A balanced viewpoint on gold

In terms of gold, and silver, analysis from those ‘expert pundits’ who tend to monopolise the information highway with their self-promotional opinions, usually with an agenda to promote their own subscription websites and newsletters, or their latest books, it seems to be a case of ‘bulls are bulls and bears are bears and never the twain shall find any common ground’. They have made their positions clear over and over and while both sides may ultimately prove to be correct in their views at some point over very long periods of time, they do not tend to be good guides for the investor in the short to medium term timeframes in which most of us make investment decisions.  They may call trends correctly from time to time, but their end-predictions tend to be way off.

There are exceptions of course.  Bank analysts tend to take a more balanced viewpoint, but they seem to follow a herd instinct and are almost all totally reactive.  Gold follows an upwards path for a month or two and the analysts raise their forecasts, and vice versa.  They are not opinion leaders but followers.

I like to think of myself as having a reasonably balanced view on precious metals, although I do admit to being marginally bullish at the present time – perhaps being more swayed by bullish arguments than by bearish ones, but I would like to think I would be prepared to change my position should the fundamentals which I follow start to look like moving in a different direction.  But then my background is in mining engineering, which I believe to be a pragmatic discipline, rather than in economics where, sometimes strongly held opinions seem to have little connection with day to day life reality.

So, I tend to discount arguments that tell me that gold is going to $5,000 or $10,000 in the medium term – to be frank I’m not sure I’d want to be living in a world where this were to occur, the scenario is probably too horrific and only likely to be brought about by total economic collapse.  The world’s politicians and central bankers, however misguided they may be in their actions, do seem to just about muddle through in the end!  I wouldn’t, however, rule out a rise to $2,000 within a couple of years, although even this might be stretching it.

Conversely I do not find any sympathy for a the mega-bearish analysis that suggests gold could come crashing down well below the $1,000 level, perhaps to $750 or lower – gold at plus $1,000 levels is now probably too entrenched in the system.  Some may view it as a pet rock, but gold as an instrument of wealth is inbuilt into the psyche of the vast majority of the world’s population.  As such it has withstood the tests of time.

Thus it is always comforting when one comes across analysis which does appear to be reasonably balanced and the latest Bloomberg Intelligence Mid-Year Outlook for Precious Metals is such.  It comprises a series of short snippets from Bloomberg analysts on precious metals – some of which I would agree with and some not – but overall a more balanced series of viewpoints than are generally released onto the markets.  The report was presided over by Ken Hofmann, Bloomberg Intelligence’s Senior Industry Analyst whose opinions I much respect.  It doesn’t try and predict prices going forward but raises a succession of points which are hugely relevant to current investors and to future trends in gold demand and sentiment.

It opens with the statement: “The U.K.’s surprise vote in favor of leaving the EU has sent investors clamoring for currencies other than pounds and euros, favoring gold and other precious metals. With elections in the U.S. and major European nations scheduled through 2017, precious metals such as gold and silver also are viewed as less susceptible to political changes. The launch of blockchain, using technology currencies backed by physical gold, has also supported demand for the metal.” 

None of this I would quarrel with, although, as noted above there are aspects in the informational snippets which to me suggest a degree of unfortunate under-research in particular relating to current Chinese gold consumption, but perhaps that’s just because the analyst responsible did not have the space to present a more closely researched picture of the reality.

The introduction also highlights the following aspects of the report:

  • China Seeks Larger Role in World Gold Market: Primer
  • Blockchain May Be Future of Trading, Currencies: Midyear Outlook
  • Gold Holdings Show Rising Role in Global System: Midyear Outlook

The notes on the Chinese impact are, for the most part, quite illuminating having mainly been drawn together by Chinese speaking analysts who perhaps have greater insights into the Chinese mindset and policies than those of us Westerners who try, and often fail, to understand some of the motivations and nuances behind Chinese gold demand and market participation rationale.  A considerable section of the overall analysis is devoted to China and its importance in the Precious Metals sector and what the analysts perceive as the key points in the country’s overall precious metals strategy which is particularly significant given that the nation is both the world’s largest producer of gold, and the largest consumer.

It is, though, the snippet on Chinese consumption with which I would perhaps argue the most.  Analyst Sean Gilmartin comments: “Estimates by groups such as the World Gold Council and Metals Focus put Chinese gold demand at 834 metric tons in 2015, based on imports from Hong Kong and local mining. The Shanghai Gold Exchange (SGE), the official exchange of Chinese gold, had over 2,500 tons of withdrawals in 2015. Those who say China has been importing more gold than the West estimates point to this figure as support for higher Chinese demand. Traditional sources maintain it is just the same gold, moving in and out of the SGE.”  This is something of a simplification of the position and does not note that the WGC and Metals Focus estimates (which are effectively the same number as the latter supplies the data to the former) of Chinese demand relate only to a section of gold flows into China plus Chinese production. This has been very much the pattern mainstream analysts have followed for some years.  But in the past two or three years there has been a substantial flow into banks and financial institutions which is not included in this ‘demand’ figure. which has teneded to follow precedent and only look at consumer and retail investment flows.

Flows from Hong Kong, which still seem to being taken as a proxy for total Chinese imports are no longer so dominant with much more gold being imported directly than used to be the case and published detailed gold export figures from several countries bear out that perhaps only 60%, or even less, of mainland China imports nowadays flow through Hong Kong.  The true figure for Chinese gold imports plus domestic production is far close to the SGE withdrawal figures than the note might have us believe.

However other aspects of the report trying to get behind the Chinese rationale for building its gold reserves, the role of the huge increase in the Shanghai Gold Exchange’s impact, the increasing participation of Chinese banks in global gold price setting and trade and the implementation of the Chinese daily gold ‘fixes’ in yuan, make for valuable reading.  But again all could do with much further analysis.

A significant sector of the overall report is also devoted to gold and the blockchain and its potential impact moving ahead.  It notes that “Blockchain is also being used to transform gold, one of the world’s oldest forms of money, into one of the newest. Gold apps, such as the gold-backed BitGold, are being used as global payment systems, similar to PayPal, only backed by metal, not cash.”

Time will tell how much impact the above will have on the global usage of gold.  The somewhat chequered history of bitcoin – the progenitor of the blockchain – suggests perhaps that one should reserve judgement.

The report gives some limited insights into other aspects of gold, gold stocks, central bank gold buying and even more on the Chinese effect round it off.  Valuable reading if one can get hold of a copy, although is definitely in need of further amplification which no doubt is available, at a cost, direct from the Bloomberg service.

The above is an edited version of an original article published on sharpspixley.com – which will be updated with some of the edited changes in this article.

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China on a gold standard? Food for thought at least

By Lawrie Williams

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

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

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

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

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

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

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

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

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