China shocks bullion market with small gold reserve increase

Here’s Ross Norman of London Bullion Dealer Sharps Pixley’s interesting quick commentary on today’s Chinese increased gold reserves announcement.  While the initial reaction on markets was muted, as the news sunk in gold was being marked down quite sharply.  Ross is one of the smartest gold commentators out there.

‘China shocked the bullion market by declaring today its official gold holdings for the first time in 6 years – the surprise was less that they had done so, and more at the incredibly small figure which is less than half the market consensus. China last reported a figure of 1,054 tonnes in April 2009 which has risen to only 1,658 tonnes today – we don’t believe the figure, but we struggle to understand the motivation for down-playing it.

With only 1658 tonnes of gold reserves this would put China in 5th position behind the US (8133 tonnes), Germany (3383 tonnes), Italy (2451 tonnes) and France (2435 tonnes). As a country with the world’s largest economy by some measures, one would have expected they would be well north of the German figure really. So what is at play here …

China is seeking a place at top table in financial markets by having its currency accepted under IMF rules (the so-called Special Drawing Rights) at a meeting to be held in October – in other words, to have the Yuan included by Central banks around the world as a reserve currency. As part of this process, China would need to fully declare its gold reserves ; in that sense the timing is as expected – its just the amount that makes no sense.

Secondly, China is struggling with an equity market in freefall and some have suggested that the timing of the declaration is to give comfort to domestic investors that their reserves are sizeable … but that makes no sense either, because they aren’t !

The third explanation – and here we move into the under-world of conspiracies, is that China wants to downplay gold as part of its reserves – especially as they are world’s top buyers both for domestic jewellery and to top up their official reserves (yes they are also the top producers but they are significant net buyers). This is to say that China may be adopting the reverse of the UK policy of the late 1990’s where it telegraphed in advance to the world its intentions to sell most of its gold reserves – thereby prompting a fall in prices to a 21 year low … thank you Gordon Brown.

I would suspect a decision has already been made by the IMF in principle about the Yuan joining the US dollar as a reserve currency (although I have no proof of that), effectively seeking to fill a void in reserves as Central Banks desert the Euro … and it does therefore need to update its gold holdings.

There is an apocryphal story about the Chinese Premier on a state visit to Paris who was asked what he thought about the French Revolution … “Too early to say” was his reply … which caused a guffaw amongst observers who were aware of China having an uber-long term view on things (actually he misunderstood the question !) … perhaps they are playing the long game both with regards to the economy and with regards to declaring its hand fully and openly on gold.

 

Ross Norman

ross.norman@sharpspixley.com

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LBMA top gold forecaster: gold price to average $1321 in 2015, silver $18.56

The annual LBMA precious metals price competition’s top gold forecaster over the years, Sharps Pixley’s Ross Norman, is bucking the mainstream analyst consensus with a $1321 average gold price forecast for 2015.  Silver $18.56, Platinum $1268, Palladium $876.  Slightly modified version of article posted to Mineweb.com – the website for the best global mining and metals news and comment.

Lawrence Williams

In his submissions to this year’s LBMA precious metals forecasting competition, Ross Norman who heads up London bullion broker Sharps Pixley, and who has been probably the most successful forecaster in the LBMA panel in the past, says he is going out on a limb with his forecast for the gold price average this year at $1321. (It would certainly have been out on a limb last month although perhaps seems less so now given the gold price performance so far this year.) He is also looking for a gold price high of $1450 and a low of $1170 during the year. With most of the forecasting panel being bank and institutional analysts, whose forecasts tend to be much more conservative – some would say decidedly bearish – Norman must have a good chance of adding to his wins if gold’s advances continue.  The LBMA is expected to publish its full listing of its annual competition forecasts later this week, along with the analyst participants’ reasons for their predictions.

Norman has been the outright winner of price forecasting sections of the LBMA competition five times in the past  – usually by ‘going out on a limb’ which was a pretty good policy when the gold price was in its bull market phase  Norman has also had numerous Top 10 positions.  Perhaps he tends to favour the more bullish trends so will he be back on track again this year?  If the current momentum in the gold price gathers more strength still his forecasts could even prove conservative but it would perhaps be foolhardy to automatically assume that gold’s good start to the year will not beget a serious correction at some stage later on.

Norman’s stated reasons for his fairly positive predictions on gold this year are as follows: “If markets move on what you don’t know today, but will know tomorrow then it follows that many factors such as a US interest rate rises should already be factored into the current price… it also begs the question what the new drivers for 2015 will be. We see ongoing declines in economic growth prompting central banks to fight deflation by resorting to inflationary pressures in H2.  If our outlook for gold in dollar terms is bullish, in emerging currencies it may be even more so as investors seek to insure or hedge against currency debasement. As such, we foresee good demand for the physical.”

He sees gold already demonstrating that it has turned a corner and sees investor flows returning strongly but reckons there are unlikely to be runaway prices beyond the $1450 level without either significant new product innovations or without the sort of black swan events in the economy that few would wish for, although the potential for these looks ever greater following the SNB’s decision of last week to drop the Swiss Franc peg against the Euro.

He is also fairly bullish on silver, looking for an average price of $18.56 over the year, encompassing a high of $21.75.  In percentage terms these are big rises from the prices prevailing at the beginning of the year.  This is commensurate with the general pattern of silver moving up faster than gold on the upside – and he also reckons that investors will take comfort from silver ETF holdings which have remained firm (unlike gold ETFs) coupled with reported retail sales of the physical – coins and bars -which have also remained robust.

He seems to be a little more sanguine in his views on platinum.  Despite many analysts seeing platinum in serious supply deficit this year, he is looking for a yearly average price at $1268 – somewhat below that of his gold forecast suggesting that at some stage during the year the platinum price will fall back below that of gold as it has now already done on Friday after struggling to stay above the gold price level for most of last week.  He does foresee a high price during the year of $1480 – thus higher than that he sees for gold.

Finally there is palladium – the precious metal probably most supported by analysts in recent months due to what are seen as continuing strong fundamentals.  Norman is looking for an average price over the year here of $876 with a 2015 high reaching $975 as against the price at time of writing of $755.  Palladium was last year’s best performer in the precious metals sector and Ross suggests it may have trouble matching last year’s 10.9% increase, but even so he feels the junior precious metal as having another positive year based on continuing attractive supply/demand fundamentals despite the backdrop of a relatively weak global economy. He also points to an assessment suggesting an ongoing supply deficit in the order of 1.4 million ounces which will keep the metal well bid. Of the four metals, palladium remains once again his favourite, although, on his predictions perhaps gold and silver will do even better!