China’s official gold reserves level – as believable as Santa Claus or the tooth fairy

A second article published earlier today on the Sharps Pixley  website now it is up and running again.  Check the website out for much more gold news.

If you believe that China’s gold reserve figure is static at 1,842.6 tonnes, as the country’s central bank would have us believe, then you probably also believe in Santa Claus and the tooth fairy.  Well that’s the writer’s opinion but like all matters on Chinese finances the view is perhaps open to question given the nation’s assumed lack of transparency in its statistical announcements.

With gold, the Asian giant has a long track record of continuously surreptitiously adding to its gold reserve, but only reporting such increases at multi-year intervals.  It has now been claiming its gold reserves have remained static for the past 13 months in a row (the November reserve level was announced as unchanged today), which goes against stated policy and also against the long-known overall financial policy of trying to reduce forex reliance on the U.S. dollar and U.S. Treasuries.  China has long considered gold as the ultimate supporter of its financial status in a likely restructuring of the global financial system and has almost certainly been building its gold reserves with the intent of achieving this aim and, in all probability, being somewhat economical with the truth in reporting its true financial position vis-a-vis gold in particular.

Indeed there is probably good reason to doubt that the country’s total gold reserve was even actually at the aforementioned 1,842.6 tonne level the last time it announced a revised total reserve back in October 2016.  That month was, as we have mentioned before, the month in which the Chinese yuan was finally accepted as an integral constituent of the IMF’s Special Drawing Rights basket (alongside the US dollar, the Euro, the UK pound sterling and the Japanese yen).  For just over a year ahead of this acceptance, China had been reporting monthly increases in its gold reserves, apparently in the interests of transparency.  Ever since that date, though, it has reported zero increases.  Given the size of the Chinese economy and China’s enormous involvement in global trade, its acceptance into this global currency club was a seemingly inevitable move and if it needed to fudge its gold reserve figures to facilitate that aim – so be it.

There are a number of expert followers of the gold market though, who suggest that China’s gold reserves are actually far higher than the stated total with the ultimate aim of matching, or exceeding, the official U.S. gold reserve total of 8,133.5 tonnes – itself open to some questions as to its true level.

Indeed much of the world’s official gold reserves could be open to question given the IMF relies on ‘official’ figures given to it from the individual reporting countries without running any checks.  Most gold reserve figures are not independently audited and could thus be open to exaggeration, or understatement, by the various countries which report, although the incentive for the majority of countries which hold only relatively small amounts of gold to do so is perhaps unnecessary.  What is not disclosed in the figures reported to the IMF, though, is the amounts of gold owned which may not actually be readily available due to gold leasing, or swap deals, which fall outside the reporting guidelines.

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

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

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

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

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

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

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

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

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

Will the Gold Bull be Back after the Summer is Over

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

Donald Trump accepting the Republican nomination for president this week

Looking more Las Vegas casino than Oval Office, the stage Donald Trump delivered his nomination acceptance speech from Thursday was all gold, from the stairs to the podium, completely befitting of his showman-like style. Whether you support or oppose Trump, it’s time to face reality. This is really happening, and we should all brace ourselves for what will surely be one of America’s messiest, ugliest general election seasons.

Only time will tell which candidate will be triumphant in November, but in the meantime, one of the winners might very well be gold, which has traditionally attracted investors in times of political and economic uncertainty. In the United Kingdom, which voted one month ago to leave the European Union, gold dealers are seeing “unprecedented” demand, especially from first-time buyers. Some investors are reportedly even converting 40 to 50 percent of their net worth into bullion, though that’s not advisable. (I always suggest a 10 percent weighting, diversified in physical gold and gold mining stocks.) In Japan, where government bond yields have fallen below zero and faith in Abenomics is flagging, gold sales are soaring.

It’s not unreasonable to expect the same here in the U.S. between now and November (and beyond).

Strong U.S. Dollar and Treasury Yields Weighing on Gold

More so than the upcoming election, gold prices are being driven by U.S. dollar action, interest rates and low-to-negative bond yields around the world. (Between $11 trillion and $13 trillion worth of global sovereign debt currently carries a negative yield.) Right now the yellow metal is in correction mode on a strengthening dollar and rising two-year and 10-year Treasury yields, both of which share an inverse relationship with gold.

Gold Corrects on Rise of 10-Year Treasury Yield
click to enlarge

It’s also worth mentioning that the summer months have historically been among the weakest. By contrast, some of the highest gold returns of the year have occurred in September, when the Love Trade heats up in India in anticipation of Diwali and the wedding season.

Gold's Average Monthly Gains and Losses, 1975 - 2013
click to enlarge

For the past several trading days, gold demand had also been overshadowed by a hot equities market, with many stocks hitting 52-week highs. Both the S&P 500 Index and Dow Jones Industrial Average closed at all-time highs, twice in the latter’s case. The CNN Fear & Greed Index, which measures investor sentiment, is currently in “Extreme Greed” mode, at more than a two-year high.

Markets in Extreme Greed Mode

With gold taking a breather, now might be a good buying opportunity. Since 1970 there have been only four major gold bull markets, and the consensus among analysts right now is that we’re in the early stages of a new one, with end-of-year forecasts in the $1,400 an ounce range.

Learn more about what’s driving gold.

Rumors of Brexit’s Negative Impact Have Been Greatly Exaggerated

Despite gold’s correction, the metal got a boost last Thursday courtesy of Mario Draghi. The European Central Bank (ECB) president, as expected, announced that euro area interest rates and asset purchases would remain unchanged as economic ramifications of the Brexit referendum continue to be assessed.

Speaking of Brexit, Draghi noted that markets have met the volatility and uncertainty in the month following the U.K. referendum with “encouraging resilience.” Like many others, he had predicted that Brexit would dramatically stunt euro growth, but as we’ve already seen, such claims are overdone. In a note released last week, securities trading firm KCG wrote that June 24, the day following the British referendum, “was no repeat of August 24,” a reference to the “flash crash” that struck equities last summer and led to ETF mispricing.

Last week, the International Monetary Fund (IMF) trimmed 0.1 percent from its global economic growth forecast for the year, singling out Brexit fallout as the culprit. Curiously, though, the organization sees the U.K. growing faster than both Germany and France this year and next. This disconnect prompted U.K. Independence Party MP Douglas Carswell to label the IMF as “clowns” with “serious credibility problems.”

IMF Sees the U.K. Growing Faster Than Germany and France, Despite Brexit
click to enlarge

Following Draghi’s statement, gold prices immediately popped in Thursday morning trading, effectively hitting the pause button on the correction. On Friday, though, prices continued to slide, contributing to gold’s second straight week of losses.

The next hurdle to be cleared is a U.S. interest rate hike. Expectations that rates will go up in September have wobbled back and forth since Brexit, but in recent days, it’s been reported that Federal Reserve officials feel confident enough to raise them at least once before the end of the year. Gold will face additional pressure if rates are allowed to rise, but if the Fed chooses to stand pat, it could serve as another catalyst for a price surge.

 

Chinese central bank gold buying is back

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

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

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

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

China stops buying gold?

The latest figures out of China suggest that the country ceased buying gold for its reserves in May. An announcement from the country’s central bank indicated its total reserve figure was an unchanged 58.14 million ounces (1,808 tonnes) at the end of last month.  Whether this represents an end to buying for its central bank holdings, or a temporary hiatus in its reports is unknown, but it appeared to have had an immediate effect on the global gold price, although not that significant a one so far, which fell around $7 in late Asian and early European trading today on the announcement. Since then though, other factors have taken gold and silver up a fair amount so the markets are obviously not letting the China buying, or lack of it, have too much impact, but if future months also see a hiatus in Chinese buying that could change.

In March and April China had reduced its gold purchases to around 9 tonnes in each month, so the amount is relatively small in relation to total gold demand, but as a possible indicator of an ongoing halt in China and thus a corresponding fall in the likely total of central bank buying this year, it may be taken as an important factor. Some commentators have suggested that the rise in the gold price so far this year has been at least a partial cause for the apparent fall in the purchases which have been announced monthly since July last year.

Prior to that China had only been disclosing its gold reserve increases on a five or six yearly basis leading to speculation that it was hiding its true reserve increases from the world, and that even now its reserves might well be considerably higher than the amounts reported to the IMF through holding an important chunk of its gold in non-reported government accounts.  Many observers suggest that the country’s total reserve figure may really be two or three times the officially declared amount.  Others put an even higher figure suggesting the country’s total may be nearing or exceeding the 8,133.5 tonnes of the reported official holdings of the USA – the world’s largest holder of gold.

China has been seen as building its gold reserves in part as diversification of its holdings away from the U.S. dollar, but also because it is believed that the country’s government is convinced that gold will play an ever bigger role in any realignment of the perceived economic status of nations in the years ahead.

We have also suggested that the Chinese central bank may see the huge holdings of gold by the state-owned and controlled commercial banks as being technically part of its gold reserve which would put the total under its control at perhaps 4,500 tonnes or more – See: China’s Govt controlled gold reserves already 4,500 tonnes plus .  This would put the total well on the way to that of the USA, and ahead of Germany – which currently has the world’s second largest gold reserve at 3,381 tonnes according to the IMF.

This is an edited and updated version of one I published a day earlier on the sharpspixley.com website

Will this week see clear direction for gold and silver?

The New York gold price closed Monday at $1,089.10 the same as Friday. In Asia on Monday, it was held at the same level as it was in London until it was set by the LBMA at $1,087.00 down from $1,090.45 with the dollar index higher at 99.21 up from 99.03 on Monday. The euro was down at $1.0867 from $1.0891 against the dollar. The gold price in the euro was set at €1,000.28 down from €1,001.24. Ahead of New York’s opening, the gold price was trading at $1,087.45 and in the euro at €1,000.69.  

The silver price in New York closed at $14.00 up 10 cents at Monday’s close.  Ahead of New York’s opening on Monday, the silver price stood at $14.03.

Price Drivers

The gold price has held at the same level this week barely moving either way. This behavior normally precedes a strong move either way. At the same time currency markets have also quietened down. The oil price has held at the $28 level despite fears that it would plunge to $25.

We are seeing a broad acceptance that in 2016 currencies will be volatile, particularly those in the emerging world. Again, we repeat this is not tied to economic performance but to solely financial/ currency/ debt factors. It is the slowing of global growth that is making the monetary world more vulnerable.

Many feel that the 6.9% GDP growth in China is better than expected and also feel that China’s demand will help the rest of the world avoid further value collapses. We note that China is developing its economy to be able to do what the rest of the world does, as well and cheaper. So to the contrary, over time, the development of China will cost the developed world dearly, as it outperforms the developed world.

The IMF has cut its global growth target from 3.6% to 3.4% pointing to recession in Brazil, falling oil prices and a too strong dollar. Last year the global economy is estimated to have grown 3.1% the worst performance since 2009. U.S. growth will fall to 2.6% down from 2.8% in the I.M.F.’s last estimate.

Monday 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 is consistent with an immobile gold price. The gold market is waiting for the delicate balance of gold demand and supply on COMEX [not the rest of the world which remains unconnected with the U.S. gold market] to be disturbed.

The silver price has decided that gold is about to rise and jumped from below $14 to its current level. Hopefully this week will see a clear direction given for silver and for gold.

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

UPDATED: Latest Gold Reserve figures from the World Gold Council

A computer glitch had recorded the % of reserves for all countries at 18.8%.  This has now been corrected.

The World Gold Council (WGC) has today announced its regular statistical update on gold reserves in the official sector.  This monthly release includes (1) World Official Gold Holdings ranking gold holdings by country, (2) a spreadsheet with the latest changes in official sector gold holdings.  As noted these are not completely up to date – except for the Chinese reserve figure where we have added in the 19.8 tonne change in our table.  We are also only showing the Top 20 national plus IMF holdings in our table below – a full table for all countries as reported to the IMF is available on the WGC website (www.gold.org/statistics ).

Table 1.  Top 20 Gold Reserves as reported to the IMF

Tonnes % of reserves**
1 United States 8,133.5 73.4%
2 Germany 3,381.0 67.7%
3 IMF 2,814.0
4 Italy 2,451.8 65.6%
5 France 2,435.5 65.6%
6 China 1,722.5 1.8%
7 Russia 1,370.6 13.6%
8 Switzerland 1,040.0 6.4%
9 Japan 765.2 2.3%
10 Netherlands 612.5 56.5%
11 India 557.7 5.8%
12 ECB 504.8 25.8%
13 Turkey 500.9 15.3%
14 Taiwan 423.6 3.5%
15 Portugal 382.5 72.9%
16 Venezuela 361.0 67.4%
17 Saudi Arabia 322.9 1.8%
18 United Kingdom 310.3 8.6%
19 Lebanon 286.8 20.9%
20 Spain 281.6 18.8%

* This table was updated in December 2015 and reports data available at that time.  Data are taken from the International Monetary Fund’s International Financial Statistics (IFS), December 2015 edition, and other sources where applicable. IFS data are two months in arrears, so holdings are as of October 2015 for most countries, September 2015 or earlier for late reporters

What analysts primarily look out for are for any month by month changes in the official holdings figures.  As can be seen below the only significant regular additions to gold reserves in the second half of the year are By Russia (95.6 tonnes in the four months to end October), China (83.9 tonnes in the five months to end November) and Kazakhstan (11.7 tonnes in the 4 months to end-October).  Our assumption is that going forward we would expect these countries, which seem intent on building their gold reserves, will continue to buy at a similar pace.  For the record. According to the IMF figures Kazakhstan is 23rd on the list of national gold holders with 216.3 tonnes which accounts for 27.8% of its total official reserves.

The IMF figures should be taken as a guide as they relate to holdings as reported by the various countries and do not take account of gold holdings which may be temporarily reduced due to gold swaps and leasing (as the countries do not need to report these figures under the IMF guidance), or countries which may be under-reporting their gold holdings as many believe China to be.

Table 2  Changes to official reserves since July*

Country Comments Jul Aug Sept Oct Nov Dec
Belarus Purchases and swaps +2.5  -3.0  -2.5
Brunei Darussalam +0.2  -0.3
China +19.0 +16.2 +14.9 +14.0 +19.8
Colombia  -6.6  -0.3
Czech Republic  -0.2
France +0.1
Jordan +7.5  -0.6
Kazakhstan Purchases and swaps +2.5 +2.1 +3.2 +2.9
Malaysia +0.6
Mexico Additions to reserves and trading  -0.1  -0.2  -0.2  -0.1
Mongolia Trading activity +1.0  -0.9  -0.6  -0.2
Mozambique +0.6  -0.9
Philippines Buys locally produced gold; may sell or retain in reserves +0.1
Russia Mainly purchases of gold in the domestic market & other changes +13.1 +29.6 +34.5 +18.4
Serbia +0.1 +0.1
Sri Lanka Trading activity  -0.2
Turkey3 +17.2 +0.6  -13.2  -3.6
Ukraine +2.2 +0.9 +0.3
United Arab Emirates +2.4 +0.1 +0.1
Uruguay  -0.2
 

*As in Table 1, IFS data are two months in arrears, so holdings are as of October 2015 for most countries, September 2015 or earlier for late reporters.  We have added in China’s latest Reserve upgrade for November.

3Gold has been added to Turkey’s balance sheet as a result of the policy accepting gold in its reserve requirements from commercial banks

 

 

Today an important day for gold and silver prices

The New York gold price closed at $1,063.20 up from $1,052.70 a rise $10.50 on Thursday.  In Asia prices were pulled back to $1,061.85 as the dollar weakened from 100.19 on the dollar index to 97.88. The dollar is at $1.0938 down from $1.0586 against the euro. The London a.m. price was set at $1,063.00.  In the euro the fixing was €975.68 down from Thursday’s €995.17 because of the stronger euro.  Ahead of New York’s opening the gold price was trading at $1,061.70 and in the euro at €974.53.  

The silver price in New York closed at $14.11 up 8 cents on Thursday’s close. Ahead of New York’s opening the silver price stood at $14.16.

Price Drivers

The moves by the E.C.B. underwhelmed the market and the dollar fell back heavily against the euro. It was expected that the euro would fall to $1.03 but instead it has risen to $1.0938.  If the gold/euro relationship holds anywhere around here, we should see a further rise in gold towards the critical $1,080 level. This is subject to what the Fed does today. The shorts got a shock and may well have started to close positions, or are waiting for the Fed today before they do. They may precipitate the rally.

We have written about how critical the $: € is to both the E.U. and the U.S. looking to see just how they will ‘manage’ the exchange rate. From what we saw yesterday there appears to be agreement that the $+1.07 level is the point that the two agree is the line in the sand. If this is true the actions of the Fed today will confirm this. If so, this applies to gold and silver too, going forward.

We do expect a rate rise, but it could be less than the expected 0.25%? If so, we have no doubt that the E.C.B. accepted that their actions must not strengthen the dollar or weaken the euro against the dollar. This would add fact to the thought that the dollar’s ‘bull’ market, at least against the euro, is over? Hence today is an important day for the gold and silver prices! Ahead of New York’s opening the markets were virtually frozen waiting for the Fed’s announcement.

After massive sales of 15.776 tonnes of gold from the SPDR gold ETF we saw a tiny sale of 0.226 of a tonne and a sale of 0.9 of a tonne from the Gold Trust, yesterday. The holdings of the two gold ETFs, the SPDR gold ETF and the Gold Trust remain at 638.797 tonnes in the SPDR gold ETF and at 157.07 in the Gold Trust. These investors remain in a holding pattern waiting for the Fed too.

The silver price remains over $14.00 and should move with gold after the Fed’s announcement today.

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

Waiting on the IMF’s SDR vote

The New York gold price closed at $1,058.60 on Friday.  In Asia prices were pulled back to $1,056 as the dollar went stronger again this morning, taking the dollar to 100.23 up from 100.08 on the dollar index. The LBMA price setting fixed it at $1,055.65 down from $1,064.65 on Friday’s LBMA price setting. The dollar is at $1.0580 up from $1.0590 against the euro.  In the euro the fixing was €998.44 down from Friday’s €1,005.43.  Ahead of New York’s opening the gold price was trading at $1,056.15 and in the euro at €999.01.  Later it moved up to the low $1,060s

The silver price in New York closed at $14.10 on Friday. Ahead of New York’s opening the silver price stood at $14.12.

Price Drivers

The Technical picture on the gold price continues to point lower. We would have thought the fall would have been faster, but it seems that the lack of physical sales is now affecting the pace of the fall. The fundamentals have become irrelevant for 50% of gold mines are now unprofitable with the industry looking at a five year life for its mines, at the pace that gold is being produced now.

But gold is moving with currencies as money, rising in falling currencies and falling in the dollar. After a sales of 0.893 of a tonne from the SPDR gold ETF but none from the Gold Trust, the holdings of the two gold ETFs, the SPDR gold ETF and the Gold Trust remain at 654.799 tonnes in the SPDR gold ETF and at 159.52 in the Gold Trust.

The big news of the day will be the vote by the I.M.F. as to whether the Yuan will join the basket of currencies that make up the SDR. While it is a symbolic move, it will trigger an adjustment in central bank foreign exchange holdings with the Yuan coming in against while that amount of dollars and euros being removed. Its acceptance as a ‘well used’ currency by the IMF will make it far more acceptable for international deals to be funded in Yuan, again at the expense of the dollar and the euro.

But most importantly is signifies a change in the monetary system’s structure. While the other currencies are ‘allies’ of each other China is not seen as an ally, thereby opening the likelihood of a divided and multi-currency system. With the U.S.A. holding the controlling vote in the I.M.F. we will wait to see if they accept the situation. It appears they can hardly refuse to do that, but let’s see first.

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

 

Gold price in a high risk area

New York closed at $1,117.70 down $16.60 on Tuesday. In Asia it rose to $1,120.00 before London opened. The LBMA price setting fixed it at $1,118.00 down from $1,130.90 yesterday. The dollar Index was stronger yesterday and rose to 97.36 at the close of New York up from 96.86 yesterday. The dollar was slightly stronger at $1.0931 up from $1.1017 up against the euro.  In the euro the fixing was €1,023.25 down from €1,029.789.  At New York’s opening gold was trading in the euro at €1,023.19 and at $1,118.30.  

The silver price closed at $15.29 down 14 cents over Tuesday’s close. At New York’s opening, silver was trading at $15.27.

Price Drivers

Technically, the gold price has broken down through support and yet in Asia it lifted again. The Technicals are not yet clear enough to point a way forward for the gold price. We are in a high risk area now. It could either rally strongly or plunge.

Tuesday saw sales from the SPDR gold ETF of 2.978 tonnes making over 10 tonnes sold this week and a further 0.70 of a tonne sold from the Gold Trust leaving their holdings at 686.304 tonnes and at 160.30 in the gold Trust.

These sales were not sufficient to cause such a large fall in the gold price so we must ask why such a fall? We know that exporters of gold to China do not chase prices but accept gold that is offered to them. This means they have little impact on prices allowing prices to fall increasing supply. This increases the influence of speculators and dealers on COMEX on the gold price, which is solely reflective of U.S. opinion on gold prices with little physical gold movement. The result is a distorted market causing prices to behave as they are now. It is not in the interests of Asian buyers to change this scene as they are maximizing physical supply at bargain prices.  

Today the I.M.F. discusses the inclusion of the Chinese Yuan in the currencies that make up the Special Drawing Right. It is a day on which China has placed great importance. Since discussions began, China has complied with the wishes of the U.S. controlled I.M.F. in publishing gold reserves on a monthly basis and keeping the Yuan exchange rate steady against the dollar. This would change if the IMF rejected the Yuan in that role. We expect that a Yuan Gold Fixing will follow soon thereafter, on the Shanghai Gold Exchange.

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

Russian central bank accumulates another 34.2 tonnes of gold

Russia continues to amass more gold in its reserves with the purchase of another 34.2 tonnes in September, bringing its total to around 1,353 tonnes – or around 13% of its total foreign exchange reserve figure.  This is Russia’s second highest monthly total purchase in six years and represents yet another indicator of its continuing desire to downplay the significance of the U.S. dollar holding in its overall forex reserve make-up.

This is the seventh successive month that Russia has increased its gold reserve – it didn’t add to reserves in January or February.  It thus remains the world’s sixth largest national holder of gold, moving further ahead of Switzerland in seventh place which is sitting on 1,040 tonnes and closing the official gap with China which also reported increasing its gold reserve in September by 15 tonnes to 1,708 tonnes, although this only represents well under 2% of its massive forex reserves of around $3.5 trillion. Many reckon though that gold held in Chinese government accounts amounts to a far higher total than officially reported being amassed in accounts which it does not classify as part of its forex holdings and thus does not report to the IMF.

Top 10 World national holders of gold in forex reserves
Country Gold holdings
(in tonnes)*
Gold’s share of
forex reserves
1 USA 8,133.5 72.6%
2 Germany 3,381.0 66.8%
3 Italy 2,451.8 64.9%
4 France 2,435.4 65.2%
5 China 1,677.4 1.6%
6 Russia 1,288.2 12.7%
7 Switzerland 1,040.0 6.1%
8 Japan 765.2 2.2%
9 Netherlands 612.5 56.3%
10 India 557.7 5.5%

Sources:  IMF, Wikipedia, Sharelynx, LawrieOnGold

However transparency in the reporting of global gold holdings can be obscure – even for those like China and Russia which are reporting month by month official changes.  Most of the gold holders in the table above as the central banks of the countries concerned do not allow audits of their gold holdings and many have reported zero change for a number of years.  In particular, as Wikipedia points out, gold leasing by central banks could place into doubt their reported gold holdings.

GLD purchase halts gold price slide

New York closed Wednesday with the gold price at $1,116.00 down $11.40 from $1,127.40. With China closed for the next week the gold price held at New York’s close overnight. The dollar was a little stronger at €1.1175 this morning in London and the dollar index a little higher at 96.27. In London’s morning the LBMA gold price was set at $1,114.20 down from $1,122.50. In the euro this was €998.48 down from €1,001.16.  Ahead of New York’s opening gold was trading at $1,113.10 and in the euro at €997.58.  

The silver price closed at $14.54 down 10 cents over Wednesday in New York. Ahead of New York’s opening, silver was trading at $14.52.

Price Drivers

With China closed for the next week, the market price of gold could easily be distorted by traders in New York. However, the gold ETF SPDR in the U.S. saw a healthy purchase of 3.276 tonnes and a purchase of 0.36 of a tonne into the Gold Trust yesterday, but this was insufficient to lift the gold price, but certainly halted its fall.  This leaves the holdings of the SPDR gold ETF at 687.417 tonnes and 160.65 tonnes in the Gold Trust. The trading range of the gold price is at the bottom end of support at $1,114. We may see a strong move shortly, either way.

The IMF and the World Trade Organization has issued another warning on the global economic front. They see global economic growth falling from current levels. This may well place additional pressures on emerging nation’s exchange rates and interest rates in addition to the pressures already on large corporates across the world. It is only a matter of time before banks pull the plug on some of these. So be ready for more bouts of global, financial market volatility.

We pointed to the possibility of a series of financial markets falls yesterday, similar to 2008. Then the gold price fell from $1,200 to below $1,000, before turning around and soaring to a record $1,921. At that time the U.S. was very long of gold, which was sold off to cover margin calls and provide liquidity to cover shortages. Some believe that we will see the same again soon. The difference between then and now is that the U.S. holdings of gold were not rebuilt after the massive sell-off in April 2013. Since then on balance their holdings have fallen lower. The implication is that gold should not have a very heavy sell-off as we saw in 2008, despite U.S. investors search for sources of easily liquidatable holdings. The subsequent turning to gold may happen much quicker. Before that, we should see markets very volatile.

Silver is back in sync with the gold price and should continue to stay so today.

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

 

Official: IMF extends composition of current SDR basket for 9 months.

In an announcement today, the IMF Executive Board has confirmed the previously suggested extension of the current SDR basket of currencies by nine months from December 31 this year up until September 30th next.  This leaves the way open for changes to be made, and implemented, in the structure of the SDR basket for a revised basket (if so chosen) to be implemented in October 2016.

The proposal for the extension was put forward by IMF staff in a paper published on August 4, 2015 (see Review of the Method of Valuation of the SDR – Initial Considerations) and subsequently submitted to the Executive Board for lapse-of-time decision.

Normally the IMF would review, and restructure if it chooses to do so, the SDR basket every five years which would have made this process due to be announced in October this year, and implemented at the beginning of next.  However the extension is undoubtedly due to internal arguments over the inclusion of the Chinese renminbi and the delay gives the Chinese time to meet some of the requirements of key IMF board members (the USA?)  which have almost certainly already led to China’s recent renminbi devaluation against the U.S. dollar.  This may at least give it the appearance of no longer being tied directly to the greenback with which it had been in lockstep for a number of years.  Whether China will allow a full float of the renminbi on the global currency markets remains to be seen – this may be a step too far, and perhaps also an over-worrying move if implemented for some IMF board members (the USA again?)

The official statement from the IMF says that the ‘nine-month extension is intended to facilitate the continued smooth functioning of SDR-related operations and responds to feedback from SDR users on the desirability of avoiding changes in the basket at the end of the calendar year. The extension would also allow users sufficient lead time to adjust in the event that a decision were to be taken to add a new currency to the SDR basket.’ (The italics are ours – with the only currency likely being considered for inclusion being the Chinese renminbi, and with the country’s now global top GDP status as confirmed by the IMF, it would presumably form a major – if not the major – currency in the SDR basket.)

The inclusion of the renminbi in the SDR basket may be seen by many as downgrading the status of the U.S. dollar in global trade and even possibly as the leading global reserve currency with all the advantages that brings.  However any such change in status may take some years to take effect.

Doom and gloom for gold overdone? – Are there positives ahead?

Seldom has the media been more bearish on gold’s prospects, and this will undoubtedly present itself in a further retreat from gold derivatives and gold stocks.

China seems to be being fingered for the latest gold price crash, but should it be?  A truly Machiavellian argument might be that the crash was perpetrated by those elements seen as anti-gold seeking to gain maximum advantage at a time when gold was already under pressure. And by undertaking some of the activity on the Shanghai markets seeking either to try and apportion the blame to Chinese hedge funds, but also to dampen the appetites of the gold purchasing Chinese people and institutions who may be seen as standing in the way of a major manipulated gold price downturn.

What is the evidence here?  The gold price crash was actually initiated in New York with an enormous futures sale – which then continued in Shanghai with a reported double whammy of a large 5 tonnes of physical gold being sold into the Shanghai Gold Exchange and another massive futures trade on the Shanghai Futures Exchange.  As the U.K.’s Ambrose Evans Pritchard puts it, writing in the Daily Telegraph – “Spot prices slumped by more than 4 percent to $1,086 an ounce in overnight trading after anonymous funds sold 57 tonnes of gold in Shanghai and New York, choosing the moment of minimum market liquidity in what appears to have been a synchronized strike intended to smash confidence.”

Indeed the initial COMEX futures sales, conducted at around 11.29 pm on Sunday night when activity on the exchanges would be at around their lowest, was so great that it forced two 20 second automatic trading halts because of the volumes – virtually unprecedented.  The chart below from Reuters shows the activity as noted by Bron Suchecki of the Perth Mint in his analysis of what took place.  The red circled initial drop was over a period of precisely 4 seconds!    If anyone tells you the gold price can’t be manipulated  here is an almost perfect counter argument.  The two green stars are when the automatic trading halts took place.

gcq5ann

The recent Chinese announcement of a far lower than expected increase in its gold reserves after a six year denial of any increase (although few believe the Chinese figure), coupled with a U.S. Fed interest raising start date now expected to be in September had already weakened the gold price and with what seems to have been a concerted anti-gold media campaign in most Western mainstream media, seldom will gold investors been on the end of a more gloomy array of prognostications.

Yet, when sentiment is as low as it is at present this often represents the turning point.  Readers of my articles on Mineweb may recall one of May last year entitled Gold to fall to $1,100 then skyrocket – silver, platinum in behind.  In it we discusses a prediction by Elliott Wave analyst, Peter Goodburn on a scenario as suggested in the title of the article – and indeed gold has now, as he then suggested, fallen to the $1100 mark, although perhaps a year behind the timing his initial premise may have suggested – but these things are always difficult to time accurately.  Now we shall see if gold does indeed recover from this level, and if it does, on the Goodburn projections the reversal in fortunes could be both rapid and very large indeed.  We shall see.  Personally I’m not a great believer in such chart analysis but have to recognise that the chartists are often, but not always, right in their predictions.

Goodburn’s company, WaveTrack International has thus put out a note today reminding clients of the prediction in a note entitled Gold Bullion – Time to be a Contrarian .  We will have to wait and see if this is indeed a good predictor of the gold price, but if it is we shouldn’t have long to wait.

Another possibly bullish point for gold is the IMF’s pending announcement – probably in October – of any revision in the make up of its Special Drawing Rights (SDR), which is broadly regarded as an indicator of global reserve currencies.  If, as many expect, the Chinese yuan is to be included, it would have to be at least close to pari passu with the US dollar which could, over time, lead to a major reduction in the dollar’s current role as the world’s principal reserve currency and be a major game-changer in the dollar’s global influence.  And with China, and the countries seen as already in its zone of influence (like India, Russia, Brazil and South Africa) seen as pro-gold nations this could well herald a significant change in sentiment for the yellow metal.

So could gold have reached its low point with the only way now upwards?  Its not beyond the bounds of possibility.  The recent move to drive the price down noted above has been so blatant that maybe some kind of counter reaction will be set in place.  Perhaps by China which has already demonstrated its capability of halting a stock market collapse in its tracks in the interests of stabilising its economy.  With so many of its citizens holding gold could it be prepared to do the same here, particularly if it feels the blame for the latest price collapse has unfairly been attributed to its financial elements?

Greek bailout deal unworkable – IMF

New York closed yesterday at $1,145.10 down $4.20 with Asia and London holding it there in line with the moves in the dollar against the euro. The dollar was stronger at $1.089 up from $1.0934 against the euro with the dollar Index at 97.54 up from 97.27.  The LBMA gold price was set this morning at $1,143.00 down $2.10 again, in reaction to the rising dollar. The euro equivalent was €1,049.39 down €1.69. Ahead of New York’s opening, gold was trading in London at $1,144.30 and in the euro at €1,050.54.

The silver price fell to $15.01 down 10 cents in New York. Ahead of New York’s opening it was trading at $15.00, again.

The gold market continues to see thin trade but yesterday saw the emergence of buyers from Asia as prices in the Rupee in particular began to hit recent lows. But the gold price was shifted in line with the moves in the dollar. In the euro it remained above €1,050. Short positions are still at extremely high levels on COMEX.

We are sorry to say that our expectation that the fat lady had at last sung in the Greek tragedy is now far from correct. The IMF had stated emphatically that the deal is unworkable. The IMF cannot lend to an insolvent state. Germany has stated emphatically that Greece cannot have a ‘debt haircut’ under the rules of the E.U. nor can it have a ‘back door haircut’ by extending the debt out for a generation and with mini-interest rates.  The ECB has given funds to rescue Greece for a short while and stated emphatically that Greece’s place in the Eurozone was ‘never in question’ and that ‘debt relief is ‘uncontroversial’. This horse won’t run!

The next month should see a lot of fur flying and a Grexit is not off the table. This raises questions about the euro exchange rate, which is dominating the gold price unreasonably so. The divisions in the Troika are very deep and may take some heavy backing down for them to be resolved. For sure the deal agreed earlier this week is not a done deal.

Let’s see what Germany says today. All the world’s eyes are turning back to Greece for the next month if not years. So the gold sold into the market in the belief that the issue was resolved may well find its way back into investor’s hands? We are in important territory for gold from a Technical point of view!

As of the end of June 2015, China’s official gold reserves were 53.32 million ounces (1,658.48 tonnes), the People’s Bank of China announced today. This is an increase of only 604 tonnes since the last time the central bank updated its figures in 2009.

There were sales of 1.772 tonnes from the SPDR gold ETF and purchases of 0.36 tonnes into the Gold Trust leaving the holdings of the SPDR gold ETF at 707.878 tonnes and 167.76 tonnes in the Gold Trust.

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

China middle class growth to add to record gold buying levels there

New York closed yesterday at $1,155.20 down $2.70 with Asia and London holding it there. The dollar was weaker at $1.1011 down from $1.0992 against the euro with the dollar Index at 96.66 down from 96.94 before London opened.  The LBMA gold price was set this morning at $1,154.75 up $1.55. The euro equivalent was €1,047.53 up €2.02. Ahead of New York’s opening, gold was trading in London at $1,155.00 and in the euro at €1,047.90.

The silver price fell to $15.38 down 12 cents in New York. Ahead of New York’s opening it was trading at $15.33.

The gold market is seeing thin trade with few buyers or sellers, allowing the gold price to be nudged around by currency moves. Since the 8th July the holdings of the SPDR gold ETF have moved from 709.65 tonnes and at 167.40 tonnes in the Gold Trust to 709.071 and to 167.76 tonnes in the Gold Trust. This continues to show that the U.S. investor is not interested in gold at present. All the action in gold is occurring below the surface of the price and in Asia, primarily China.

The news that China is doing better than expected, achieving over 10% growth on their retail side and 8.4% on the services side, points to a fast growth rate in their middle classes. It is this group that will add to the current record levels of buying of gold into China. These numbers directly impact gold demand.

While the Greece tragedy, we feel, is no longer impacting the euro exchange rate, the report from the IMF that Greek debt is unsustainable with it reaching 200% of GDP within 2 years really does make a real tragedy of the current deal, which sad to say the Greek Parliament looks like accepting. While it may be politically acceptable to give a “grace period” [postponing repayments and interest?] for 30 to 40 years, according to the IMF, all this does is to emasculate Greek sovereignty and allow the creditors that time to write-off the debt. The country is bankrupt and this deal makes sure it stays that way for more than the next generation. Keeping such a weak link in the E.U. does achieve the objective that it will keep the euro weak for the foreseeable future and maybe longer. Overall this will be positive for the gold price in euros. The entire exercise has weakened the credibility of the Eurozone. For weak nations to use the euro, which reflects far greater strength than their economies deserve, is a fundamental mistake for them.

Silver will likely recover faster than gold now.

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