Some thoughts on silver’s poor performance vis-a-vis gold.

What is puzzling in the precious metals space is the underperformance of silver in comparison with gold during the latter’s very sharp recent price rise. Historically silver tends to outperform gold percentage wise when the latter is rising sharply.  This time around, so far, this has not been the case,  Silver guru Ted Butler puts this down to continued price manipulation on the U.S. COMEX Futures Exchange – see: http://silverseek.com/commentary/stranger-fiction-17678 for his latest outspoken commentary on this subject, and who he sees as the main culprits.

Meanwhile appended below is Stefan Gleason’s latest commentary from Money Metals Exchange, where he predicts a potentially explosive rise in the silver price should gold continue its upwards path.  Gleason heads up a precious metals trading business in the U.S. so he does have an interest in higher prices, but his views on the current silver situation are echoed by many perhaps more impartial observers too:

Will Silver Soon Follow Gold’s Lead?

Gold Price (June 21, 2019)

To be sure, there is also the possibility of some retracing and back-testing this summer before the $1,400 level is conquered for good.

The fall and winter periods are typically more conducive to big precious metals rallies.

Seasonality, however, isn’t a dependable trading tool. Some technical analysts (who will go unnamed here) wrongly turned bearish on gold and gold stocks after they put in a disappointing early spring performance and were thought to be headed straight into the summer doldrums.

Instead, the summer solstice arrived with gold’s chart displaying a powerfully bullish long-term setup.

The one glaring problem with the current setup in precious metals markets: silver hasn’t yet confirmed gold’s breakout.

Silver Price (June 21, 2019)

Silver needs to break above $15.50, then $16.00 (the last intermediate cycle high) in order to establish a bullish trend on par with gold’s.

The white metal’s lagging price performance in recent months has resulted in it trading at its biggest discount to gold in three decades.

Hardy silver bugs are excited at this rare opportunity to buy more ounces on the cheap. Others are understandably concerned that silver isn’t showing any leadership during rallies in the metals sector.

Silver, being a smaller and naturally more volatile market than gold, is supposed to amplify gold’s moves on both the upside and downside. So why is silver instead acting like an anemic version of gold?

Lots of reasons can be proffered – from record central bank buying of gold, to silver’s reliance on industrial demand, to low (official) inflation, to market manipulation.

It probably comes down largely to investor psychology. When precious metals markets have been out of the “mainstream” news cycle for years – trumped by a rising stock market and the rise of digital currencies – the general public won’t be interested in precious metals.

The super-rich and large institutional investors who are more apt to take contrarian positions in overlooked assets generally prefer gold over silver because it is more convenient for them to accumulate in large quantities.

We are still in the stealth phase of a precious metals bull market. When we enter the public participation phase – and demand for physical bullion increases – we have no doubt that silver will shine.

Advertisements

Gold’s Pricing Power Moving East – Part 1

By Julian D.W. Phillips – GoldForecaster.com | SilverForecaster.com | StockBridge Management Alliance 
How is the gold price made?

When we hear commentary on why the gold price has moved, we usually hear of U.S. economic or political factors and a move in the U.S. Dollar. Most times these do not precipitate the buying of physical gold.

What they do do, is to spur the buying or selling of futures or Options on the COMEX gold market. Many commentators attribute moves in the physical gold price to moves on COMEX.

But this link is tenuous, as COMEX does not [except for a maximum of 5% and minimum of 1% of contracts that disclose they will deal in physical gold, upfront] deal in physical gold.

The dollar gold price is the one that most investors look at, even though they may deal in a different currency to the dollar. This is because the dollar is the key global currency against which all others are measured.

Price differential between Shanghai and London/New York

U.S. gold prices today are primarily driven by demand for physical gold in gold ETFs, such as the Gold Trust and the SPDR gold ETF [GLD].

But the bulk of physical gold traded in the world now happens on the Shanghai gold exchange. There are 10 million investors, including 10,000 institutions that are able to deal over their cell phones at any time on the Shanghai Gold Exchange. Such a market dwarfs both London and New York on the physical front, as all transactions have to be backed by physical gold.

With gold exports not permitted from China, there are obstacles to the free flow of gold globally. The International Gold Exchange in Shanghai has not yet attracted sufficient numbers to allow this. But the major banks can and do hold stock both in Shanghai and London and by running a dollar/Yuan currency book can arbitrage gold between the markets to smooth out the bulk of price differences between markets.

While there are frequent fingers pointing to the ‘premium’ of Shanghai prices over those of London and New York of $5 all the time, it is because Shanghai prices 0.9999 quality gold whereas London prices 0.995 quality gold. One has to deduct this before comparing the prices in the two markets.

On top of this we see between $5 – $15 an ounce difference on a daily basis, which can include the cost of moving the gold from London to Shanghai.

Overlying this cost lies the difference in liquidity between the markets and the differences in local demand and supply. In the very liquid Shanghai market, bullion banks do not exert the same influence as in London and New York, so speculation is restricted. It is further restricted by the much higher costs of taking large speculative positions in Shanghai. These costs were increased at the beginning of the year to discourage speculation.

Shanghai, as a result, gives less volatile prices, more indicative of [Chinese] physical demand. While no gold flows out of China [removing its downside pressure on the gold price] Chinese demand draws from the rest of the world.

Gold enters China from the rest of the world’s gold markets primarily via Switzerland where it is refined into metric bars. We see metric measures of gold dominating the global gold market in the future. Imports comes from all over the world in all forms, with a reducing amount coming in via Hong Kong.

Consequently, the Shanghai Gold Exchange gold price, although higher [for reasons given above] is exerting a growing influence on the global gold price in all currencies and better reflects the physical gold price of gold.

London, New York and the Gold Price

With London having been the global center of the physical gold world until recently, one would have thought that the influence over the gold price would have resided in London. But this is no longer so, as history over the last few years, has shown that London has usually followed COMEX prices.

Of course, this would give rise to charges of ‘manipulation’ from U.S. and other sources.  The not uncommon bear-raids by the big U.S. banks and high frequency traders ensured that the gold price bore little resemblance to the real global physical gold demand and supply factors.

But on closer examination of the chart above, one sees that all but a small percentage of “gold” is traded not in gold but in some form of derivatives, such as shares in GLD, futures, options, or even gold shares, where the buyer does not own physical gold but a piece of paper to the gold price.

Take out this ‘paper’ gold and London and New York’s 88% of gold traded, falls to around less than 1% compared to Shanghai’s 5% of physically traded gold. i.e. five times as big.

When there is a real premium in Chinese gold prices over London and New York’s Chinese gold importers [Like the ICBC/Standard bank and HSBC bank] then export gold bullion to China to meet that higher demand and smooth out price differentials. Consequently, we have witnessed a steady very, very large flow of gold pass through the refineries of Switzerland [to be upgraded to 0.999 fineness] and onto the Far East.

This has allowed both Russia and China in particular, to acquire huge tonnages of gold [on top of their own production] at what really are, discount prices over the last decade!

With gold now an integral part of the Chinese financial and banking systems, China cannot afford to be at the mercy of the capricious, non-representative, U.S., physically-small gold market, even though the volumes of paper gold traded are huge as you can see in the pie chart above.

Day to day news items are not the real reasons gold is bought and sold in the west. It is theprofit motive inherent in western financial markets, driving traders and funds to buy and sell gold frequently. Gold holdings are changed even by large funds from day-today positions to monthly or three monthly. There are few that hold a long-term holding.  The demand for short-term performance prevents that.

The Chinese view of gold

The motive east of Greece is to acquire gold holdings as a prime financial asset that, over time, provides secure wealth for the long term. Trading of gold is an ancillary function only. East of Greece it is the sheer volume of gold kilos held that’s important.

China’s gold holdings are far greater than the available statistics tell us. Gold is held as jewelry at retails levels, on the balance sheet of banks, in the Shanghai Gold Exchange, for clients, as well as for the Exchange itself, in government agencies, for the government and by the People’s Bank of China, for the nation.

In summary, as the People’s Bank of China put it, “We own gold through the people of China!”

This is resulting in China moving to take over gold’s global pricing power.

 

Major divergence between SGE and London gold benchmarks

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

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

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

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

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

SGE and London PM Gold ‘Fixes’ (US$

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

Source: www.Kitco.com

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

Gold Flow reversals – will they continue after U.S. holiday season over?

The U.S. holiday season effectively gets into full swing on the Independence Day weekend around July 4th, and comes to an end after Labor Day, which was on July 5th.  These holidays can represent major turning points in investment sentiment.  Gold investors will have Labor Day 2011 writ on their hearts as that was effectively the day the gold bull market ended, and a four and a half year bear market in the precious metal began.  This year saw the big SPDR Gold Shares (GLD) gold ETF reach its interim peak at 982.72 tonnes immediately following Independence Day.  Currently its holdings stand at 937.89 tonnes – a fall of 44.83 tonnes in only two months.  Gold investors will thus be nervous at what the post-holiday period will bring this year and sentiment indicators, like the GLD holdings, will thus be followed with particular interest for the next few days to see where the market is possibly headed.

Initial indications on European markets look positive with gold putting on a few dollars in morning trading today (July 6th), but it is the opening of the U.S. markets later on (this is being written at 6.24 am EST) which will be watched with particular interest as it is still very much the U.S. gold futures markets which call the tune on the gold price.

But the GLD figures, which tend to be a strong indicator of North American gold investment sentiment, particularly from the institutional viewpoint, will not be the only indicators being viewed with huge interest by gold investors.  As we have pointed out here beforehand there have been some hugely relevant reversals in gold supply and demand patterns this year.  Asian demand has been seen as weak with the two largest markets, China and India, taking in less gold that previous years, while Swiss gold import and export statistics have reversed with respect to some key nations which usually export gold to Switzerland for re-refining, becoming significant gold importers from the Alpine nation – notably the UK and the US – while on the other hand some key nations which had been significant importers of Swiss gold to meet their own trading needs have in turn become the largest exporters of gold back to Switzerland – notably the United Arab Emirates (UAE) and Hong Kong.

We have speculated here that this remarkable change in gold flows has been for two main reasons.  The first is that physical gold availability in the West has been becoming tight – particularly due to the big first half of the year needs of the major gold ETFs to maintain their gold balances in the light of big money flows into them by gold-focused investors.  The second reason, we have suggested, is that the big gold fabricators and traders in nations/states like the UAE and Hong Kong have been suffering from a severe downturn in gold demand from their traditional purchasers, mostly in Asia, and have been liquidating excessive inventories built up in the expectation of continuing high Asian demand levels.  With the substantial rise in the gold price so far this year this has been a profitable trade.

But is all this about to change and will Labor Day be the trigger?  The return of fund managers and traders to their desks may prompt a serious rethink in terms of gold investment policy and this could take the gold price in either direction depending on consensus.  This makes the past two months’ gold price mostly range-bound movements perhaps the calm before the storm.

So what is changing which could affect the price scenario?  By all accounts Indian and Chinese demand is beginning to pick up again, while on the other hand gold ETF inflows have been replaced by outflows, but this could change rapidly with any improvement in sentiment towards gold investment.  Net central bank gold buying appears to have fallen off, although as we pointed out in our recent article: Central bank gold buying – what the media reports don’t really tell you , perhaps not too much should be read into this yet given there are only three significant central bank gold buyers – Russia, China and, to a lesser extent, Kazakhstan and month by month announced reserve increases by the first two of these can be somewhat variable.

On the gold production front, we may, or may not, have reached peak gold, although evidence suggests we are now there or thereabouts.  The Australians may be bucking the trend and increasing production to maximise returns (See: Australian Gold Output Hits 15-Year High, but in other nations undoubtedly new mined gold output is beginning to slip.

So gold fundamentals are somewhat mixed in outlook, but close to balance and the markets could move it in either direction.  We remain gold positive as even when price weakness has appeared with some big technical sales on the COMEX futures market driving the price down, such raids have tended to prove shortlived in duration and effect suggesting there are plenty of buyers out there in the $1,300 – $1,340 range where gold is currently trading.  But it could be a whole new world for gold from today when the traders and fund managers are fully back on track.  With the U.S. futures market still effectively setting the gold price, although Shanghai seems to be having an increasing mitigating influence, this is all vitally impotrtant for the gold price direction from here on.  We shall see.

The above is an edited and updated version of one which I had previously posted on info.sharpspixley.com 

BoE disappoints. Gold and silver fall back. Pound rises.

Gold TodayGold closed in New York at $1,332.20 on Wednesday after Tuesday’s close at $1,332.20.  In Asia the gold price tried to rally as you can see below  

  • The $: € fell to $1.1096 up from $1.1151.
  • The dollar index fell to 96.32 from 96.53 Wednesday.
  • The Yen was weaker at 105.44 from Wednesday’s 104.32 against the dollar.
  • The Yuan was slightly weaker at 6.6855 from 6.6845 Wednesday.
  • The Pound Sterling was initially weaker at $1.3225 down from Wednesday’s $1.3271 waiting for Governor Carney’s expected easing of the B. of E. interest rates.  A hope that was dashed with a no change decision leading to a pick up to the $1.3400 level before easing back again.

Yuan Gold Fix

Trade Date Contract Benchmark Price AM Benchmark Price PM
2016  07  14

2016  07  13

SHAU

SHAU

288.94

286.90

287.60

288.16

Dollar equivalent @ $1: 6.6855

$1: 6.6845

$1,344.26

$1,334.97

$1,338.02

$1,340.83

The Chinese gold market was not convinced by the fall in New York and lifted the gold price, reflecting internal Chinese demand. After the close and ahead of London’s opening the gold price was ‘marked down’ pretty heavily and after the LBMA price setting was trading at $1,326.65. No doubt, if Shanghai prices remain higher, its banks in London will move physical gold from their London bases to Shanghai to arbitrage prices and shift more bullion into China.

The attempt to break the gold price down further in New York with no physical sales is a risky mark down of prices as the Technical picture degenerated and pointed down. The bears who have engineered this break down of the Technical position are relying on no further stimuli and hope that physical demand will stay on the sidelines. Get ready for a dramatic day in New York!

LBMA price setting:  $1,325.70 down from Wednesday 14th July’s $1,340.25.

The gold price in the euro was set at €1,192.71 down €17.56 from Wednesday’s €1,210.27.

Ahead of the opening in New York the gold price stood at $1,328.05 and in the euro at €1,195.20.  

Silver Today –The silver price closed in New York at $20.38 on Wednesday up from $20.09 Tuesday.  Ahead of New York’s opening the price was trading at $20.15.

Price Drivers

The extraordinary features of the gold market are that they do not reflect the balance of demand and supply, either totally or even the marginal amounts outside those amounts ‘subject to contracts’. So called ‘efficient markets’ are supposed to reflect these fundamentals and changes in physical demand and supply.

Shanghai is trying to do that, but is hesitant to impose their fundamentals on the global gold price, even though they should be entitled to do so in view of the fact that they have the largest, most active physical market in the gold world.

No, the biggest influence on the gold price is the ‘paper’ gold market on COMEX where 5% or less of the transactions require a physical settlement. However, we are seeing U.S. demand for physical gold for the gold ETFs based in the U.S. have a decidedly strong impact on prices, despite such gold being bought and sold in London.

This makes the global gold market far from an ‘efficient’ market and one likely to remain so until Shanghai exerts it potential influence on gold prices. What’s holding them back? We believe it is their desire to acquire as much gold as possible for the retail, institutional and retail Chinese gold markets, as all such sources are considered ‘China’s gold” [easily available for confiscation should the authorities decide to do that].

But the gold price is far from just a ‘commodity’ price. It is a monetary metal.  As we said yesterday, “The prime drivers of the gold price remain macro-economic and monetary factors which will not change overnight.”

The degradation of the value of currencies give a facet to the gold price which ‘reverses’ the gold price, making gold a pricer of currencies, not currencies pricing gold [which is how the majority of investors view the gold price]

Gold ETFs – In New York on Tuesday there were no sales or purchases into either the SPDR gold ETF or the Gold Trust, leaving their holdings at 965.221 tonnes and at 214.54 tonnes respectively.

We expect activity in this market to pick up later today in New York.

Since January 4th this year, the holdings of these two gold ETFs have risen by 382.17 tonnes.

Silver –Silver prices could be extremely volatile and have slipped along with gold after the BoE decided not to raise rates.

Julian D.W. Phillips

GoldForecaster.com | SilverForecaster.com | StockBridge Management Alliance [Gold Storage geared to avoid its confiscation]

Gold and silver futures markets like a rigged casino

By Clint Siegner*

 

A respectable number of Americans hold investments in gold and silver in one form or another. Some hold physical bullion, while others opt for indirect ownership via ETFs or other instruments. A very small minority speculate via the futures markets. But we frequently report on the futures markets – why exactly is that?

Because that is where prices are set. The mint certificates, the ETFs, and the coins in an investor’s safe – all of them – are valued, at least in large part, based on the most recent trade in the nearest delivery month on a futures exchange such as the COMEX. These “spot” prices are the ones scrolling across the bottom of your CNBC screen.

Future Markets

That makes the futures markets a tiny tail wagging a much larger dog.

Too bad. A more corruptible and lopsided mechanism for price discovery has never been devised. The price reported on TV has less to do with physical supply and demand fundamentals and more to do with lining the pockets of the bullion banks, including JPMorgan Chase.

Craig Hemke of TFMetalsReport.com explained in a recent post how the bullion banks fleece futures traders. He contrasted buying a futures contract with something more investors will be more familiar with – buying a stock. The number of shares is limited. When an investor buys shares in Coca-Cola company, they must be paired with another investor who owns actual shares and wants to sell at the prevailing price. That’s straight forward price discovery.

Not so in a futures market such as the COMEX. If an investor buys contracts for gold, they won’t be paired with anyone delivering the actual gold. They are paired with someone who wants to sell contracts, regardless of whether he has any physical gold. These paper contracts are tethered to physical gold in a bullion bank’s vault by the thinnest of threads. Recently the coverage ratio – the number of ounces represented on paper contracts relative to the actual stock of registered gold bars – rose above 500 to 1.

Comext Gold Cover Ratio

The party selling that paper might be another trader with an existing contract. Or, as has been happening more of late, it might be the bullion bank itself. They might just print up a brand new contract for you. Yes, they can actually do that! And as many as they like. All without putting a single additional ounce of actual metal aside to deliver.

Gold and silver are considered precious metals because they are scarce and beautiful. But those features are barely a factor in setting the COMEX “spot” price. In that market, and other futures exchanges, derivatives are traded instead. They neither glisten nor shine and their supply is virtually unlimited. Quite simply, that’s a problem.

But it gets worse. As said above, if you bet on the price of gold by either buying or selling a futures contract, the bookie might just be a bullion banker. He’s now betting against you with an institutional advantage; he completely controls the supply of your contract.

It’s remarkable so many traders are still willing to gamble despite all of the recent evidence that the fix is in. Open interest in silver futures just hit a new all-time record, and gold is not far behind. This despite a barrage of news about bankers rigging markets and cheating clients.

Someday we’ll have more honest price discovery in metals. It will happen when people figure out the game and either abandon the rigged casino altogether or insist on limited and reasonable coverage ratios. The new Shanghai Gold Exchange which deals in the physical metal itself may be a step in that direction. In the meantime, stick with physical bullion and understand “spot” prices for what they are.

Q1 gold and silver rally different this time around

A Paper Gold Rally – Physical Yet To Engage

by Ross Norman – CEO Sharps Pixley Ltd.

The key question in our mind is whether a paper rally in gold can be sustained without the significant engagement of the physical community…

During 1Q16, physical demand for gold declined 23.8% compared to 1Q15 according to GFMS (1025 tonnes Vs 781 tonnes) yet gold prices rallied 22% – res ipsa loquitur.

Gold’s gain year-to-date is impressive – not to say exceptional – and gold bugs will heave a sigh of relief that it has behaved as it should in the face of what is clearly a vulnerable, even fragile macroeconomic outlook. However 2014 and 2015 saw similar rallies before momentum fade set in after Q1 in both years and hence not surprisingly confidence remains light, particularly in view of the size able 45% correction since 2011.

2016 is different.

Yes, gold has seen a similar price action, but the drivers are not the same. The key physical gold markets in China and India are comparatively speaking absent and the erstwhile seller – the West – has turned buyer.  This is not a question of geography, but of motivation, form and tenure.

The correction lower from all time highs at $1922 in 2011 were driven by selling across the spectrum of the gold community in the West. European Central banks had already disgorged sizeable chunks of metal under the Washington Accord and then it was instititutional investors selling of ETFs (roughly 1000 tonnes), coupled by speculators on COMEX who sold their long futures positions and the market went into a rare net short position – and then there was cash-for-gold at the retail end – not in itself significant in size, but it underscored the West falling out of love with gold and cashing it in to sustain the consumption binge of the early 2000’s.

Never before was there such an epic movement of bullion from West to East in exchange for fripperies since the days of Marco Polo and the silk road.

This year on COMEX we have seen a battle royal between the longs and the shorts with the former winning out. The short covering has played a key role in taking the market through key technical levels and net longs stand at close to record highs. This should leave gold bulls – especially contrarians like myself – feeling distinctly uncomfortable. Meanwhile ETF flows have risen at record pace adding 330 tonnes in Q1 (compared to just 36 tonnes in Q1 2015). Now it could be argued that ETFs are paper or physical – this is irrelevant – what matters is how they behave and as we saw since 2011 these players can operate with the same short termism as speculators and rapidly reverse their positions. In short neither can be entirely trusted.

Meanwhile Indian buyers are absent as its government behaves as if it was at war with its gold community (and 3,000 years of history) through punitive taxes ; the market remains lacklustre with prices at a 2 1/2 year high in local terms and is not much helped by a poor monsoon and therefore harvest. The Chinese and indeed Russians meanwhile seem content to pick metal up on any price correction (more traditionally the Indian style) and not chasing the market higher – price supportive, but not a driver. GFMS reports that physical purchases for 1Q16 declined in India by nearly 65% compared to 1Q15.

So what has changed. There is growing perception in the West that Cental Banks may indeed be fallible and that the Keynesian experiment may have run its course – in short, the desire for sound money and by extension a growing concern about the increase in debt to resolve financial crisis is gaining currency. If fear is back in vogue then arguably it may less of a sustainable position then the motivation of many Eastern buyers which is simply as long term store of value.

For gold to see a sustained rally it needs to fire on more than one cylinder and physical players need to join the party. This in turn would put bullion onto the radar of institutional investors who are yet to be convinced that it really is an alternative to more traditional asset classes. This could then bring about the price elasticity – or buying on higher prices – that typified the last bull run. Or equally perhaps physical buyers do not turn up to the party in which case the speculators – sometimes described as behaving like 11 year olds high on e-numbers – could get bored and as easily reverse their positions.

 

Time will tell.

What is the COMEX Futures & Options market really all about?

By Julian Phillips*

Let’s take a deep look into COMEX in this article that describes COMEX today.

All of us follow COMEX in New York and assess the ‘net speculative long position’ there, so as to see the actual weight of opinion on the gold price.   It gives us a clear market opinion, after all.   But many of you out there may believe that COMEX is a very large factor in the gold price.   Should it be?   

It would be easy of us or any other commentator to give their opinion on the matter, but would that be enough to be absolutely right?    So as to not give an opinion, we felt it important to go direct to COMEX to get the proper story.   We spoke to the Director of Metals Products in the COMEX Marketing Dept.   This is what COMEX says;

What you may have thought about COMEX

It may seem reasonable to you to assume that the ‘net’ position on COMEX would be covered by COMEX actually ensuring that this amount of gold or silver is held in one of their four COMEX approved depositories that are all located in New York city.   After all, delivery of the gold and silver is effected via electronic warrant.   

This would reassure us that COMEX dealings did affect the gold or silver price, would it not?   After all, supposing someone went short and could not deliver, who would supply the metals?   The implications are that COMEX is constantly adjusting their gold & silver holdings to make sure that no-one would be left without the metal they bought there.   Not so!

What really happens?

 

  • Does COMEX hold gold or silver to cover the net position to ensure market players will get their metal?   

 

COMEX does not ensure the net long positions are covered by gold or silver. But, COMEX does perform oversight and regulatory due diligence, to ensure that no adverse events disrupt the marketplace to ensure that all market participants meet their contractual obligations.   Yes, holders of COMEX approved depository electronic warrants can withdraw gold and silver from the depositories.

  • So where do the sellers of gold or silver come from?

 

– The Exchange takes all short notices tendered and matches them to the appropriate long positions per an Exchange system algorithm.   COMEX DOES NOT supply the gold.   The Seller supplies the gold as part of the contract rules.    The deliverable gold resides in four (4) COMEX approved depositories that are all located in New York City and the delivery of the gold is effected via electronic warrant.   Find our warehouse stocks on a daily basis on our website:     http://www.cmegroup.com/trading/energy/nymex-daily-reports.html

  • So if a seller doesn’t have the gold to supply to the buyer, what happens?

 

– COMEX positions in spot (current) month Gold are settled by trading out (rolling) of the position or engaging in the Exchange delivery process.   When someone wants to take delivery, they will establish a Long (buy) futures position and wait until a Short (seller) tenders a notice to delivery.

  • Where does the gold come from, that’s held in approved depositories?

 

– Should you hold to delivery, you will get your gold!   We match buyer and seller….one cannot exist without the other.   The majority of positions are settled via trading as opposed to delivery.   I cannot comment on where participants buy physical gold.

  • So how is physical delivery made?

 

– The gold contract is physically settled, meaning if you stay to delivery you must deliver gold or you receive gold.  If you trade out of your position or roll into other month you are paid or must pay the difference.  You must know that less than 1% of the trades actually go to delivery. 

  • What if a seller [Short] does not have the gold to deliver [naked short]?

 

– If a short does not have Gold to deliver he must liquidate his position by the last trading day.  A short which goes to delivery must have the Gold in an approved depository. This is represented by the holding of electronic depository warrants.   

  • What percentage of sellers are ‘naked shorts’

 

– Don’t know what percentage of shorts do not have physical gold and am not aware that any such statistics are kept.   I imagine you could get some idea by looking at open interest and comparing that to registered stocks [gold] in the depositories.   [Go to the above website and check the totals against the Commitment of Traders report on Fridays and look at “Open Interst” to get that number.]

  • Does the COMEX gold market directly affect the gold price?

 

– Our markets are used primarily for price risk management or financial reasons…..although we can be a source of physical metal we are not used for that reason.   The Exchange does not set the price – the market does.    The gold price is created by the buyers and sellers.

  The exchange in no way determines the price….we only report it.

Conclusion on COMEX

The long and short of it is that COMEX is simply a ‘cash’ market that does not deal in gold or silver or other items at all.   They simply provide a’ cash’ market where risks are laid off.   Yes, physical dealers in gold and silver may well use the market to ‘hedge’ opposing real physical positions so that they don’t face a price risk and yes, traders [or gamblers] use the market to take leveraged, speculative positions that are in no way backed by the physical possession of the metals.

To see how a true “Hedger” uses COMEX see the experience below of one trader protecting himself and profiting by the sound use of COMEX

How a true Hedger acts

Many investors are puzzled by the importance of the COMEX Options & Futures markets on the price of gold.

Take a look at the Diagram here [to enlarge it put your cursor on the corner and pull it diagonally] and you see that 86% of trading in gold Futures and Options takes place in London and New York.

jdwp

Many may well believe that this translates into 86% of trading in gold [physical gold] takes place in these two centers. But this is not correct. The best way to illustrate this is to give you an example of a company that manufactures gold jewelry, as its main business.

This company needs to take delivery of a tonne of gold for the manufacture of jewelry between September and November and then deliver it to retail jewelers. Its business is manufacturing only, but it finds itself at the mercy of a constantly moving gold price. These moves can be large enough to destroy profit margins.

The company cannot afford to suffer the risks on the gold price.

It is at this point that they need to turn to the COMEX Futures & Options to lose the risk of the gold price.

The head of the jewelry manufacturing company decides on when they enter the contract to buy the needed 1 tonne of physical gold. This may be at a time well ahead of September, the delivery date. He may believe that the price he can buy for is the lowest price he will see before September. So he goes ‘long’ of one tonne of physical gold just as he needs to be, so he can take delivery in September to get on with the business he is in. He does this by buying it on a bullion market, or from a refinery, or a bullion dealer.

But can he afford to take such a risk with such a changing price in gold? The price may drop before then and he is left with a cost that may prove too much for his business.

So he ‘hedges’ by selling a tonne of ‘paper’ gold on the Futures market. Now he hasn’t ‘zero’ positions, but one physical long and one short hedge position, but zero risk, as any losses he makes on one position will be covered by profits on the other position.

Now the price drops horribly. He then believes it has gone far too low, so he buys another tonne of paper gold on the Futures market and makes a profit [technical] from his short position. Now he is left with his original physical long physical position, a ‘hedged’ short position and a new long position. The effect of his profits on his short position has left him, in effect, with a much lower price on his physical long position.

But he has a risk position, nevertheless, as the net position is; two long and one short. But netting out these is what he started with. So now the manufacturer still wants to cover his risk, although his net price is lower than the price he originally paid.

He is willing to open another short position to remove all risks if the price rises again. The price then rises again so he does open a new short position.  Now he has four positions, three of which are in the Futures market. Each time he makes a ‘profit’ on matching positions, in effect he lowers his entry price.

He is not speculating, in the modern sense of the word, as the only risk he really takes is on the original physical position.

It is not uncommon for such a hedger to have 50 plus positions against the original exposure. He doesn’t need a large change in price to continue increasing his positions. The reason it is not so speculative is that his original position needed hedging and subsequent actions are only undertaken when a profit is sure.

A speculator takes a view on the price itself with no underlying motive except price direction. He usually exposes himself to high risk that remains uncovered. Frequently, such traders take losses. We questioned one trading house, who informed us that even amongst professional speculators the success rate was only 52% at best amongst amateurs.

This example helps one to understand that COMEX is not about gold supply and demand, simply about price. It is a money market separate from the gold market or the pork belly market.

It serves a vital function, but should not lead the gold price but follow it.

Now look at the diagram we featured here once more.

*Julian Phillips is the publisher of the Gold Forecaster and Silver Forecaster newsletters

SGE IS publishing gold withdrawal figures – but only monthly

I am indebted to Koos Jansen (who else) of www.bullionstar.com for initially guiding us in the right direction, and to LawrieOnGold reader John Bentin and his Chinese speaking wife for interpreting the tables, in that, contrary to our previous assumptions, the Shanghai Gold Exchange (SGE) is still publishing SGE gold withdrawal data – but now only on a monthly, rather than a weekly, basis.  Thus for January 2016, some 225.1 tonnes were withdrawn from the Exchange, compared with 255.4 tonnes in the first month of the record 2015 year when full year deliveries reached 2,596.4 tonnes.  The amount is close to the 228.2 tonnes recorded in December last year, and ahead of November 2015 deliveries of 202.7 tonnes.  In January 2013, the previous record year for SGE deliveries, only 173.7 tonnes were delivered out of the SGE.

Given there can be quite substantial month-to-month fluctuations in withdrawals it is far too early to tell how 2016 will measure up to last year, but the figures do show that gold demand as represented by SGE withdrawals remains at a strong level – 56.3 tonnes  a week on average.  However it remains to be seen how the surge in the gold price over the past few weeks will affect February deliveries (which are anyway likely to be substantially lower due to the week-long Chinese New Year celebrations next week during which the SGE will be closed.)  We will really need to wait until March and April to see how 2016 deliveries are measuring up to previous years.

Even so, the January figures are quite encouraging in showing that gold demand has indeed been holding up pretty well so far.  Overall China and India, where gold imports of over 100 tonnes were recorded in November, look like remaining the key gold market drivers.  We are also seeing a pick up in a third key market, the U.S. where there have been strong gold ETF inflows year to date, and very strong demand for gold coins from the U.S. Mint.  With the gold price up 9% year to date the yellow metal is currently outperforming any other asset class.

(But, be warned.  Gold started off strongly in January 2015 too, also rising by around 9% in the first three weeks of the year.  But from then it was almost all downhill.  This year’s upturn is looking perhaps stronger and longer, and does seem to have more going for it than a year ago, but the price is still largely set by the COMEX paper gold market in New York where huge amounts of virtual metal are traded on a daily basis and there may well be other forces at play here which seem to ignore fundamentals.  Could this yet be déjà vu all over again!!)

Gold and silver to thrive in currency war environment

The New York gold price closed Friday at $1,089.10 up from $1,076.90. In Asia on Monday, it was moved down to $1,088.25 and London held slightly higher until it was set by the LBMA at $1,090.45 with the dollar index almost the same at 99.03 up from 98.97 on Friday. The euro was at $1.0891 down from $1.0897 against the dollar. The gold price in the euro was set at €1,001.24 up from €992.29. Ahead of New York’s opening, the gold price was trading at $1,090.00 and in the euro at €1,000.83.  

The silver price in New York closed at $13.90 up 5 cents at Friday’s close.  Ahead of New York’s opening on Monday, the silver price stood at $13.90.

Price Drivers

Friday saw purchases of 3.867 tonnes of gold into the SPDR gold ETF and a purchase of 0.30 of a tonne into 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.  Without physical sales and with persistent gold purchases into the U.S. gold ETFs, dealers look as though they will be pushed to reflect gold and silver prices moving higher in line with U.S. demand and supply. COMEX speculators have increased their bullish positions last week.

We do see emerging market capital outflows from India, South Africa and importantly China. The People’s Bank of China is doing its best to prevent brutal falls in the Yuan by using Capital Controls [increasing reserve requirements for the offshore Yuan] but all know that the Yuan should be 6% lower at 7.00 to the dollar to just remove the appreciation caused by its ‘peg’ to the dollar. It could fall up to 30% more in time. Meanwhile ahead of the Chinese New Year we see gold demand in China quadrupling to 238 tonnes in the first week of January.

Gold and silver investors should note that currencies are not moving on economic fundamentals but reflect the tsunamis of capital leaving the weaker emerging nations. 2016 will be a year when we see battles to lower exchange rates by individual countries, lessening the credibility of those currencies internationally and undermining monetary system confidence. Gold and silver will thrive in this environment.

China is building an ‘empire’ independent of the developed world through ignoring politics and doing business with anyone. It is now trying to get its feet under the tables of the Middle East on both sides of the Persian Gulf on this basis. Now that Iran has seen sanctions lifted we do not think it will turn to the developed world but to China, so that it is not vulnerable to the U.S. Saudi Arabia too, sees similar advantages in developing ties with China. Over time this will lead to a lower use of the dollar replacing much of it with the Yuan.

The silver price will see a volatile start to the week, but still follow gold.

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

The COMEX paper gold casino

Speaking yesterday at Mines & Money London among one of the best speaker programmes at any conference I’ve attended recently, perhaps the stand-out presentation was from John Hathaway, Senior Portfolio Manager for Tocqueville Asset Management of the U.S. – and when I say it was the standout that was praise indeed given the remarkable array of top speakers presenting on the day.  Perhaps the only real problem is that with 20 minute speaker slots, kept to remarkably rigorously by the organisers, many of the speakers could have gone on far longer.  But the organisers have to be commended for bringing so many top names to a London conference.

Going through the speaker slate for the day we had Rick Rule, Frank Holmes, David Humphreys, Pierre Lassonde, Evy Hambro, Mark Bristow, Peter Hambro, Oskar Lewnowski, John Kaiser, Graham Tuckwell, Rob McEwen, Grant Williams and many more, as well as some cracking panel discussions featuring most of the above, and others.  Today’s programme is almost equally strong.  Mines & Money’s format seems to be working well and as well as events in Hong Kong and Australia the conference company is planning a North American event next year too, to be held in Toronto in September.

But back to John Hathaway – there’s a more comprehensive article on his presentation written by me on the Sharps Pixley website – click here to read it – but for the record here he climbed into paper gold on COMEX and its undue effects on the gold price, in the light of the huge amount of paper being traded – latest figures suggest that paper gold trades in a single day can reach as much as 300 times daily global physical gold supply.  Overall this has the effect of the gold price being set based on U.S. paper trades, almost totally ignoring supply/demand fundamentals – which are far more positive for gold, particularly now the big liquidations out of the gold ETFs are diminishing drastically, and in view of the record gold demand coming out of China and India, which between them are on their own accounting for around all globally new mined gold.

Hathaway also looked at a number of other aspects on gold supply and demand, and like a number of the other gold oriented speakers is convinced that the fundamentals for gold are so positive that the price must turn positive sooner rather than later, but the actual timescale remains obscure.

Upwards pressure on gold and silver prices despite Chinese holiday

New York closed with the gold price at $$1,135.70 down $1.60 yesterday. China remains closed until Thursday in its ‘Golden Week’ holiday. When London opened the gold price rose to $1,140.00 after which it was set at $1,136.90 up from $1,134.35 at the LBMA gold setting. The dollar Index was up at 95.89 from 95.58 and the dollar trading against the euro at $1.1217 down from $1.1268. In the euro the fixing was €1,013.55 up from €1,006.70.  Ahead of New York’s opening gold was trading at $1,138.45 and in the euro at €1,114.93.  

The silver price closed at $15.62 up from $15.24 or over $1 in two days. Ahead of New York’s opening, silver was trading at $15.70.

Price Drivers

There continues to be upward pressure on the gold and silver prices, despite Shanghai being closed. It is impossible not to draw the conclusion that the physical gold market is separate from the New York COMEX market and London prices. This is because gold and silver prices are made in New York, primarily by dealers and traders reflecting sentiment on COMEX. The perception there reflects expectations for rise in interest rates as well as for the dollar. While the dollar remains in a bull market, we are of the opinion that the Treasury will not permit it to rise to the point the U.S. suffers more on the international competitive front. This is supported by the reality that the peak of $1.07 against the euro and peak on the dollar index, close to 100, have not even been approached since then, surprisingly. After the jobs report the dollar fell a full two cents against the euro and remains close to that level even now.

Record short gold positions continue to be closed and long gold positions opened on COMEX since last Friday.  

But against this positive background we saw a sale of 0.221 of a tonne from the SPDR gold ETF and a sale of 0.03 from the Gold Trust. This leaves the holdings of the SPDR gold ETF at 688.983 tonnes and 160.62 tonnes in the Gold Trust. We see this sale as small relative to the volumes being traded currently, so will not influence the gold price. Additions to the gold ETFs in the U.S. in the last two weeks point to a positive attitude to gold growing in the U.S. slowly but surely now.

The Technical picture is now moving to a critical point which may see a strong move this week.

Silver continues to outperform gold having risen over a dollar in the last two days. If gold does breakout to the upside we may see a sprint higher by the silver price. –

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

COMEX ‘almost ignores’ gold and silver supply and demand fundamentals

New York closed with the gold price at $$1,137.30 up from $1,114.30 on Friday. China remains closed until Thursday in its ‘Golden Week’ holiday. When London opened the gold price slipped to $1,135.00 after which it was set at $1,134.35 up from Friday’s $1,106.30 at the LBMA gold setting. The dollar Index was down at 95.58 from 96.30 and the dollar trading against the euro at $1.1268 down from $1.1165. In the euro the fixing was €1,006.70 up from €990.86.  Ahead of New York’s opening gold was trading at $1,133.00 and in the euro at €1,107.60.  

The silver price closed at $15.24 up from $14.56 or 68 cents over Friday in New York. Ahead of New York’s opening, silver was trading at $15.31.

Price Drivers

After what has been labeled a’ disastrous’ jobs report on Friday when only 142,000 job increases were reported against a 200,000 expectation the gold price leapt $25 in 15 minutes in New York despite there being no physical gold purchases into the two U.S. based gold ETFs. [This leaves the holdings of the SPDR gold ETF at 689.204 tonnes and 160.65 tonnes in the Gold Trust.]

After the jobs report the dollar immediately fell two cents against the euro although the gold price in the euro also rose €20 at the same time. With little gold actually traded we see just how large the influence of COMEX and dealers in gold is in the market place where demand and supply are almost ignored. The same is true in the silver market. As we have pointed out in our newsletter before, it will take the arrival of the Shanghai gold price setting to change the pricing of gold. With a Chinese physical price and a New York ‘COMEX’ price moving away from each other, arbitrageurs will trade between the two smoothing out price differential. This will cause a structural change in the gold price. The ‘Yuan Gold Fix” is scheduled to begin before the end of the year.

With China still closed, we did expect attempts to crush the gold price through small physical selling, but the jobs report appears to have put paid to that now. The Technical picture is now moving to a critical point which may see a strong move this week.  

The jobs report has made a re-appraisal of the future state of the U.S. and global economies necessary. If such reports continue to disappoint, it is certain financial markets will become even more volatile. While equity markets rose today, it was not on the prospects of a rosy future, but because better yields in equity markets against those in fixed interest markets will continue for the

next two or three months. Deleveraging will slow and the threat of more turmoil remains when interest rates eventually do rise.

Silver is rose a remarkable 68 cents on little trade in the Silver Trust, as dealers whipped prices higher to protect themselves.  

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

What is China’s real gold demand?

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

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

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

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

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

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

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

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

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

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

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

Gold seeing heightened volatility in a shrinking market

Julian Phillips’ latest commentary on early day movements in the gold and silver markets and some of the forces he sees as currently driving prices.

New York closed at $1,189.70 on Monday, up $1.20 on the Friday close as the trading range remains tight. Today sees the dollar stronger at $1.0898 against Friday’s $1.0949 against the euro with the dollar index at 97.48. The LBMA Gold Price was set at $1,188.75 up $1.45 and the equivalent euro price was €1,082.75. Once again this was a currency play against a weaker dollar and stronger euro. Ahead of New York’s opening, gold was trading in London at $1,188.60 and in the euro at €1,078.10 with the euro recovering.

The silver price rose slightly to $16.73 up 3 cents in New York. Ahead of New York’s opening it was trading at $16.68.

Yesterday saw sales from the SPDR Gold ETF of 1.79 tonnes and nothing from or into the Gold Trust. The holdings of the SPDR gold ETF are at 714.067 tonnes and at 166.60 tonnes in the Gold Trust.  We do not believe these sales had an impact on the gold price.

What was notable yesterday was that the price of gold leapt through $1,200 at the start of business in New York on heavy volume. The buying out of Asia was heavy. While the gold price sank back to $1,189 thereafter, we are of the opinion that such bursts of buying remove large chunks of liquidity from the developed world’s gold markets. Such a process brings heightened volatility in a shrinking market. Having said that, it will take some time before we see COMEX losing its pricing power but it is on the path to losing it, we believe. With gold prices pulling back again, we see Asian demand coming in again as it will continue to do below $1,200, again, fading when prices go through that level.

In the U.S., data released yesterday was lacklustre at best. Inflation, consumer spending disappointed coming in well below expectations and well below what the Fed wants. The numbers for the second quarter of the year have become critical in deciding the direction of the U.S. economy and, by extension the Eurozone and Japanese economy. China is also weakening more than the Chinese government wishes, but they still have a lot of tools and far greater control over the Chinese economy that the developed world has over theirs. With such weakness around, an interest rate rise could have a disproportionate impact on the recovery.  If the numbers for the second quarter are poor, at a time when the recovery should show itself at its best in the year, a major reappraisal of all markets will take place.

The dollar is no longer giving signs that it is headed much higher. It is stalling at current levels. If it were to continue rising much more, it would hammer the U.S. export market and the recovery, as well as disrupt the global monetary system.

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

New York still setting gold price although bulk of trade is through London

New York still setting gold price although bulk of trade is through London

Julian Phillips’ latest analysis of what is happening in the immediate gold and silver markets and of what is really driving the price movements.

New York closed Monday at $1,225.30 up 40 cents over Friday’s close. Asia and London let it slip. The LBMA Gold price was set at $1,219.65 down $8.50 over Monday’s level. The euro equivalent stood at €1,089.12 up €11.89 while the dollar was stronger and the euro weaker at $1.1198 down from $1.1401 against the euro. Ahead of New York’s opening, gold was trading in London back over $1,220 and in the euro at around €1,090.

The silver price closed at $17.68 up 15 cents on Friday’s level. Ahead of New York’s opening it was trading at $17.40.

Yesterday saw sales of 5.668 tonnes of gold from the SPDR Gold ETF but nothing from the Gold Trust. The holdings of the SPDR gold ETF are at 718.243 tonnes and at 166.14 tonnes in the Gold Trust.  These were heavy sales and, we suspect from the same sellers that sold the heaviest tonnage since early 2015 in the last week and more. The sales were large enough to restrain the gold price but not to pull it down.  This is what the consolidation of the gold price is all about.

The dollar index is stronger at 94.88 up from yesterday’s 93.60.  The euro is much weaker today at $1.1090 after yesterday’s $1.14o1 and remarks from the ECB that they will increase QE in months when liquidity is low in holiday months. Is the correction over? Perhaps it is and as we said yesterday the market expectation and ours is that we will see the euro eventually at $1.

The gold market is moving because of currency issues now. But in time the gold price, as it has done of late, walks its own road and rises in the euro too and often in the dollar, at the same time. Gold will move against all currencies and is not linked to a specific currency. But when the market allows it will follow a currency.

This brings us to the concept of pricing power, once more. It is apparent over the years of this century that New York, where a small amount of physical gold is traded, the gold price is ‘made’. London where around 80% of the globe’s market traded physical gold is traded, has a smaller say in the matter. The bulk of gold traded outside the market usually on contracts or with central banks, has no say in the gold price. Instead it is convenient to refer to the New York or London price [currently the twice daily LBMA Gold Price] as a price on which the contract price will be based. The question is, “Do New York’s prices or even London’s prices represent true demand and supply?” No is the answer! Markets that genuinely do this may be called perfect because academically we would like to see this, but in the bulk of markets it is only the marginal supply and demand that prices the product along with speculators, day traders and dealers. Gold and silver are no exception. Until a credible alternative pricing mechanism is established that contractors and dealers accept, the markets in silver and gold will remain imperfect. With the Yuan contract “Fixing” in Shanghai coming this year, will that price become the alternative? Let’s see?

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