to a candidate who was anathema to half the American population – and to much of the Western World as well.

Both Russia and the USA have a paranoid streak when it comes to the other stemming from many years of mutual distrust.  What might be considered as legitimate by the one may be seen as a major threat by the other and nowhere is this more apparent than in Eastern Europe.  Russia’s annexation of Crimea with its dominant ethnic Russian population is a case in point.  Given that Russia had, by agreement, based its Black Sea naval fleet there meant Crimea was of major strategic interest to Russia and the changes in the Ukraine Government resulting in the ousting of President Yanukovyc, which seemingly were orchestrated by the US, had put this at risk.  The threat of NATO expansion into the Ukraine will have contributed to Russian paranoia over the military threat this posed given NATO had already moved forces into other areas which had previously been part of the Former Soviet Union, contrary to what Russia believed were promises by NATO not to expand into these territories.

The Crimea move brought US and European sanctions against Russia into play, damaging the latter’s economy, although this has made something of a recovery as European trade has been partly, at least, replaced by building additional Asian trade ties.  Indeed the sanctions have probably been more economically damaging to Europe than to Russia.  But the sanctions are set to persist until Crimea is returned to Ukraine – a highly unlikely outcome given it would hugely undermine President Putin’s credibility.

The paranoia is not just one sided though.  The US population has a hugely paranoid streak when it comes to any individuals or regimes seen as acting in contrast to what are seen as the US’s best interests.  This is aided by national media which are largely little more than propaganda outlets for the Administration – not that this is any different in Russia, or in most other countries for that matter. This was brought home to me by US attitudes to Al Jazeera, which is a pretty independent Middle Eastern-based TV news station which is in general an accurate reporter of Middle Eastern and World Affairs.  Al Jazeera was demonised by the US Administration and media over its Gulf War reporting – not because it was inaccurate, but because it did not necessarily follow the US propaganda line over what was actually happening on the ground.  To this day the majority of Americans still seem to believe that Al Jazeera is totally anti-American.  Indeed, if asked, many Americans who have never watched Al Jazeera probably think of it as a propaganda outlet for Islamic State, which it patently is not.

And so it is with Russia, as it was with Communism with which Russia is still equated in the USA.  (This spills over into Cuba too – it will be interesting to see how Trump resolves all this – he seems to be pro-Russia and anti-Cuba).  The Russian/Communism paranoia probably has its roots in the McCarthyism era of the 1950s – described by Wikipedia as “the practice of making accusations of subversion or treason without proper regard for evidence” – in which many prominent Americans were unjustly branded as having Communist leanings and suffered loss of employment and/or destruction of their careers; some even suffered imprisonment. Most of these punishments came about through trial verdicts later overturned.

Thus Russia becomes a convenient scapegoat for perpetrating anything that might be considered anti-American – like hacking into the DNC emails – even though it is probably seen as perfectly legitimate for American agencies  to undertake similar practices and try to help promote regime change in countries where policies are seen as running counter to American interests.  We live in an era of government spin and as one gets older one becomes more and more sceptical about what our own governments and media are telling us.

But back to American paranoia.  Trump’s avowed policies of getting closer to President Putin – in a similar manner to President Reagan with President Gorbachev – in our view could go a long way towards defusing global tensions.  It could certainly help bring an end to the Syrian conflict, although that could also align the US with Iran and Hezbollah, as well as President Assad,  which would be a decidedly uncomfortable relationship.  However with many in the US Congress, on both sides of the political divide, having been imbued almost since birth with anti-Russian feelings, they may well seek to block any closer relationship with President Putin’s Russia.

What of Trump’s other flagged policies?  Some will undoubtedly fall by the wayside anyway.  Certainly getting Mexico to pay for the much vaunted border ‘wall’ seems unlikely to see the light of day.  The massive proposed infrastructure building programme cannot be an immediate fix and may be fraught with difficulties anyway and we suspect that delays in implementing this will have an adverse effect on equities markets.  Tax cuts would be popular, but again may be easier in theory than in practice as so often these are perceived to benefit the ‘already-haves’ more than the ‘have-nots’.

On other foreign policies a confrontation with China may well not be in American interests, although Trump seems determined to venture down this path.  A potential military confrontation in the South China Sea seems to run counter to suggestions that the US may refrain from intervention by force in the affairs of other nations – policies which have cost America dear and cost the countries in which it has been militarily involved even more dearly in terms of infrastructure destruction and huge losses of life.

Some kinds of economic moves against the Middle Kingdom and against US  companies which have set up manufacturing outlets there, and elsewhere to take advantage of lower wages, look to be on the cards.  These could be counter-productive in that China, in particular, may just use that as an excuse to take over these manufacturing plants and produce competitive products at even lower prices.

Trump’s policies on Taiwan could also have a major negative effect in terms of confrontation with China, but here again US Congress may prefer to retain the status quo, although Trump’s unpredictability will raise doubts as to whether he’d pay heed.

Unpredicatbility may well be the key take-away from a Trump Presidency.  In theory, altyhoughh not always in practice, safe haven assets thrive on unpredictabily.  The No.1 sahe haven asset has been the US dollar but this could well suffer if Trump’s policies don’t set the American economy back on the upwards track.  Indeed we believe the dollar could be heading for something of a fall as early as by the summer if Trump’s policies don’t have an immediate positive effect on equities and the US economy and a falling dollar will likely mean a rising gold price (in US dollar terms at least) and a rising gold price could well lead to an even more rapidly rising silver price, with the even better beneficiaries being gold stocks and silver stocks .  Our thoughts on this scenario are laid out in an article on Seeking Alpha- 2017 Predictions – Gold, Silver, PGMs, The Dollar,  Markets and Geopolitics.  Do read and draw your own conclusions!

Gold back on the Fed Grindstone

Edited version of another of my articles published on the Sharps Pixley website.  To read original click here

Gold followers will hardly be unaware that every time a Fed Open Market Committee Meeting draws near the gold price moves, often  quite sharply, on the will she, won’t she prospect of Janet Yellen announcing that at long last the Fed will start to raise interest rates again.  Now we are coming up to the December FOMC meeting – a full year after the last Fed rate rise.  Well the meeting is due to take place on December 13thand 14th and perhaps there is actually a realistic likelihood that indeed on this occasion it will be a case of ‘she will’.

So the gold price has been moving accordingly, but perhaps not quite in such a volatile manner as on previous occasions when the likelihood of a Fed rate raising decision was rather more uncertain.  During European and North American trading the futures markets have managed to control it in the $1,170s and $1,180s for the most part, with a so far brief foray into the $1.160s but any moves to the higher levels seem to be swiftly capped and brought back down again.  There does seem to have been something of a plethora of adverse gold price comment being released at present and when this has happened in the past it has sometimes been associated with a significant price takedown.  It remains to be seen whether this is a portent of yet another instance of such.

The anomaly here appears to be the Shanghai Gold Exchange Benchmark Pricing which seems to be coming in at levels above $1,200 two or three times this week so far, although these higher levels don’t seem to appear in the Kitco gold price charts.  We do know that Chinese gold prices are running higher at the moment and carrying the highest price premiums over London and New York prices seen for some time.  Some put this down to reports that the Chinese Government is already restricting, or is planning to restrict, the number of gold import licences.  This has been running in parallel to rumours that India, the other major global importer of gold, is planning to ban gold imports altogether, although one suspects that if this were to happen the amount of gold smuggled into the country would soar.  The caution here though is that when Chinese and Indian demand was just about at its strongest back in 2012, the gold price tanked due to heavy withdrawals out of the big gold ETFs and we have again been seeing some major outflows from GLD in particular.

The other reason for the Chinese high premiums – reportedly approaching $30 an ounce on some days – is that traditionally this is the time of year for Chinese fabricators and gold retail outlets to stock up ahead of the Lunar New Year festivities which can create temporary gold shortages, particularly in a year when gold imports have been running at a lower level.  In 2017 the Chinese New Year falls on January 28th, followed by a full week of holidays (The Spring Festival Golden Week) and gold has always played a hugely significant part in gift giving over the period.

It should be noted, though, in respect of something of an anti-gold media campaign that reports are surfacing that a number of major bank analysts are now seeing a period of substantial gold price weakness ahead coupled with the Fed rate rise decision. and more  Whether these analysts should be given any credence or not given most analysts were predicting that a Donald Trump victory in the U.S. Presidential election would see gold surge and the stock market crash, is a moot point.

Perhaps before drawing any conclusions one should wait for the results of this weekend’s Italian constitutional referendum.  A defeat for the Renzi  Government position,  which the opinion polls are suggesting, given the set anti-euro positions of the opposition could put the EU in turmoil again, which could give the gold price a welcome boost.  But then, after the Brexit vote and the U.S. Presidential election result, who believes the opinion polls any more?

In the context of a Fed rate increase those with only a short memory may also recall that after the last rate increase a year ago, gold fell back just a little, and briefly, in a knee-jerk reaction and then set off on a six month bull run!

The past year has seen a number of major destabilising events occurring (the Brexit vote, Trump victory and Indian banknote cancellation fiasco all within the past few months) and with the Italian referendum perhaps adding another.  In the long term such uncertainties have to be gold positive, but  there could well be some negatives in the interim and perhaps the first will be the actuality of a Fed rate increase.  Prepare for a bumpy ride.Gold

China – still the heavy metal, gold and silver rock star

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

FH1

I want to begin with a quote from a recent Cornerstone Macro report that succinctly summarizes the research firm’s view on growth prospects in emerging markets, China specifically. Emphasis is my own:

Our most out-of-consensus call this year is the belief that China, and by extension many emerging markets, will see a cyclical recovery in 2016. We understand the bearish case for emerging markets on a multiyear basis quite well, but we also recognize that in a given year, any stock, sector or region can have a cyclical rebound if the conditions are right. In fact, we’ve already seen leading indicators of economic activity and earnings perk up in 2016 as PMIs have rebounded in many areas of the world. That is all it takes for markets, from equities to CDS, to respond more favorably as overly pessimistic views get rerated. And like in most cyclical recoveries that take place in a regime of structural headwinds, we don’t expect it to last beyond a few quarters.

There’s a lot to unpack here, but I’ll say upfront that Cornerstone’s analysis is directly in line with our own, especially where the purchasing managers’ index (PMI) is concerned. China’s March PMI reading, at 49.7, was not only at its highest since February 2015 but it also crossed above its three-month moving average—a clear bullish signal, as I explained in-depth in January.

I spend a lot of time talking about the PMI as a forward-looking indicator of commodity prices and economic activity. As money managers, we find it to be far superior to GDP in forecasting market conditions three and six months out. In the past I’ve likened it to the high beams on your car.

FH2

We were one of the earliest shops to make the connection between PMIs and future conditions, and we continue to be validated. Just last week, J.P.Morgan admitted in its morning note that “stocks are taking their cues from the monthly PMIs,” the manufacturing surveys in particular, as opposed to GDP.

We eagerly await China’s April PMI reading and are optimistic that this cyclical recovery has legs.

Cornerstone’s outlook is supported by a recent study conducted by CLSA, which found that 73 percent of “Mr. and Mrs. China” expect to be better off three years from now, while only 3 percent expect to be worse off:

Optimism is strongest among those in higher-tier cities, reflecting the disparity in economic vibrancy across tiers: as many as 80 percent of families in first-tier cities have optimistic outlook. The figure is lower, albeit still strong, at 68 percent among families in the third tier.

More than half of those surveyed said they expected to be driving a nicer car and living in a bigger home in the next few years, which is a boon for materials and metals such as platinum and palladium, used in catalytic converters.

As a reflection of growing demand for new homes, house prices in China are climbing right now in first-tier and, to a lesser extent, lower-tier cities, a sign that more and more citizens are seeking the “Chinese dream.”

FH3

China’s Insatiable Appetite for Metals

China’s appetite for metals—gold, silver, copper, iron ore and more—is growing, another sign that the Asian giant is in turnaround mode.

China is the world’s largest importer, consumer and producer of gold. Last year, physical delivery from the Shanghai Gold Exchange (SGE) reached a record number of tonnes, more than 90 percent of total global output for 2015. Meanwhile, the People’s Bank of China continues to add to its reserves nearly every month and is now the sixth largest holder of gold—the fifth largest if we don’t include the International Monetary Fund (IMF). As of this month, the bank holds 1,788 tonnes (63 million ounces) of the yellow metal, which amounts to only 2.2 percent of its total foreign reserves, according to calculations by the World Gold Council.

Now, in a move that’s sure to boost China’s financial clout in global financial markets even more, the country just introduced a new fix price for gold, one that is denominated in Chinese renminbi (also known as the yuan).

Gold is currently priced in U.S. dollars. That’s been the case for a century. But since gold demand has been shifting from West to East, China has desired a larger role in pricing the metal. The Shanghai fix price is designed with that goal in mind.

It’s unlikely that Shanghai will usurp New York and London prices any time soon, but over time it will allow China to exert greater control over the price of the commodity it consumes in vaster quantities than any other country.

China’s gold consumption isn’t the only thing turning heads. I shared with you last week that the country imported 39 percent more copper in March than in the same month last year. (Shipments also rose 18.7 percent in renminbi terms in March year-over-year.)

The heightened copper demand has fueled renewed optimisim in the red metal. Prices are up 6 percent month-to-date.

FH4

Caixin reports that China’s iron ore imports are surging on lower prices. In the first two months of 2016, the country purchased 86 percent more iron than it needs. What’s more, total imports were up 84 percent from the same time last year.

Steel production, which requires iron ore, is likewise ramping up.  Output is currently at 70.65 million tonnes, an increase of nearly 3 percent year-over-year.

FH5

For reasons unknown, China has also been growing its silver inventories pretty substantially for the past six months, according to an article shared on Zero Hedge. This month, as of April 19, the Shanghai Futures Exchange added a massive 1,706 tonnes, which is a 452 percent increase from the amount it added in April 2015. Shanghai silver inventories are now at their highest level ever.

FH6

Though unconfirmed, it’s possible this silver will eventually be used in the production of solar panels, every one of which uses between 15 and 20 grams of the white metal. China is already the world’s largest market for solar energy—it surpassed Germany at the end of last year—with 43.2 gigawatts (GW) of capacity. (By comparison, the U.S. currently has 27.8 GW.) But get this: It plans on adding an additional 143 GW by 2020, which will require a biblical amount of silver.

Not to be outdone, India also plans significant expansion to its solar capacity, with a goal of 100 GW by 2022, according to the Indian government.

Metals Still Have Room to Rock

We know that money supply growth can lead to a rise in commodity prices. Note that Chinese money supply peaked in 2010 and has since fallen, along with commodity prices.

FH7

New bank loans in China have spiked dramatically this year while money supply has grown more than 13 percent year-over-year, which is good for metals and manufacturing.

The increase in metals demand, not to mention the weakening of the U.S. dollar, has allowed silver to become the top performing commodity of 2016 after overtaking gold.

FH8

Despite the rally, gold doesn’t appear to be overbought at this point, based on an oscillator of the last 10 years. We use the 20-day oscillator to gauge an asset’s short-term sentiment. When the reading crosses above two standard deviations, it’s usually considered time to sell. Conversely, when it crosses below negative two standard deviations, it might be a good idea to buy.

Silver is currently sitting at 1.2 standard deviations, suggesting a minor correction at this point would be normal.

FH9

Time to Take Profits in Oil?

The same could be said about Brent oil, which has returned 61 percent since hitting a recent low of $27.88 per barrel in January. This has driven up the Russian ruble and energy stocks. (We’ve recently shown the correlation between world currenices and commodities.)

The rally has been so strong over the past three months that it’s signaling an opportunity to take profits or wait for a correction. Based on the 20-day oscillator, Brent’s up 1.3 standard deviations, which suggests a correction over the next three months.

FH10

Oil has historically bottomed in January/February. The rally this year has not disappointed. Further, it has helped many domestic banks that have been big lenders to the energy sector. High(er) oil prices translate into stronger cash flows for loans.

China’s annual gold production falls for first time in years

According to figures released by the China Gold Association (CGA), China’s annual gold output fell, albeit by a paltry 0.4%. in 2015, down to a still comfortably world leading 450.05 tonnes.  While the actual amount of the fall is insignificant, the fact that it has declined at all, is not so. Over the past 10 years China’s gold output has been growing at an average annual rate of around 11% bringing it far and away to being the world’s top gold mining nation – producing 1.6 times more gold than the world’s second and third largest gold miners – Australia and Russia, and more than double that of No.4, the USA – See: World’s Top 10 Gold Mining Nations and Peak Gold for consultancy GFMS’s most recent report on production from the world’s top 10 global gold mining nations – which incidentally had suggested that China’s gold output rose last year, but as we pointed out these figures were only estimates.  One would hope that the latest CGA figure is definitive.

The CGA also reckoned that Chinese gold ‘consumption’ last year ‘rose’ 3.7% to 985 tonnes.  However the CGA apparently subscribes to the World Gold Council’s ‘consumption estimates’ (there is an association between the CGA and the WGC). which we reckon hugely underplays the amounts of gold flowing into China by ignoring gold held by the Chinese commercial banks (See: How does one calculate the huge gold flows into China now SGE no longer publishing withdrawal data).  Known imports of gold into China last year were very significantly higher than the CGA figures for ‘consumption’, and to which has to be added the aforementioned mined gold output, plus scrap.  Such gold absorption by China would thus be comfortably more than double the CGA’s ‘consumption’ estimate.  Be this as it may, the CGA does say that it expects Chinese gold demand to keep on growing in the years ahead along with the growth in the Chinese middle classes with their buying power.  (Latest estimates put the numbers of Chinese with middle class status now exceeding the number of U.S. middle class citizens and continuing to grow with China’s GDP.  Don’t be fooled into believing that China is in recession.  Even though there are doubts expressed about the actual level of GDP growth, it IS still growing, and at a faster rate than western economies.)

What this means, if the Chinese gold production decline continues, is that its citizenry will need to replace the shortfall in China’s own gold output by buying more from outside.  Thus higher import levels (We have already seen a big surge in gold imports from Hong Kong in December). This can only exacerbate the ever continuing gold flows from West to East.  This physical gold has to come from somewhere – or will lead to substantially higher gold prices which could even overcome the COMEX futures market pricing based on paper gold transactions.  How long this will take is anyone’s guess, but the day must be drawing closer.

See also: China gold output falters for first time in around 20 years on sharpspixley.com

Gold and Silver both showing ‘Desire to Rise’

The New York gold price closed Tuesday at $1,087.20 down $2. In Asia on Wednesday, it was lifted to over $1,094 before London opened and then was set by the LBMA at $1,093.20 up from $1,087.00 with the dollar index lower at 99.03 down from 99.21 on Tuesday. The euro was up at $1.0906 from $1.0867 against the dollar. The gold price in the euro was set at €1,002.38 up from €1,000.28. Ahead of New York’s opening, the gold price was trading at $1,095.15 and in the euro at €1,004.17 moving up nicely towards the $1100 level again.  

The silver price in New York closed at $14.03 up 3 cents at Tuesday’s close.  Ahead of New York’s opening on Monday, the silver price stood at $14.10.

Price Drivers

Yesterday, just ahead of the opening in New York there was an attempt to take gold’s delicate market balance and push gold prices down heavily through to $1,083, but over the day the gold price floated higher ending the day at $1,087.20, the same as it was when the day began. With Asia taking it over $1,090 this morning, the battle over the price in the last day was won by the bulls, perhaps indicating the way forward for the rest of the week. While we expected a strong move either way yesterday, the attempt to break the gold price down was foiled, but with an indication that the gold price would prefer to rise?

Tuesday saw no purchases or sales from either the SPDR gold ETF or the Gold Trust. The holdings of the SPDR gold ETF are now at 657.924 tonnes and at 161.46 tonnes in the Gold Trust.  This showed that the attempt to push gold down again had no physical substance so could not hold prices down.

With China now moving to play such an important role in the future of the gold market and its price, its moves to tighten ties with the Middle East and particularly Saudi Arabia [its largest oil supplier] and other Middle Eastern nations comes under the spotlight. Saudi Arabia has signed important developments contracts with China yesterday, leaving the U.S. out of these particular contracts. Is the hold over Saudi Arabia [and Iran] by the U.S. weakening? China may well do the same with Iran?

The advantage to them of China is that China stays away from politics, leaving them to do their own thing. At the heart of concern over such moves is the use of the dollar in oil transactions. China may be paying in dollars, now, but undoubtedly, will also offer Yuan, eventually. This will directly affect the dollar on foreign exchanges and by extension, the gold price. This could become China’s choice adding to China’s hold over the dollar on foreign exchanges?

The same desire to rise is found in the silver market, which ignored gold’s small fall yesterday before its recovery. Just as with gold, the same conditions apply to the silver price, which as always, will be sure to go. –

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

Update with chart: Gold taken out of China’s SGE to top previous record by huge 400 tonnes.

The following is an edited version of an article I’ve written for sharpspixley.com – and was posted on that site on Friday, entitled: CHINA: SGE Gold withdrawals head for huge new record year.  This year’s withdrawal figures passed the 2013 full year record a months ago already and at the current rate will exceed the previous record figure by around 400 tonnes by the year end – although there’s a chance the figure could be higher still as withdrawals tend to rise as we get closer to the Chinese New Year, which falls on February 8th in 2016.

The big growth in SGE withdrawals this year is demonstrated  by the chart below from Nick Laird’s www.sharelynx.com website  which shows total withdrawals at the same time for the past seven years.  As can be seen gold taken out from the Shanghai exchange have been growing strongly year by year apart from a blip in 2014.    This year’s figure for week 47 is thus a massive 538 tonnes higher than at the same time last year and 382 tonnes higher than in the previous record 2013 year.  As can be seen from the chart the growth in withdrawals accelerated hugely in 2013 compared with previous years – a trend which has continued pretty well since.

sge 47

The Sharps Pixley article notes that although Shanghai Gold Exchange (SGE) weekly withdrawal figures seem to have fallen back a little from their heady July/August/September heights, when at times over 70 tonnes of physical gold were taken out of the Exchange’s vaults in a single week, this year’s total is still heading for a huge new record high.  Total withdrawals so far this year to the end of last week (Dec 4th – the SGE reports withdrawals a week in arrears) have amounted to just under 2,405 tonnes after a figure of 42.6 tonnes in the latest reported week.  The record full year withdrawals figure was back in 2013 when 2,181 tonnes were withdrawn – a figure which was already surpassed several weeks ago and with virtually four weeks of withdrawals still to come this year the full year total looks to be heading for the high 2,500s.  For reference the full year SGE withdrawals figure in 2014 had fallen back somewhat to 2,102 tonnes – still comfortably the second highest year on record at the time.

It was also noted that SGE withdrawal figures do remain running well in excess of known Chinese gold imports plus domestic production so far this year (See: 2016 a crunch year for physical gold supply).  The linked article suggests total gold availability of only around 2,100 tonnes for the full year (which includes a perhaps conservative estimate of around 200 tonnes from scrap sources).  However China is extremely reticent about reporting all its import and gold supply figures, so it is conceivable the actual figure could well be higher still perhaps bringing it closer to the SGE withdrawals metric.

But be that as it may, and given the huge discrepancy between the SGE figures and those for Chinese domestic gold consumption from the major analytical consultancies, if one just looks at comparative SGE figures they will provide a great guide to the trend in Chinese domestic gold flows and consumption so these gold flows have thus been trending sharply higher this year.  With the Chinese economy continuing to expand, even though at a much slower pace than in previous years, it would not be unreasonable to assume Chinese gold demand will continue to grow alongside the nation’s GDP.  It will thus be interesting to see what next year brings.

As readers will know, China is going through a centrally planned restructuring of its economy which is moving away from being export and manufacturing driven to being domestic consumer and services oriented following a pattern much of the Western World took generations to accomplish, yet China is aiming to do this in a few short years.  It is proving to be a painful process, but perhaps not so much for the Chinese themselves, but more for those who had been relying on ever-growing Chinese manufacturing growth as their primary market for raw materials to fuel manufacturing growth.  Looking ahead China, having built new cities and a remarkable infrastructure, is well placed to build on these plans which will continue to see the domestic purchasing power of its people grow as more and more services type better paying jobs are created.  Antiquated manufacturing plants are being closed down, particularly in the ongoing drive to reduce pollution which will perhaps put China at the forefront of new technological development, further enhancing its global position.

China’s economic transformation – NOT an economic collapse

China’s Economy Is Undergoing a Huge Transformation That No One’s Talking About

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

The photo you see below was snapped recently in Beijing. It might not be that special to some readers, but in my 25 years of visiting the Chinese capital, I’ve never seen a blue sky because it’s always been blotted out by yellow smog. Beijing is clearly undergoing a massive transformation right now. This might please proponents of the green movement, but it’s ultimately harmful to the health of China’s manufacturing sector.

Blue skies ahead? A cyclist pedals through Tiananmen Squar in Beijing

On the other hand, blue skies could be ahead for China’s service industries.

Misconception and exaggeration are circling China’s economy right now like a flock of hungry buzzards. If you listen only to the popular media, you might believe that the Asian giant is teetering on the brink of economic disaster, with the Shanghai Composite Index’s recent correction and devaluation of the renminbi held up as “proof.”

Don’t get me wrong. These events are indeed significant and have real consequences. They also make for some great, sensational headlines, as I discussed earlier this month.

But what gets hardly any coverage is that China’s economy is not weakening so much as it’s changing, much like Beijing’s skies. Take a look at the following two charts, courtesy of BCA Research:

China's Economy is Shifting Away from Manufacturing More Towards Services
click to enlarge

You can see that the world’s second-largest economy has begun to shift away from manufacturing and more toward consumption and the service industries. While the country’s purchasing managers’ index (PMI) reading has been in contraction mode since March of this year, the service industries—which include financial services, insurance, entertainment, tourism and more—are ever-expanding. The problem is that the transformation has not been fast enough to offset the massive size of the manufacturing sector.

the Czech Republic's PMI came in at an impressive 57.50 in July up from 56.90 in June

Just as a refresher, the PMI is forward-looking and resets every 30 days. It helps investors manage expectations. Consider this: The best-performing country in our Emerging Europe Fund (EUROX) is the Czech Republic—which also happens to have one of the highest PMI readings. Coincidence?

In China, overseas travel, cinema box office revenue and ecommerce are all seeing “explosive growth,” according to BCA. The country’s once-struggling real estate market is also robust. The government just relaxed rules to permit more foreigners to purchase mainland property.

But you’d be hard-pressed to come across any of this constructive news because it’s not particularly good for ratings.

A recent Economist article makes this point very clear:

The property market matters far more for China’s economy than equities do. Housing and land account for the vast majority of collateral in the financial system and play a much bigger role in spurring on growth. Yet the barrage of bearish headlines about share prices has obscured news of a property rebound. House prices have perked up nationwide for three straight months. Two months after the stock market first crashed, this upturn continues.

“Commodity Imports Have Actually Been Quite Strong”

Again, China’s transformation from a manufacturing-based economy to one that focuses on consumption has real consequences, one of the most significant being the softening of global commodity prices. As I told Daniela Cambone on last week’s Gold Game Film, gold’s Love Trade has become not a No Trade, but a Slow Trade. We’ve seen demand cool along with a decline in GDP per capita, the PMI readings and China’s M2 money supply growth.

Below you can see the relationship between China’s M2 money supply growth and metal prices. Since its peak in late 2009, money supply growth has been dropping year-over-year, driving down metal prices.

China's falling money supply since 2009 peak has driven down metal prices
click to enlarge

Money supply growth tends to be a “first mover.” When it has contracted, the PMI has usually followed. Recently, this has hurt economies that depend on China as a net buyer of raw materials, including Brazil, which supplies the Asian country with iron ore, soybeans and many other commodities, and Australia.

Australian Dollar and Brazilian Real Retreat with Drop in China's Money Supply
click to enlarge

When M2 money supply growth and the PMIs are rising, commodity prices can also rise. But that’s not what’s happening. It’s important to recognize that when new orders for finished products fall, there’s less consumption of energy to manufacture and ship. Again, this might make the greenies happy, but it’s ultimately bad for manufacturing.

I’ve said several times before that China is the 800-pound commodities gorilla, and it continues to be so. The country currently consumes about a quarter of the total global output of gold. For nickel, copper, zinc, tin and steel, it’s around half of world consumption. For aluminum, it’s more than half.

These are huge figures. But investors should know that Chinese imports of these important metals and materials still remain strong. Tom Pugh, a commodities economist at Capital Economics, told the Wall Street Journal last week that the market has it wrong about China, that the drop in demand has been overstated:

If you look at Chinese commodity imports over the last few months, they’ve actually been quite strong. A lot of it is just that people thought China would continue to grow at 10 percent a year, ad infinitum, and now people are just realizing that’s not going to happen.

Reuters took a similar stance, reporting that “there were at least 21 commodities that showed increases in imports greater than 20 percent in July this year, compared to the same month in 2014.” Weakening demand has been caused by a number of reasons, including “structural oversupply” and “the impact of the recent volatility in equity markets.”

But it’s important to keep things in perspective. Compared to past major market crashes, China’s recent correction doesn’t appear that bad.

China's Crash is Big, But Not the Biggest

Any bad news in this case can be seen as good news. I think that in the next three months we might see further monetary stimulus, following the currency debasement nearly three weeks ago. We might also see the implementation of new reforms in order to address the colossal infrastructure programs China has announced in the last couple of years, the most monumental being the “One Road, One Belt” initiative.

Dividend-Paying Stocks Helped Stanch the Losses

As investors and money managers, it’s crucial that we be cognizant of the changes China is undergoing. With volatility high in the Chinese markets right now, we’ve raised the cash level in our China Region Fund (USCOX), and after the dust settles somewhat and the right opportunities arise, we’ll be prepared to deploy the cash. We’re also diversified outside of China.

We managed to slow the losses during the Shanghai correction by being invested in high-quality, dividend-paying stocks.

According to daily data collected since December 2004, the median trailing price-to-earnings (P/E) ratio for the Shanghai Composite Index constituents currently sits at 48.6 times earnings. If it reverts to the mean, risk is 32 percent to the downside for the index. Currently, the P/E ratio of our China Region Fund constituents sits around 16 times. This suggests that USCOX has less downside risk and is cheaper than the Shanghai Composite.

Median Trailing Price-to-Earnings Ratio for Shanghai Composite Index Constituents
click to enlarge

We seek to take advantage of the trend toward consumption by increasing our exposure to the growing service industries—technology, Internet and ecommerce companies (Tencent is one of our top 10 holdings); financial services (AIA and Ping An Insurance); and enviornmental services (wastewater treatment services provider CT Environmental).

Golden State Warriors guard Klay Thompson unveiling the KT Fire ANTA EARLIER THIS YEAR

Rising sports participation among white collar workers in China is very visibile these days. Xian Liang, portfolio manager of USCOX, says that his friends back in Shanghai share with him, via WeChat, how they track their daily runs using mapping apps on their phones.

With that said, an attractive company is Anta Sports, an emerging, innovative sportswear franchise. Fans of the Golden State Warriors might recall that guard Klay Thompson endorsed its products earlier this year.

We believe the China region remains one of the most compelling growth stories in the world and continues to provide exciting investment opportunities.

China: QE, Depreciation and Gold

By Frank Holmes

CEO and Chief Investment Officer
U.S. Global Investors

Renninbi

First it was the U.S. Federal Reserve. Then, in 2013, Japan launched what became known as Abenomics. The European Central Bank (ECB) followed suit in 2014. And now the People’s Bank of China has joined the parade.

All of them in some way stimulated economic growth by initiating monetary quantitative easing (QE) programs.

The media and politicians applauded them for their QE plans. All of them, that is, except for China. Instead, we’ve only seen a flurry of negative headlines.

I often tell investors to follow the money, which currently is cheap to borrow. Cheap money is good for stock prices, but not for retired folks who have most of their savings in term deposits with low interest yields.

Most important for commodity investors is the powerful correlation between China’s money supply and commodity prices. The money supply peaked in 2011 and has been falling along with commodity prices.

On Monday, China unexpectedly trimmed the value of its currency, the renminbi, 2 percent, the most in two decades. In the days since, many analysts and “experts” have irrationally turned sour on the Asian country, similar to the extreme bearishness toward gold in the last month.

But investors last week came home to the yellow metal after China announced it had increased its gold reserves by an additional 19 tonnes in July, boosting its total holdings to 1,677 tonnes (nearly 54 million ounces). This helped prices rally 1.4 percent on Wednesday to reach $1,124.46, a three-week high.

Investors should likewise return to China when they realize that the global reaction to the renminbi devaluation has been hugely overblown. I agree entirely with my friend Addison Wiggins, who writes in his Daily Reckoning newsletter:

The market is up in arms about this currency move. And frankly most things that I read from the market have it all wrong…

They make China out to be the big, bad villain—calling this move manipulation or a “currency war.” And while EVERYTHING that central banks do is indeed manipulation or a “currency war”—why don’t we hear those terms thrown around the ECB or the U.S. Fed?

To help cut through the noise and get a more balanced picture of devaluation’s causes, effects and possible ramifications, I chatted with our resident Asia expert Xian Liang, portfolio manager of our China Region Fund (USCOX). Below are some of the highlights.

As you know, we follow currencies very closely in our investment team meetings because we’re aware that government policy is a precursor to change. Having said that, why did China decide to devalue the renminbi?

There are several possible reasons, the first one being economics—specifically, to stimulate economic growth and ease liquidity in the financial sector. A weaker renminbi can help make Chinese exports cheaper for foreigners and imports dearer for locals, creating the incentive for a “net inflow” of money. July data shows that economic activity remains worse than expected. China’s purchasing managers’ index (PMI) reading for the month is one example, but fixed-asset investments, power generation and exports were all down.

chinas-manufacturing-pmi-falls-to-two-year-low-in-july
click to enlarge

Deflationary pressure also intensified in July, and the renminbi in trade-weighted terms—that is, against a whole basket of major trading partners’ currencies, not just the dollar—has soared to record highs. This is because of a de facto peg to the dollar, making Chinese goods and services uncompetitively priced to world customers.

Another reason is domestic politics. Chinese policymakers want to resurrect their reformist image among domestic intellectuals and the middle class by yielding more power to market forces to determine its currency exchange rate, which offers some compensation for July’s aggressive, command-and-control intervention in the A-Share market.

And then there’s international politics. It’s well known that China wishes its currency to be included in the International Monetary Fund’s special drawing rights basket, along with the U.S. dollar, euro, British pound and Japanese yen. Chinese policymakers are actively demonstrating to the IMF their commitment to “a more market-determined exchange rate,” a critical step toward eventual renminbi internationalization.

Many countries have devalued their currencies lately—Japan, Germany, France and others. Business Insider, in fact, just shared a Goldman Sachs chart showing how miniscule the renminbi’s depreciation really is compared to other emerging countries’ currencies. And yet China gets singled out in the media! Why is everyone so hard on China?

Renminbi-depreciation-not-nearly-significant-as-other-emerging-markets-currencies
click to enlarge

What’s usually not mentioned in all the news and editorials we’ve seen is that China hasn’t resorted to currency devaluation in 20 years. For the last decade, the renminbi was largely moving in a single direction—up—because China was tired of being dubbed a currency manipulator and it would like to foster consumerism.

As the second-largest economy in the world, China is interested in transforming its growth model from investment-driven to consumer-driven, and some investors might wonder how the devaluation will affect consumption. Today, the richer Chinese middle class is made up of big spenders, both home and abroad, and a weaker renminbi translates to weaker purchasing power for them. It might also have larger implications for global tourism, global consumer goods and global property. So the difference between China and, say, France is pretty significant.

Chinas-Central-Bank-Trims-the-Renminbi-2-After-10-years-of-Gains
click to enlarge

A lot of people think the Federal Reserve will hike interest rates this year—maybe even as early as September—though I’ve expressed doubts about that. Will the devaluation have any effect on the Fed’s decision?

To the extent that it weakens its own currency, China exports deflation to the U.S. and can help the dollar’s strength. Lower inflation and a stronger dollar reduce the incentive or rationale for any imminent Fed rate hike. So yes, you can almost say this is China’s silent protest against the widely anticipated September hike. China seems to be reminding Janet Yellen that in today’s interconnected world, unilateral monetary policy action by the U.S. without first considering global dynamics might not be the smartest thing to do. In effect, it’s saying: “Here’s a preview of what could happen if you insist on hiking rates this year.”

Is this a sign of further reforms? What else can we expect?

The devaluation does indeed herald back to the days of major Chinese reform. In fact, it occurred one day after China approved a comprehensive plan to reform its state-owned enterprises to make them more market-driven, similar to those in Singapore. So at least the government welcomes the perception that the devaluation has more to do with long-term structural reform and less to do with short-term expediency.

Investors are being bombarded with bad news about China right now. There have been some very negative headlines. Where’s the good news in all this?

Here’s the simple answer: A weaker currency not only helps Chinese exporters but also U.S. consumers. Whether you buy things made in China or are planning your next vacation there, you’ve got money to save now. Opportunities have also been expanded for U.S. retailers and manufacturers that source from China, not to mention U.S. airlines. And if you’re in the camp that believes this devaluation is the start of a new “currency war,” then it might be time for gold to shine.

Gold’s Safe Haven Status Never Disappeared
Countries with largest gold holdings

Indeed, gold tends to benefit the most when there are global currency fluctuations. Last week was no exception, as the metal had its best week since June. Many analysts, it seems, prematurely declared that gold has lost its safe haven status because it fell to five-year lows during the height of Greece’s and Puerto Rico’s debt crises.

But as I explained last month, gold is behaving this way not because it’s lost anything. Instead, there are external forces at work here, including the strong U.S. dollar, fears of rising interest rates and a slowing global economy, not to mention possible price manipulation. Despite these powerful headwinds, gold managed to hold strong the week before last as media giants’ stock plummeted, erasing $60 billion in stock value.

Speaking of gold and mining, I’ll be in Lima, Peru during the first week in November to attend the Mining & Investment Latin America Summit, where I’m scheduled to deliver the opening keynote address. I’ll be speaking on mining around the world, macro trends and opportunities and challenges in the upcoming year. For those of you interested in attending, you can register here. I’d love to see you there!

China govt buying implications for gold price

On Wednesday New York closed at $1,097.20 up another $1.60. The dollar was a cent stronger at $1.0963, with the dollar Index stronger at 97.31 up from 96.64. This morning the LBMA gold price was set at $1,085.65 down $1.10. The euro equivalent was €989.43 down €1.80 on yesterday. Ahead of New York’s opening, gold was trading in London at $1,087.00 and in the euro at €992.11.

The silver price closed at $14.82 up 14 cents in New York. Ahead of New York’s opening it was trading at $14.67.

After the Fed’s almost neutral announcement after its 2-day meeting the dollar went stronger and dealers marked down the gold price in line with that strength. It had rallied initially after the FOMC statement which did not refer to any timing for a rate hike, but the media continues to  quote Janet Yellen confirming there would be a rate hike this year. Despite the inadequacies of the ongoing guessing of the timing of a rate hike, it persists and dealers adjust their books slightly, so as not to be caught off guard. Hence the move down in gold is entirely due to currency considerations.

There have been no sales or purchases of gold into or from the SPDR gold ETF or Gold Trust.  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.

A trader in Chinese shares that specialized in shorting them, had to leave the country and a colleague of his was imprisoned some time ago.  This amply demonstrates the dangers of going against government policy in China. With the crash in share prices there and the government’s support for the market now more than visible, many feel that the opportunities there are now to the upside.

Our comment that it may well be arms of government that have picked up the gold dumped in China two weeks ago, may well carry implications for the downside on the gold price. If it did indeed happen, then we do not expect much more selling in the bear raid manner in the future. We are watching with great interest to see if more attempts will be made to hammer the gold price soon.

If they don’t then we can expect that any positive news for gold will have a positive impact on the gold price.

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

Spin on gold, China, Russia and everything else out of control

 

Am I just getting cynical in my old age or is everything one reads in the media becoming more and more suspect as to its provenance?  Even this article will undoubtedly reflect some of my own prejudices, but at least they are my prejudices and not fed to me by some monolithic organisation trying to manipulate global thinking.

Americans in particular in the run up to the next Presidential election will be fed all kinds of propaganda for and against the various candidates.  Some will be true, some will be half truths, and some may well be downright lies, but it may be impossible for the general public on the receiving end to know which is which.  The frightening thing is that whoever’s team is most successful in spinning their candidates’ suitability will win the election.  Their sponsor will then be at the head of the most powerful nation on earth.  And the spin will continue at the same kind of level throughout the Presidency.  And the same will apply in leadership elections in virtually any country.

And of course the same factors are being applied in global economics and geopolitics.  The media is force-fed with often axe-to-grind data and opinion designed to move markets, vilify or beatify whole countries and institutions, politicians, business leaders etc. – no-one is immune.  Modern day spin is out of control.

Personally I have a specific interest in precious metals, and in gold in particular as a long term wealth protector.  I readily admit that my articles will probably favour a pro-gold conclusion, although I do try to be rather more balanced in my opinions than many of my peers and look at both upsides and downsides rather than just the one or the other.  I am ever increasingly dismayed therefore by the plethora of opinion and dubious ‘fact’ which appears in the mainstream media in particular.  This only seems designed to try to downplay gold and its role in global economics by attempting to make it ever less attractive to investors.  Thereby to reduce gold’s influence in the global economic picture and try to drive it out of peoples’ understanding as a potential brake on profligate government spending via the degradation of fiat currencies by unchecked money printing.

But of course the spin doctors are not just anti-gold.  They target just about anything and everything which the establishment doesn’t like.  In the West Russia, and its leader President Putin, for example, have come in for enormous vilification over policies on matters occurring on its borders.  The Russian point of view over the expansion of NATO ever eastwards is totally disregarded as irrelevant.  The U.S.A. is lucky in that it has not faced potentially hostile military forces close to its borders since the Cuban missile crisis and, to an extent Russia sees the NATO moves, or potential moves, to move ever closer to its borders as its equivalent of the Russian missiles in Cuba.

In Russia itself, of course the reverse is true.  Any economic difficulties are laid fair and square as being the result of dirty tricks by the Americans and their allies and President Putin is portrayed as a hero standing up to American-instigated aggression – and has domestic popularity ratings which any U.S. president would give their eye-teeth for.  True the Russian state  is rather less tolerant of opposition than Western ‘democracies’ and more controlling of its own media which makes this task easier.  But this is still spin.

China too is beginning to be seen as a threat to American global political and financial hegemony, so we can expect more and more media attacks on Chinese policies and institutions.  One wonders, for example if the very recent, hugely blatant, gold flash crash, being blamed by much of the Western media by insinuation as being instigated by Chinese hedge funds, despite it starting in New York, was designed both to be anti-gold, but also to cast doubts on the position of the rapidly growing Chinese financial and futures exchanges.  These are seen as a threat to Western control of key markets and anything which can set back their progress towards overtaking their American counterparts (which seems inevitable long term) would not upset the latter!  With the IMF considering inclusion of the Chinese yuan in its SDR currency basket, which the U.S. establishment may see as a threat to its position as the main global reserve currency, with the enormous trade and financial benefits that brings with it, anything that might cast aspersions on the integrity of the Chinese markets could be seen as beneficial!

As an example of double standards here and in political spin, one only has to look at Afghanistan, which geographically might be considered in the Former Soviet Union’s geographical sphere of influence.  When Russia put troops into the country in 1979, supposedly in support of the then Afghan government, this was hugely condemned by the West – to the extent of supplying the Afghan Mujahiddin with weapons to fight the Russian ‘invaders’.  Fast forward 22 years with the Russians having withdrawn in 1989, the U.S. and its allies went in to Afghanistan on much the same grounds as the FSU had earlier – but this was a just intervention as far as western political spin to the media was concerned.  Of course Western political spin came up with good reasons for the American ‘intervention’, just as it had with condemnation for the Russian ‘invasion’ although the two sequential super-power involvements look to have been almost identical in purpose – but one to prop up a Communist leaning government and the other to do the same for a Western leaning one.  Such is political spin.

So what point am I making here?  Primarily don’t necessarily believe anything you read in the mainstream media which could have been placed to suit some government or financial institution’s political or economic agenda.  Someone’s likely paying for it big time and it’s for their own benefit, not yours!

As I said at the beginning, I have a specific interest in gold as a long term store of wealth and my personal prejudices and feelings will show up in the above article.  But, despite my views on Afghanistan above,  I’m not what used to be described in the U.S. press as some pinko-liberal – indeed politically I probably fall on the right wing side of things in the European context (i.e. not as far right as the American right!).  This article has thus been prompted by the enormous volume of anti-gold propaganda in the mainstream media – described as reaching bubble proportions by one commentator yesterday.  Much of this negative spin is by insinuation rather than by condemnation, and in many respects that is the more dangerous as it makes readers think they are coming to the desired conclusion by themselves rather than being told what to do.

Modern day political and economic spin is dangerous, but in this day of global news and comment dissemination by internet we all have to live with it.  The important thing is to understand that it is an integral part of modern day propaganda and to consciously try and reason things out for oneself rather than just follow the mainstream media and the herd.

Potential for instability and uncertainty increasing: World heading for extreme times.

Julian Phillips’ analysis of what’s happening in the gold and silver markets, sees some very uncertain times ahead.

New York closed at $1,162.40 up $3.60 with Asia and London holding it there in a barely changed market. The dollar was weaker at $1,1107 down from $1.1033 against the euro with the dollar Index 96.11 down from 96.50.  The LBMA gold price was set this morning at $1,162.40 up only $0.30. The euro equivalent was €1,038.27 down €14.69. Ahead of New York’s opening, gold was trading in London at $1,160.10 and in the euro at €1,037.01.

The silver price rose to $15.46 up 32 cents in New York. Ahead of New York’s opening it was also trading at $15.46.

Has Tsiprias done enough? Has he committed political suicide? Will he get the Greek Parliament’s backing? Will the E.U. feel it is enough? The German Finance Minister agrees that Greece cannot repay its current debt, but will not go with a debt write down. Better to make repayment last for 40+ more years at a miniscule interest rate, he feels. A rose by any other name? Monday will see if this issue will impact the exchange rate of the euro or not. The dollar gold price is relatively unmoved but with the euro climbing the euro price of gold is falling. Next week could prove dramatic! Certainly it looks as though, at last, there could be a resolution to the story? Markets are, on balance looking for the E.U. to accept the latest Greek offer, but we would rather wait and see. Until next week we do not see any really strong moves in currencies or precious metals.

The Chinese government’s ‘shackling’ of the Shanghai equity market is more a clash between Communism and free markets than it is of global economic concern. China had thought that it was a way of increasing wealth but did not account for speculation.

With the IMF lowering global economic growth forecasts and, in particular, that of the U.S., the potential for instability and uncertainty has increased. This takes us towards extreme times. With the Fed looking at the end of this year or next before raising interest rates, they too are keeping their heads down. What is important about these downward looking prospects is that this is all that has been achieved after 7 years of efforts to stimulate the global economy and in particular the U.S. economy. Is the global economy on a self-sustaining road forward to better times? That’s not what we are hearing. So are we at the bottom for gold and silver prices? With China aiming to have more control over the gold price and to inject the Yuan into the global monetary system there is a case to be made for this thought.

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

Gold price set by US but buying is in Asia and elsewhere

My latest article on Mineweb looks at  the hugely anomalous situation whereby the gold price is effectively set by the U.S. market, but gold demand is virtually all elsewhere – primarily in Asia where, of course, China and India dominate.  The price currently fluctuates around U.S. economic data and whether this is likely to lead to the Fed raising interest rates sooner rather than later, but where the gold is being bought whether U.S. interest rates may rise a quarter of a basis point in June, September or whenever is a total irrelevance.

China in particular is well aware of this and is making moves to have more control over gold price setting itself, and it is interesting also that many of its recent initiatives – the latest being the setting up of the $16 billion Silk Road gold fund – involve gold.  China certainly sees gold as playing an increasing role in global finance and trade, and here it is aligned with Russia which has been adding to its own gold reserves on a regular basis.  It is widely believed that China is doing so too, but without reporting the additions to the IMF until it deems it politically expedient to do so.

China also feels that the U.S. in particular is trying to sideline it economically, as the former is worried about the latter’s potential impact on the U.S.’s hitherto dominant position in world trade through the dollar’s use as the world’s reserve currency.  China want the yuan to have a much greater role – and if it sees this as being blocked by the U.S. it sets up parallel institutions to rival the U.S. dominated ones – the Asian Infrastructure Investment Bank is a prime example which could grow to rival the World bank and the IMF.  There is also a belief that China may be preparing to set up a rival to the IMF’s super currency – the SDR – if it blocked from becoming part of this currency basket again this year.

Interesting times in the global financial sector.#

To read the Mineweb article click on: Gold: The U.S. sets the price but Asia does the buying

HK to China gold exports way down; SGE gold withdrawals way up. What gives?

Lawrie Williams

As can be seen from the excellent chart from www.bullionstar.com below, we are seeing quite a divergence in statistics between Shanghai Gold Exchange (SGE) gold withdrawals so far this year and gold exports to mainland China from Hong Kong, which used to be seen as a proxy for total Chinese imports, but should now be discounted as such.  That is because China last year eased some of its direct import controls which may mean that perhaps as much as 40% of Chinese gold imports are currently going direct to the mainland, completely bypassing Hong Kong.  Direct mainland gold imports built up decidedly in 2015 as seen from gold export statistics published by countries such as Switzerland, the UK and the U.S.

sgechart

But so saying, SGE withdrawals in week 20 (the week ending May 22nd) came to 43.4 tonnes, bringing the year to date total to 946 tonnes – around 20% up on the same week a year ago when the full year total came to 2,102.4 tonnes and also 8% higher than at the same time in the 2013 record year when the full year total was 2,197 tonnes and included a massive withdrawal week of around 117 tonnes in early May after the extraordinary COMEX gold take-down at the end of April that year.

By contrast Hong Kong net gold exports to China have, according to Bloomberg, apparently dipped to 46.6 tonnes in April from 61.8 tonnes in March and 65.4 tonnes a year earlier.  Much of the fall from April 2014 will have been due to more shipments bypassing Hong Kong, but the fall from the March 2015 figure seems to be something of an outlier given the still high levels of gold movements out of the SGE.

While there have been doubts expressed that SGE withdrawals are indeed equivalent to Chinese retail demand, it remains that all gold imported into China – either directly or via Hong Kong – together with China’s own gold production – around 460 tonnes last year – has to pass through the SGE.  Some will aver that this thus represents total Chinese consumption, but the mainstream western analysts (such as CPM, GFMS and Metals Focus) come up with far lower consumption figures (indeed 1,000 tonnes lower or more), but do recognise that SGE gold withdrawal volumes need to be accounted for somehow, but are mostly rather vague on how the discrepancy between their figures and the SGE ones arise.  Part of the discrepancy comes from a rigid interpretation of what actually comprises consumption, and there may also be an element of double counting in SGE figures with recycled gold coming back in and then out again, but this will be small. Now too figures are slightly muddied by movements in and out of the Exchange’s International section – the SGEI – but Koos Jansen, who perhaps follows the figures more closely than any other analyst, estimates the volume here so far this year as only distorting the overall figure by just under 13 tonnes. There is also an important element in gold apparently utilised within China in financial transactions and as collateral by the banks and other financial institutions, but this is highly unlikely to account for much of the differences.

Gold analyst Philip Klapwijk (former executive chairman of GFMS), who nowadays has based himself in Hong Kong and is thus close to the action, states that there has been a substantial amount of gold shipped trans-border from mainland China into Hong Kong for remelting – mostly technically illegally – which could account for the big differences as it is generally assumed that China exports no gold.  But given Hong Kong is treated statistically by the Chinese as a separate country this zero export number is obviously not the case, according to Klapwijk at least.  He put the figures as around 1,200 tonnes last year and, with an element of round tripping likely involved, this could have distorted the Hong Kong to China net gold trade somewhat.

In Q1 this year though, Klapwijk reckons the volumes of such ‘exports’ has dived dramatically as the Chinese authorities have been clamping down severely on this cross-border gold trade with Hong Kong.  But if movements to Hong Kong have fallen as dramatically as Klapwijk reckons, yet SGE withdrawals are even up on last year, this gold has to be going somewhere on the mainland.  How this will tie in with Chinese gold ‘consumption’ figures in the next quarterly analyses by the big gold consultancies is anybody’s guess.  Our best guess is they will still see ‘consumption’ drop a little in line with current reports out of China of a fall-off in jewellery demand, which begs the question as to where all this excess gold coming out of the SGE is headed?  Despite denials it has to be possible the excesses are somehow being absorbed by the PBoC – the Chinese Central Bank.  Given the Chinese have a track record of hiding the PBoC’s true gold holdings in non-reportable accounts, this excess gold could be finding its way into similar accounts thus enabling the PBoC to stick to the position that it doesn’t buy gold from the SGE.  As always there is a degree of opacity here which is hard to break through with the Chinese always playing their key economic cards close to their chest.  Draw your own conclusions here – they are probably just as good as ours!

China on a gold standard? Food for thought at least

By Lawrie Williams

Earlier this week I penned an article based on a talk by Ken Hoffmann, Bloomberg’s Global Head of Metals & Mining Research at the Global Mining Finance Precious and Base Metals Conference in London.  This was published on Mineweb and has already attracted extremely strong readership from around the world – See: Will China go for a gold standard? The jury is out!

In it, Hofmann set out what some might consider an off-the-wall appraisal of possible Chinese moves to back its currency with gold to try and help cement the yuan’s position as a potential future reserve currency.  This, it feels, could go a long way towards other countries’ central banks accepting the yuan as an integral part of their foreign currency holdings, perhaps even pari  passu with the U.S. dollar.

Hofmann puts forward the viewpoint that the Chinese are exasperated by the West trying to treat the nation as a second class citizen on global trade and economic organisations, despite it being the world’s second largest economy – or some would even put it at No.1.  The Chinese administration is also of the opinion that the U.S. is obstructing Chinese efforts to gain a place at the global table commensurate with its economic standing as the U.S. sees China as a competitor to its global dominance of trade, and all the advantages that brings to the U.S. economy and place in the world order.

Other media picked Hoffmann’s hypothesis up, but in effect only appeared to look at how much gold China would need, or what gold price would be required, to fully back the yuan with gold in the manner of the old gold standard – perhaps with the implication that this is some kind of crackpot idea which puts Hoffmann in the ‘gold cultists’ mega-price camp.

Yet this was not really what Hoffmann was suggesting.  He effectively said that he did not know how China could achieve this but that the Chinese tend to view things in a totally different manner to the West and can move at lightning speed in comparison and might, by thinking outside the box, come up with some solution which could satisfactorily at least partially link the yuan to gold.  This would hugely enhance the currency’s status in the eyes, perhaps not of the major Western central banks, but for state banks in other parts of the world – notably in Asia, Africa and Latin America where there may be a more natural positive association with gold as a key indicator of financial strength. Indeed in many cultures gold is viewed  as the ultimate in financial probity and a symbol of wealth and power, regardless of the opinions of today’s mostly Keynesian economists who say that gold has no place in the modern financial system.

Central bankers are opposed to gold because it imposes disciplines, and ever since President Nixon dropped the dollar’s gold backing, the world’s central banks have seemed to have gradually seen this as carte blanche to allow monetary easing on an unprecedented scale and bring the global economy to the perilous state it finds itself in today.  Today’s economists, except perhaps those who follow the Austrian School, and bankers are almost unanimous in their opinions that gold should play no place in global economic thinking.  Yet the major Western nations’ central banks are for the most part hugely reluctant to part with any of their accumulated gold reserve – something of a contradiction in attitudes.  Gold obviously still has a place deep down in their collective psyches!

Today, at Bloomberg’s own  Precious Metals forum in London, Hoffmann gave a further short talk setting out the hypothesis – seeing the possibility of China going down this route as a possible Black Swan scenario.  While, in a short article released at the event he admits that the backing of the yuan fully by gold is an exercise that is highly unlikely and that in any case the Chinese government would not wish to have its monetary policy hands tied to the extent a traditional gold standard would suggest.  Indeed he admits that while the debate on this is an interesting one, ‘the idea of China on the gold standard is likely to remain in the alchemist’s lab for now’.

So what Hoffmann has done is to bring the idea of a Chinese introduction of some form of gold standard into the debate and for that he should be praised rather than vilified by those who find the whole idea counter to their own views.  The Chinese are indeed capable of springing surprises on the West.  As pointed out earlier the Chinese have a different way of thinking than us westerners.  They tend to operate with the kind of long term game plan no longer even considered in most capitalist countries and with a centrally controlled economy are perhaps far better placed to implement economic reforms which are to their ultimate benefit which might be considered impossible in the Western thought train.

So while a Chinese return to some kind of gold standard may be extremely unlikely, one perhaps should not write the idea off as totally impossible, and Hoffmann has done us a favour in getting us to think outside the box ourselves.

China-driven AIIB sees currency wars heating up – Holmes

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

Tuesday marked the last day that countries could submit their applications to become founding members of the new China-led Asian Infrastructure Investment Bank (AIIB). As of this writing, a little over 40 nations have either already been approved or have applied for membership, including strong U.S. allies such as Britain, Germany and Australia.

Notable absentees, as you can see below, are the U.S. and Japan.

Countries that Have Joined or Applied to Join Asian Infrastructure Investment Bank (AIIB)

Conceived to serve as an alternative to Western-dominated sources of credit such as the World Bank, International Monetary Fund (IMF) and Asian Development Bank, the AIIB will aim to invest in regional infrastructure projects ranging from energy to transportation to telecommunications.

The new development bank, which is expected to launch later this year, will have $100 billion in capital to begin with—a massive mountain of money, to be sure, but it falls far short of the estimated trillions that will be necessary to fund Asia’s astronomical infrastructure demand.

China’s creation of its own global bank highlights the country’s desire to wield more control over funding such projects. It currently commands only 5.17 percent of the vote in the World Bank and 3.81 percent in the IMF.

China is aiming for its currency to become part of the Special Drawing Right (SDR), the International Monetary Fund's composite currency unit.

And so the currency wars continue to heat up. China’s move demonstrates its ongoing efforts to establish the yuan as a global reserve currency on par with the U.S. dollar. It’s no secret that the country wants the yuan to become part of the IMF’s Special Drawing Right (SDR), a composite currency unit that now consists of the dollar, Japanese yen, British pound sterling and euro. The founding of the AIIB might very well bring the country closer to realizing these goals.

A-Shares Headed Higher

Chinese stocks are currently having a moment. Mainland A-shares, as measured by the benchmark Shanghai Composite Index, are up an incredible 92 percent for the 12-month period on the back of strong recent performance in the financial, property and infrastructure industries.

There’s generally a high correlation between the A-share market and China and Hong Kong, but the A-shares have outperformed by a wide margin over the past year.

Shanghai Composite's Breakout Continues

Last Wednesday the index fell a slight 0.8 percent, ending a 10-day rally that contributed 12 percent, its longest winning streak in 23 years.

Chinese policymakers have recently eased quota controls for foreign investors in mainland stocks and bonds, as they promote the yuan to be accepted as an SDR. The potential for greater inflows into the market should help the Shanghai Composite head even higher.

Our China Region Fund (USCOX) has participated in this rally through the Morgan Stanley China A Share Fund and a closed-end fund.

Read more about China:

  • China Consumes More Gold Than the World Produces
    “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.”
  • China Just Crossed a Landmark Threshold
    “One of the most headline-worthy developments is China’s $16.3-billion infrastructure initiative intended to revive trading routes along the centuries-old Silk Road. Thousands of miles of railways, roads and pipelines will link Beijing to major markets all over Asia, Africa and Europe.”
  • China Wants to Conduct the World’s High-Speed Rail Market
    “In recent months, Chinese Premier Li Keqiang has emerged as the nation’s top salesman for what he calls the ‘New Silk Road’—miles upon miles of high-speed transportation connecting all corners of the world. His plan might very well become one of China’s most lucrative exports and culturally significant contributions to the world: fast, efficient and reliable railways.”