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.

Gold and silver struggling at support

Gold TodayNew York closed at $1,317.40 Friday after the previous close of $1,321.40.  London opened at $1,314.

    • The $: € was stronger at $1.1237: €1 from $1.1173: €1 Friday.
    • The Dollar index was stronger at 95.82 from 95.82 Friday.
    • The Yen was stronger at 101.21: $1 up from 101.21: $1 Friday against the dollar.
    • The Yuan was stronger at 6.6720: $1 from 6.6720: $1 Friday.

 

  • The Pound Sterling was weaker at $1.2956: £1 from Friday’s $1.2956: £1.

 

Yuan Gold Fix

Trade Date Contract Benchmark Price AM Benchmark Price PM
     2016  10  3

     2016  09  30

SHAU

SHAU

Closed

284.79

Closed

284.88

Dollar equivalent @ $1: 6.6720

$1: 6.6720

/

$1,327.63

/

$1,328.05

Once again we see lower prices dominating while Shanghai is on holiday. New York prices dominate when China is closed.

The Yuan is now part of the SDR of the IMF, for the Chinese an important step on the way to international acceptability as a global currency. We expect to see its use accelerate from now on. Today’s Yuan exchange rate is merely academic because of the holiday there.

LBMA price setting:  The LBMA gold price setting was at $1,318.65 against Friday’s $1,327.90.

The gold price in the euro was set at €1,173.49 against yesterday’s €1,188.49.

Ahead of the opening of New York the gold price was trading at $1,315.80 and in the euro at €1,170.85.  At the same time, the silver price was trading again at $19.09.

Silver Today –The silver price rose slightly to $19.16 at New York’s close Friday from $19.07, Thursday.  

Price Drivers

The story of the week, this week, is Deutsche Bank. The media and Deutsche bank are telling the markets everything is OK. Deutsche Bank is facing an up to $14 billion fine from the Justice department and now is facing charges from Italy.  You have all read the papers and what they say, but the real problem is that the ongoing reports of bad behavior continue alongside the belief that the German government will break its own rules and rescue them no matter what. This is despite their heavy handedness over Italian and Greek banks. In turn this speaks of lack of confidence ‘in the system’ and cohesion within the E.U. needed to resolve the problems.

This is now being demonstrated by hedge funds removing their funds from the bank. There is no doubt that no matter what state Deutsche bank is in, if it loses the confidence of its clients and the system sticks to its rules Deutsche bank could fall. But everything will be done to protect it no matter what it has done. The story is gold positive.

As a reminder of what can happen if the banking system loses the trust of the financial world, in 1933 there were a host of ‘bad banks’ in the U.S. forcing the government under Roosevelt to close down the banking system for a long weekend. The bad banks were then closed, gold was confiscated and placed behind the dollar in its support. The banking system of all countries will be made to stand no matter what and no alternative to national currencies will be permitted to compete with them, including gold or cash held in or outside the banking system.

Gold ETFs – There were sales of 1.187 tonnes from the SPDR gold ETF but no change in the Gold Trust Friday, leaving their respective holdings at 947.952 tonnes and 226.68 tonnes

Since January 4th this year, the holdings of these two gold ETFs have risen by 374.33 tonnes.

Silver – Silver prices are holding above $19, above support.

Julian D.W. Phillips

GoldForecaster.com | SilverForecaster.com | StockBridge Management Alliance

Gold and silver acting strong – David Morgan

Mike Gleason* interviews David Morgan about the recent consolidation in gold and silver prices.  Interestingly David felt there was some strength in the pattern we had seen which could kick in after the Labor Day holiday – a pattern which has already come about.  The interview was conducted last week, ahead of the G20 meeting and the weak economic data which propelled gold and silver upwards before and immediately after, the U.S. holiday.

Mike Gleason: Coming up we’ll hear from David Morgan of The Morgan Report and co-author of the book The Silver Manifesto. David tells us how long he thinks the correction in the metals will last, why he believes this November’s election is less important than you might think and also talks about a key event coming up that could put a lot of pressure on the U.S. dollar. Don’t miss a wonderful interview with our good friend David Morgan.

Well now, for more on the importance of sound money and what’s ahead for the markets, let’s get right to this week’s exclusive interview with the man they call the Silver Guru.

David Morgan

Mike Gleason: It is my privilege now to be joined by our good friend David Morgan of The Morgan Report. David, I hope you’ve been having a good summer and welcome back. It’s always a pleasure to talk to you.

David Morgan: Thank you very much, and yes, I have been having a wonderful summer. Thank you.

Mike Gleason: Well, as we begin here, David, please give us your thoughts on the recent pullback in the metals. We’ve maybe been overdue for a correction for a while now. I know in following your work, you’ve been calling for one, and we’re getting it here. And after a fantastic first six or seven months of the year for gold and silver, we’re finally starting to see some real selling pressure emerge. What is your take… what have you noticed during this mini-correction, and what are some of the reasons for the pullback?

David Morgan: Well, I’ll start with the reasons. In any market, even in a non-manipulated market, which there is probably none. The stock market, bond market, metals markets, futures markets, options… just about everything out there is geared and leveraged and pretty much manipulated by the trading algorithms, and other means, but regardless of that, all markets move up and down. Nothing goes straight up or straight down, and so there are periods where there’s profit-taking, there’s periods where there’s consolidation, that type of thing. So regardless of manipulated or not, all markets ebb and flow.

So the metals markets are no different in that aspect. What we saw in the silver market was over the last two months’ time frame, we peaked out in the spot month around the $20.50 area a couple times, and now we’ve dropped as far as about $18.50, so we’ve had about a $2 drop over the last couple of months. Specifically, the most recent drop’s really over a one month period. I want to be correct on that.

The idea that I’ve had is similar to many others, and we’re kind of overdue for correction as you stated, Mike. So this is actually a healthy thing. The metals stocks certainly have leveraged both directions, so anybody that’s invested in the resource sector, particularly gold and silver stocks, is going to see a multiple percentage-wise on the drop. And some of these stocks actually gave us a clue that the consolidation or the correction was coming, because some of these sold off before the metals actually had started to sell off. What’s interesting, Mike, is that the selloff, even though it’s been a fairly good drop, $2 on a $20 commodity, you’re looking at about 12% or so, hasn’t dropped the commitment of traders… or the open interest, I should say, on the commitment of traders… very much, which means that the bulls and bears are still pretty equal. There’s still a very strongly held commitments to the silver and gold paper paradigm that futures markets more than I would’ve seen in a very, very long time for this kind of a price drop.

So let me restate that. The $2 drop in silver and a correspondingly percentage-wise drop in gold, normally, you would see a pretty good sell off in the open interest. In other words, the shorts would be winning the battle. That is not what I’m seeing at this point in time. We could see something different after the Labor Day holiday. I’m not sure, but right now, these metals for the whole year, and even during this correction, are acting extremely strong.

Mike Gleason: So in your view, it sounds like the correction might not be terribly long lasting. Is that what I’m hearing?

David Morgan: Yes, not long lasting. Maybe another month. There’s a lot of things happening this month, as we’ll talk about later. The August low is habitually seasonality-wise very accurate for gold. You usually get the lowest price in gold in August. We’re doing this in the 1st of September, and September is usually a rebound month, but the seasonalities haven’t worked very well in the metals markets for quite some time, so I don’t put as much credence in them as I used to. However, in the end of the year, you’ve got a rise in the metals, and we haven’t seen that in a while either. I’m just going to let the market dictate, but here’s what I’ll say. The main support on the silver price is around the $17.50 to 17.60 level, so we might see another drop, and I really think that that level, another dollar down, is about as far as these guys are going to be able to push it down.

On the gold side, it’s holding above $1,300 which has fairly good support. Not really strong support, because time-wise, it hasn’t been above that level for a long time during this rally of the last six months. So I believe we’re going to see a huge effort to push gold below the $1,300 level, and we have to just see how it reacts, if it rebounds quickly or not. And of course, more important than that, pretty much at the volume that takes place. In other words, if that causes a large selloff and the algorithms start to move with the shorts and the longs decide to throw in the towel and starts a waterfall decline, then of course, I’ll do an update for The Morgan Report members, show that to them. Right now, it’s too hard to call that. I don’t see that. In fact, my suspicion is that that’s not going to happen. In other words, they’ll push it down below $1,300, but it will pop back up fairly quickly. So it’s very interesting to watch the metals this year.

Mike Gleason: Talking about some of those key events that are coming here over the next month. We’ve got the G20 Meeting coming up. I know you want to comment on that. Also, China’s going to be part of the IMF Special Drawing Rights. I believe it’s October 1st. Comment on those two international events there.

David Morgan: Certainly. I think it’s very important, and this is the big news of the month of September. One is that, I think it’s the 4th and 5th of September, China will be hosting the G20 Meeting for the first time in China. And I think they will be running the meeting pretty much. And at the same time, at the end of the month, I think it’s the 30th of September, the yuan will be weighted at about, I think it’s 10% of the SDR, Special Drawing Rights. So the international currency system run by the IMF, which is really run by the United States and International Monetary Fund, will be embracing the yuan as part of the SDR. And also, you will see a lot of settlement that will take place outside the U.S. dollar.

For example, petroleum historically has been settled in U.S. dollars only, and this has caused a great deal of the banking system throughout the globe to hold dollars so they could make settlements, because everybody buys oil. And now, you’re going to see settlement directly in yuan, which means that this is going to put downward pressure on the dollar, which could be a reason to raise interest rates. This thing about the economy’s great, we need to raise interest rates like we used to have back ten, twenty years ago, is preposterous. Anyone who takes just a cursory look at the real numbers and understands what’s really going on with shows like yours, mine, and many, many others, knows that there’s no way that the recovery has really ever taken place in any substantial way since the 2008 financial crisis. Sure, there’s been pockets here and there, but the overall economic picture’s really just gone sideways or gotten worse.

However, if there’s pressure on the dollar, they could use that meme, that idea, that propaganda, that, “Oh, look at the unemployment. Look at how good we’re doing,” and this type of nonsense, “Well jeez, we really have to raise interest rates,” when actually the reality is that because there is a further weakening of the dollar and there’s negative interest rates throughout the bond market on sovereign debt, but not in the U.S. yet, that it could happen. I’m not saying it will happen, but my thinking is a little different than almost anybody that’s in my peer group on this matter, Mike. Again, I could be wrong, I could be right, but I certainly want to voice it because I want to get people to think, and the only way to keep the dollar strong, let’s say “strong”, would be that it’s got a positive rate of return when all these other sovereign nations with the euro, et cetera, have negative rates, there’s going to be a move for people to hold dollars.

And because China’s coming into the fore, there’s a move to not want to hold dollars, so you’ve got these two forces, sort of bullish the dollar and bearish the dollar. Very interesting times. Lots is happening, and I want to make one more comment and that is, as much as China has taken on the gold market in fiscal form for many, many years and built their reserves probably far higher than what the official report, I do not believe that China is ready to pull the gold card yet. They are just now entering into the global currency system in a meaningful way. They’re very patient and I think they’re more willing just to continue with this paper paradigm. They certainly caught the Keynesian disease years ago that have done the money printing to build out their infrastructure and to certainly boost their economic picture, which is of course distorted at this point just like everywhere else that’s based on the Keynesian model. But nonetheless, I don’t think they’re ready to switch horses to a gold-backed yuan or anything like that any time in the very near future.

Mike Gleason: Certainly going to be interesting to see that push-pull play out there with the dollar. You bring up some good points there about strong dollar versus weak dollar. And I also want to get your thoughts on the election here. We’ve got the election season kicking into high gear. We’ll have the debates here pretty soon. We’re about two months away now from election day. What do you think a Trump victory would mean this November for the markets, primarily the metals since that’s what we’re focusing on here, and also what do you think a Hillary victory would mean?

David Morgan: Well my view is different than a lot of people, but you want my view, my view is it doesn’t matter. My view is that it’s changing captains on the Titanic. My view is that Trump seems to resonate with a lot of conservative thinkers and I think there’s many, many Americans that are just absolutely, totally, and completely disgusted with the political class. I do think that you can make arguments either way, who gets in could move the price and we might get a blip one way or the other depending on who’s elected or should I say, “selected”.

But regardless, I think in the longer term macro picture, it really means very, very little. I think we’re way too far gone on the debt paradigm overall that any one person no matter how well meaning they are, can really turn the boat, turn the ship. The Titanic has hit the iceberg. It’s taking on water, and you might get somebody stronger at the wheel and you might veer off, but it doesn’t really matter. The ship’s going down. That’s my view.

Mike Gleason: Switching gears here a little bit, you’ve always had great advice for people when it comes to getting into precious metals. You’ve written your ten rules of investing in the sector and I know owning the physical metal is first and foremost in your view. So before we get into discussion about mining stocks, which I’ll ask you about in a moment, talk about why you recommend owning the physical bullion before you do anything else.

David Morgan: Well almost anyone that’s in this sector, and that could go from anybody that’s a prepper or as extreme as a survivalist or someone that’s familiar with financial markets and monetary history, everyone understands that we’re at risk at all times, and especially now. We’re in a situation on a global basis we’ve never been in before, which is that the reserve currency of the world is failing, which means you need something outside of the system. You need something that’s not electronic-based, you need something that has no counterparty risk, you need something that’s universally recognized, and you need something of high value that could be used anytime, anywhere by anyone. That of course is gold and/or silver. This has been the case.

So if there were, let’s say, a problem with the banking system where we go to the report that’s for free on TheMorganReport.com, you might go there, give me an email, and a first name. You’ll get the “Riches and Resources Report,” which shows you what happened during the currency crisis of 2000-2001 in Argentina. The film’s name is The Empty ATM, and they did not take your bank accounts. They just basically sealed them, where the money in the bank was held by the bank and they allotted you so much you could take out on a weekly basis no matter who you were, no matter what your account size was, and then they devalued the currency, which is basically stealing from you. So this is what took place.

I say all that to state how emphatic I am, how important it is for people to have real money outside of the system. Those people in Argentina that held some of their wealth in gold and silver circumvented the devaluation and also had readily available, recognizable and cherished real money that they could barter with, which took place all over the country in Argentina during that currency crisis that I just mentioned. So I really, really believe that this could take place in other areas of the world, certainly if you were in Venezuela right now and you had some precious metals, you might not have a smile on your face, but you certainly would be better off than the people that didn’t.

So these are really interesting times and we are in a paradigm that is failing and the powers that be are propaganda, propaganda, propaganda saying and telling everyone through the mainstream media that everything’s fine, go back to sleep, we’ve got it under control, things are wonderful, and that type of thing. When the reality of course, most people can just look out their window and drive down their main street of their town, take a look around and say, “You know, things don’t look as good as they did a decade or two ago.”

Mike Gleason: Are there any products that you prefer over others? For instance, in silver, do you generally recommend coins versus bars or coins over rounds? Does it even matter, or is it just about getting the most ounces for the money, or do you want variety? Give us your thoughts there.

David Morgan: Yeah, in the “Ten Rules of Silver Investing,” I said you should strive to get the most ounces per dollar you want, or whatever currency you have invested, which means first of all, small units. You definitely want to start with small units. You don’t want to have one 100-ounce bar, and that’s your silver holdings, because now you’re in a fix. You’ve got to make one absolutely correct decision when to turn it back into fiat currency or barter with it, whatever. So you want small coins if you have rounds, but if you’re particularly interested in recognizability, for example, and you want a government-stamped coin, you’re willing to pay a slightly higher premium, I have nothing against that.

Also, the constitutional silver or what’s known in the trade as “junk silver”, I think that’s still a good way to go. The bag market is actually fairly tight. So much has been smelted down into bars, there isn’t a lot of it around, actually. Small units. Rounds or recognizable coins are the way to go. I think you can start with silver if you’re modest means. If you have better means than that, I think you certainly should have some gold. You should actually have both if you can afford it.

And I also think moderation’s the key. I think a 10% holding in physical metal is probably more than is sufficient for most people. There are people like me that have a great deal more than that involved, but this is my life’s work. This is something I understand and I understand the risks, and I’ve been with that type of risk environment for a very, very long time. For most people, just a 10% amount in physical, and for those that really want to gain leverage and maybe triple their gains, certainly that’s available, but it’s a situation that demands study and work. And that would be through the Resources Sector, which is what we’ve specialized in for a long time.

Mike Gleason: Leading me right into my next question here, turning to the mining stocks. It’s been an outstanding year for the miners, the recent pullback notwithstanding. Now, if you look at the silver spot price, it’s up more than 35% since the first of the year, but if you look at the mining sector, gosh, David, we’ve got the HUI Gold Stock Index up nearly 100% for the year and the GDX is up over 120% year-to-date even with the big pullback in the last few weeks.

So things are finally starting to look up after a rough very few years for everyone in the Sector with many stocks down 80% of more since the 2011 peak, assuming they even stayed in business, but talk about the miners. What are you looking for here in the second half of the year after a great first half?

David Morgan: I’m actually looking for further gains by the end of the year. I think we’ve still got more work to do in the downside, and as I said earlier in your show, Mike, I think probably another month. I think by the time that the SDR takes place and people, the markets, I should say, understand how much dollar damage is done or not. We’ll have to wait and see. With the yuan being more accepted not only by the SDR but in final settlement rather than having to go to the dollar directly.

As that settles out, I think you’ll see more and more consolidation into the precious metals and more push for them to go to the upside. So it’s a situation that most of the large funds money managers, pensions even, that missed the 2008 bottom in the precious metals during the currency crisis, have woken up early this time and have moved into the paper paradigm of the gold and silver markets, which means that the open interest, as I said earlier on your show, is very, very high relative to what it’s been historically, and these are strong hands.

On top of that, the Shanghai Gold Exchange has a very, very large open interest themselves, and they’re trading from the long side vis-a-vis the commercials or the banking system that trades historically from the short side on the COMEX. So you’ve got big money that got in relatively early in both gold and silver, because they understand that the stock market is too high and they want to be hedged. They have no real philosophical reason to own gold like we just outlined in the last question, but they manage money and they need exposure. And the best way for them to get exposure is to buy it on a leveraged basis on the paper markets. So that’s what’s taking place. With the addition of the Shanghai Gold Exchange ramping up the amount they’ve purchased on paper, and of course, that’s much more physical marked than the COMEX is.

So again, there’s that really strong bull/bear back and forth and so, just to close out, I really don’t see these metals coming down a whole lot more or a whole lot longer, and I think this year is going to be one that people look back on and say, “Jeez, I’m sure glad I bought my metal or bought my mining shares during 2016.” By the way, The Morgan Report comes out this weekend right before the G20 Meeting, and on top of that, we’ve got another company that will be probably putting out mid-month, mid-September, an updated analysis, an appraisal on the mid-tier producers in the gold complex. And this is after it’s made two transformational acquisitions in 2016.

This is the kind of research we do. If you go back another month, we had like four or five speculative situations that are going to show up in these other newsletters that cost like three or four times what ours does. We see that all the time. Not that we certainly haven’t gotten ideas from others, because we have, but it seems that whatever we do our research on seems to be picked up by let’s say a lot of people in the industry. I’ll just leave it at that.

Mike Gleason: Well it’s great stuff as usual, David. We always appreciate hearing your thoughtful analysis here on our podcast, and I’m sure we’ll talk to you again very soon. Now, before we let you go, please tell folks how they can get involved with The Morgan Report, because this is a fantastic time for people to dive deeper into the metals and miners. I think they understood that by listening to our conversation here… it’s especially a good time after this recent pullback and this pause in the upward movement we’ve been having. Please let people know how they can get on your email list and also about some of the other things going on there at The Morgan Report or about the book, The Silver Manifesto.

David Morgan: Certainly. On the book, we’ve gotten great feedback from people. It’s probably one of the best $30 investments that you can make. You can get it on Amazon, you can go toTheSilverManifesto.com and read one chapter for free and get kind of an overview, you can read the reviews on Amazon. There’s a whole chapter on how to pick a mining stock, and we actually spill the beans and show you exactly how we do it. And again, we’ve gotten feedback that’s been extremely positive for those types of people that have the time, energy, and motivation to do their own analysis. We take you through step-by-step, so that’s something you can get out of the book along with a lot of other material.

As far as The Morgan Report, what I actually urge everybody to do is to just go to the website,TheMorganReport.com, and get on our free email list, and get our free “Riches and Resources Report.” In that report, you’re going to get two movies to watch for free. One is The Empty ATM I mentioned earlier and the other one is The Four Horsemen film, which is the end of The Age of Empire, and it’s very, very good thought-provoking types that are interviewed during that paradigm with some solutions to the problems at the end of the film. And that’s just two things you get in that report. You also get ways to accumulate silver and gold over time, you get some insights, and of course, once you’re on the list, you will be appraised of an update every weekend by yours truly, myself and or one of my staff.

Mike Gleason: Yeah, it’s great stuff. I’ve been on your list for an awfully long time. Always enjoy it every weekend we get an email from you, and it’s excellent information. The Silver Manifesto, as you mentioned, is another great resource. We’ve sold about 1,500 on our website, MoneyMetals.com. A lot of people are really enjoying that book and I know you’re doing very well with that in a number of different places and we wish you continued success there.

Well thanks so much. We really appreciate it, and I hope you have a great weekend, enjoy the rest of your summer, and we’ll talk to you again soon. Thanks, David, and take care.

David Morgan: My pleasure. Thank you.

Mike Gleason: Well that will do it for this week. Thanks again to David Morgan, publisher of The Morgan Report. To follow David, just visit TheMorganReport.com. We urge everyone to sign up for the free email list to get his great commentary on a regular basis, and if you haven’t already done so, be sure to pick up a copy of The Silver Manifesto, available at MoneyMetals.com, Amazon, other places where books are sold. It’s almost certainly the best resource on all things silver that you will find anywhere, so be sure to check that out.

And check back here next Friday for our next Weekly Market Wrap Podcast. Until then, this has been Mike Gleason with Money Metals Exchange. Thanks for listening, and have a great weekend, everybody

 

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

Big sale out of GLD on Friday dented gold price – but not for long.

Gold TodayGold closed in New York at $1,334.60 on Friday after Thursday’s close at $1,337.90.  London opened at $1,341.80.

    • The $: € was slightly weaker at $1.1168 from $1.1156.
    • The dollar index fell slightly to 95.65 from 95.83 Friday.
    • The Yen was slightly weaker at 101.07 from Friday’s 101.04 against the dollar.
    • The Yuan was weaker at 6.6459 from 6.6440 Friday.

 

  • The Pound Sterling was weaker at $1.2924 down from Friday’s $1.2956.

 

Yuan Gold Fix

Trade Date Contract Benchmark Price AM Benchmark Price PM
2016  08  15

2016  08  12

SHAU

SHAU

286.66

286.86

286.97

286.95

Dollar equivalent @ $1: 6.6459

$1: 6.6440

$1,341.60

$1,342.92

$1,343.05

$1,343.34

Shanghai again turned out to be higher than New York’s close but this time without any exchange rate influence as the Yuan was relatively steady. London followed Shanghai this time too, opening just slightly lower than Shanghai’s close.

As the time approaches when the Yuan becomes one of the world’s ‘hard’ currencies it is meeting the definition of being widely traded in the global monetary system. Just to what extent remains to be publicized. Certain Capital Controls still persist but the silence on this ahead of the incorporation of the Yuan in the IMF’ Special Drawing Rights is deafening.

At the same time the discussions over the type of gold trading London will see in the future has, on one side, Goldman Sachs and the Chinese ICBC who are pressing for a more transparent system. No doubt if precise numbers were published on London’s gold trade, they would influence just where gold’s pricing power resides.

LBMA price setting:  $1,339.20 after Friday 12th August’s $1,336.70.

The gold price in the euro was set at €1,198.90 up €0.50 from Friday’s €1,198.40.

Ahead of the opening in New York the gold price stood at $1,337.25 and in the euro at €1,196.32.  

Silver Today –The silver price closed in New York at $19.69 on Friday down from $19.95 on Thursday.  Ahead of today’s New York’s opening the price was trading at $19.77.

Price Drivers

On Friday in New York there was a very big sale of gold from the SPDR gold ETF of over 12 tonnes. This prompts the question, “Has U.S. demand for the shares of the gold ETFs fallen away?’  The data out of the U.S. on the economy is weak telling us that while the economy is OK, it is not as strong as it needs be to invigorate growth. The rest of the world [with the exception of China] is also giving a poor showing. Against the backdrop of globally burgeoning debt, the conditions where even the U.S. investor discards his gold do not exist at present. Add to that the approaching ‘gold season’ and we do not expect to see the thundering herd leave its gold positions. Indeed demand from gold from the U.S. has not reached the point where it is a ‘thundering herd’. It has a long way to go before U.S. investors are well stocked with gold in their portfolios.

We have a couple or more weeks before the ‘gold season’ comes into play so the gold price will continue to consolidate.

Gold ETFs – In New York on Friday there were very large sales of 12.171 tonnes from the SPDR gold ETF (GLD) but purchases of 1.65 tonnes into the Gold Trust (IAU). This left their respective holdings at 960.447 tonnes and 222.89 tonnes.  Undoubtedly the big GLD sale coincided with the sharp mid-session drop in the gold price on Friday, from which its appears to have been recovering gradually today.

Since January 4th this year, the holdings of these two gold ETFs have risen by 385.722 tonnes.

Silver –Silver prices were pulled back below $20 in line with the fall in gold prices after the heavy sale from the SPDR gold ETF.  We wait to see whether New York will counter this as bargain hunters move in.

Julian D.W. Phillips

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

Gold exchanges battling it out for leadership

Gold TodayGold closed in New York at $1,337.90 on Thursday after Wednesday’s close at $1,346.70.  London opened at $1,337.

    • The $: € was slightly weaker at $1.1156 from $1.1144.
    • The dollar index rose slightly to 95.83 from 95.82 Thursday.
    • The Yen was slightly stronger at 101.04 from Thursday’s 101.28 against the dollar.
    • The Yuan was weaker at 6.6440 from 6.6406 Thursday.
    • The Pound Sterling was slightly weaker at $1.2956 down from Wednesday’s $1.2958.

 

Yuan Gold Fix

Trade Date Contract Benchmark Price AM Benchmark Price PM
2016  08  12

2016  08  11

SHAU

SHAU

286.86

287.34

286.95

287.36

Dollar equivalent @ $1: 6.6440

$1: 6.6406

$1,342.92

$1,345.85

$1,343.34

$1,345.95

Shanghai took the gold price closing in New York higher more in line with the higher Shanghai price the day before. London then ignored Shanghai prices and opened at New York’s close. At the moment we are seeing a small battle between the developed world centers and Shanghai the physical market.  This battle can be resolved provided the arbitrageurs in the market do their job. They can’t move gold but can adjust their positions with currency plays.

We will be discussing the state of the gold market in China in particular the Commercial Bank gold market there, in our coming newsletters.

We are rapidly approaching the days when the Yuan becomes an integral part of the I.M.F.’ Special Drawing Rights. What will this unleash? Because the I.M.F. will not be able to dismiss it from this role thereafter, we do see more flexibility in the exchange rates of the Yuan. It is logical then that the People’s Bank of China then allow markets to establish the market exchange rate. We see that as continuing to fall to 7.00 to the dollar. No doubt this will produce howls of outrage from the U.S. if it happens brutally. But we suspect the PBoC. will make their adjustments behind the scenes so it happens gently.

What it does do for the Yuan is to establish it as one of the world’s main ‘hard’ currencies. The PBoC will then expand their program of Yuan globalization.

LBMA price setting:  $1,336.70 after Thursday 12th August’s $1,344.55.

The gold price in the euro was set at €1,198.40 down €7.80 from Thursday’s €1,206.20.

Ahead of the opening in New York the gold price stood at $1,338.85 and in the euro at €1,200.76 but some weak U.S. economic data saw the gold price move subsequently to over $1,350 again.  

Silver Today –The silver price closed in New York at $19.95 on Thursday down from $20.17 on Wednesday.  Ahead of New York’s opening the price was trading at $19.87. Following gold’s rise after the poor economic data, silver regained the $20.10 level

Price Drivers

Over the last day we have seen COMEX dominate London prices, ignoring those of Shanghai. The day before, saw Shanghai taking prices higher than New York and London following Shanghai. While the price differences are not that large and are influenced by exchange rates between the Yuan and the dollar, there is an ongoing pricing play between the two markets. With the Shanghai Gold Exchange/PBoC. Being the last resort counterparty we believe it does dominate prices. However, its prime objective in the exercise is not only to build a stable, orderly physical gold market and to have its prices dominate the world’s gold markets, it is to assist in the establishment of the Yuan as a leading ‘gold’ currency.

This is the way forward for the gold price. It makes little sense to have the world’s largest physical gold markets with 10,000 institutional participants and 8.3 million individuals so far bow to a mini-physical paper market in New York.

The most positive news today for gold and silver is the rapid approach of the “Gold Season” in September.

  • At this point the summer holidays for the developed world are coming to an end and the focus in the gold market is for jewelry producers to buy for the festive season at the end of the year.
  • In India, after falling to the lowest in seven years in the first half, demand for gold is certain to rise because of the excellent monsoon rains achieved this year since May continuing into September. This will boost rural demand during the festive season, starting in September.
  • In China, the expectation of a lower Yuan is broadcast in the Chinese media, encouraging growing demand in line with internal trends we mentioned in earlier newsletters from the Gold Forecaster.
  • In the last quarter of the year we expect U.S. demand for physical gold from investors in the shares of their Exchange Traded Funds to continue steadily.

     So far in 2016 investment demand for gold has overtaken the previous-ever high of 917 tonnes in 2009 [First half]  to reach 1,064 tonnes.

Gold ETFs – In New York on Wednesday there were no sales or purchases to or from the SPDR gold ETF (GLD) or the Gold Trust (IAU). This left their respective holdings at 972.618 tonnes and 221.24 tonnes.

Silver –Silver prices jumped back to over $20 after falling back this morning and will hold and move strongly when we see the strong move, either way, which we now expect from gold prices.

Julian D.W. Phillips

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

Gold bought into GLD again. Price moves upwards

Gold TodayGold closed in New York at $1,223.30 down from $1,230.20 on Wednesday. On Thursday morning in Asia, it rose to $1,230. London lifted it higher to see the LBMA price setting at $1,237.50 up from $1,225.75 on Wednesday.

The dollar index is slightly lower at 94.38 down from 94.93 yesterday. The dollar is stronger against the euro at $1.1391 up from $1.1345 on Wednesday.

The gold price in the euro was set at €1,086.38 up from €1,080.43 on Wednesday.

Ahead of New York’s opening, the gold price was trading at $1,237.10 and in the euro at €1,085.99.  

Silver Today –The silver price closed in New York at $15.07 down from $15.13, down 6 cents yesterday. Ahead of New York’s opening the silver price stood at $15.22.

Price Drivers

With the arrival of new large volume purchases into the gold ETFs in the U.S. we should see the price respond as liquidity levels of physical gold are dropping. Likewise the trading pattern of both gold and silver continue to tighten, particularly in gold. We continue to be braced for a strong move, in the near future.

Dollar weakness continues

The Fed in its minutes of the latest FOMC meeting confirmed its concern over the global economy and the strong dollar. This weakened the dollar against world currencies and to us confirmed the dollar faces a future of either sideways movements or of falling lower against other leading currencies. We cannot emphasize enough the importance of a weak dollar on global financial markets and the monetary system itself in future market action globally.

Because U.S. markets tend to move gold in the opposite direction to the dollar, we see a positive long-term future for gold. This may well reflect in the short-term too.

The Yen & Yuan

The dollar index continues to fall steadily, but the big feature of the morning is Yen ‘strength’ now at 108.44 against the dollar. This is just what Japan does not want. The economic problems of Japan are chronic and fundamental, with no easy solution [as Abenomics suggested there would be]. Without a weakening Yen, Japan is in recession, with little chance of it coming out of it in the foreseeable future. We emphasize that this is a weakening dollar and not a strengthening Yen.

A ‘stronger’ Yen confirms that. It makes Japan’s exports less competitive.

Having said that, the Chinese Yuan is also strong against a weakening dollar. But China is allowing that to be so, as they focus on the September activation of the Yuan as part of the IMF’s SDR.

Gold ETFs – We saw purchases of 4.16 tonnes of gold bought into the SPDR gold ETF on Wednesday. There were no sales or purchases into or from the Gold Trust yesterday. This leaves their holdings at 819.596 and 186.96 tonnes in the SPDR & Gold Trust respectively.  

These renewed large purchases into GLD are consistent with the buying pattern of the buyer who started buying large volumes of gold when the gold price turned at $1,150. The timing appears to be just ahead of more large rises in the gold price. We expect to see gold prices respond strongly to such buying, now that the market is looking ‘in balance’.

Silver – The silver price continues to be consolidating around $15 still, ahead of a strong move.

Julian D.W. Phillips

GoldForecaster.com | SilverForecaster.com | StockBridge Management Alliance

Gold price resilient and set for an interesting year

How things have changed in terms of market sentiment towards gold in just a couple of months!  Heading into the end of 2015 virtually every bank analyst was predicting doom and gloom for gold as Fed rate rises would make holding gold less and less attractive.  They were falling over each other to predict ever lower prices – $1050, $1000, $900 or even less.  The only way was down.

There were some marginally conflicting analyses coming out – but only marginal – most seeing a continuing downturn in the first half or three quarters of 2016 but perhaps something of a pickup towards the year end.  But this all made depressing reading for the gold investor despite some fundamental supply/demand factors suggesting that this outlook might have been too pessimistic…

The above are the opening paras from an article I have just published on news.sharpspixley.com   To read the full article click here

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 currently dependent on dollar:euro exchange rate

With markets now on edge we are waiting for the dollar index to break above 100, or pull back. Worse still, the dollar is unlikely to do much if it holds below 100, just move sideways. But the importance of it holding current levels and not rising is enormous. As we say repeatedly, the U.S. suffers if the dollar gets much stronger and yet the E.U. wants the euro lower against the dollar. Further interest rate cuts into negative territory are expected in the E.U. alongside more asset purchases and the consensus of opinion among Fed Governors is growing for a December rate hike, so how can the dollar be held back?

The use of swaps between the E.U. and the Treasury has been the usual way to go and we expect will continue to be used in a larger way in the future.

We are still sitting on the edge of our chairs waiting for the I.M.F. announcement on the inclusion of the Yuan in the SDR scheduled for November. This may exert more upward pressure on the dollar as the Yuan then drops in value. It will not be a devaluation as the currency is ‘floating’, the same as most currencies do.  Then, we expect a gear shift in market turmoil as currencies across the board try to go lower, most against the dollar. Then we will see a more visible currency war!

There were sales of just over 4 tonnes of gold from the SPDR gold ETF yesterday but none from the Gold Trust. The holdings of the SPDR gold ETF stands at 655.692 tonnes in the SPDR gold ETF and at 160.27 tonnes in the Gold Trust. These sales seemingly had zero impact on the gold price as it continued to be dominated by the dollar: euro exchange rate and the dollar index. This pattern should persist today too.

We did see the attempt at another ‘bear-raid’ late on Sunday as Shanghai opened, as a major ‘futures’ sell-off happened. Yesterday’s physical sale of over 4 tonnes may well have been in support of this. It is noteworthy that there was no follow through in the gold price. While the futures markets are skewed to the downside and this bear raid produced only a small reaction, we have to ask the question, “Are we seeing a drying up of effective sales?” This is important.

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

China adds another 14 tonnes to its gold reserve in October

The title here is self-explanatory.  China has continued to announce small monthly increases in its gold reserves as part of its new transparency of reporting following on from its big upgrading of its reserve by some 600 tonnes back in June (supposedly six years of accumulated gold purchases).  Thus China has been reporting supposed month-by month purchases since and these appear to have settled down to around 14 tonnes a month with an October increase at 14.01 tonnes.

But many Western analysts remain sceptical regarding the true levels of the Chinese monthly purchases – indeed of the the real total level of the country’s gold reserves suggesting that they both may be far larger than is being reported.  China doesn’t want to rock the gold price boat is the theory, so it can continue accumulating a massive gold reserve which it sees as vital in cementing its place in the global economic hierarchy.  First it wants the Yuan to become part of the IMF’s Special Drawing Right (SDR), which would effectively give it reserve currency status, and a decision on this is anticipated shortly.  One suspects that the U.S., which dominates the IMF, will eventually have to capitulate and let the Yuan in, despite the threat this poses for current U.S. Dollar global hegemony.

China’s past record in hiding the real level of its gold reserves suggests it may still be doing so and, at a suitable time, will unveil them – or at least yet another substantial addition – but the first goal is the SDR.  once the Yuan becomes part of this the next phase of Chinese economic policy could come about.  The Chinese always have played their economic cards very close to the chest and one suspects they may well be continuing to do so until their ultimate aim of having the dominant global currency, with all the trade advantagesthat brings, becomes reality,  It is already the world’s largest resource consuming nation and it may be only a matter of time before the petroyuan replaces the petrodollarand the Yuan the Dollar as the world’s pre-eminent rserve currency.  Time will tell.

Gold and silver market morning: Entering best time of year for gold demand

New York closed at $1,141.50 on Friday down from $1,145.80 on Thursday. It held that level in Asia before London opened. The LBMA price setting fixed it at $1,135.80 down from $1,147.75 on Friday. The dollar Index has risen and now stands at 96.80 down from 97.11 on Friday. The dollar was weakening this morning as London opened, trading against the euro at $1.1025 down from $1.0993.  In the euro the fixing was €1,030.20 down from €1,041.75.  At New York’s opening gold was trading in the euro at €1,032.87 and at $1,137.60.  

The silver price closed at $15.52 down 8 cents on Friday. At New York’s opening, silver was trading at $15.42.

Price Drivers

Friday saw sales from the SPDR gold ETF of 2.084 tonnes and of 0.66 of a tonne from the Gold Trust leaving their holdings at 692.60 tonnes and at 161.33 in the Gold Trust. In quiet trade this may have accelerated the fall of the gold price in both the dollar and the euro.

After rising to €1,050, the gold price has pulled back to €1,030, but still well above the below-€1,000 seen a month ago. Nevertheless, Friday continued to see support damaged with gold falling through that level. The Technicals are now in no-man’s land, below $1,060 and yet above $1,130. The downside risk appears limited unless gold falls through $1,130.

We have now entered the best time for gold demand in the last two months of 2015 and the first three months of 2016.

But the huge changes now expected come out of China with an announcement expected this month on China’s Yuan becoming one of the currencies that make up the Special Drawing Right of the I.M.F. While this may not be implemented until late 2016 it would be a major step forward for the Renminbi. Likely soon thereafter, we expect an announcement on the establishment of a Shanghai Gold Fix in the Yuan. This unleashes a structural change in the monetary system and the gold markets. We may not see an immediate change in these markets, but overtime will see just how important they are.

Silver prices are reflecting $ gold price moves despite the different market structure, as always. It demonstrates well the disjoint from fundamental conditions in that market.

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

16 tonnes and what do you get? – More gold in Chinese reserves

The Chinese central bank – the People’s Bank of China – is continuing with its new policy of reporting increases in the country’s gold reserves on a monthly basis.  The latest figure announced is a gold reserve increase in August taking the announced total gold holding to 54.45 million ounces (1,693.6 tonnes), up from 53.93 million ounces  (1,677.41 tonnes) in July – an increase of around 16.2 tonnes.  Although this serves to confirm China’s position as the world’s fifth largest national holder of gold it remains hugely behind the USA with a reported holding of 8,133.5 tonnes and still also well below the top European national holdings by Germany (3,381.0 tonnes), Italy (2,451.8 tonnes) and France (2,435.4 tonnes).  Russia, which expanded its gold holdings by 31.1 tonnes in August to reach 1,318.8 tonnes, is the world’s sixth largest gold holder.

Interestingly media headlines for the latest Chinese purchase suggested that the Chinese gold increases have been in order to diversify its vast forex reserves away from the dollar, although it appears to be only doing this in a relatively gradual manner given it only holds under 2% of its forex reserves in gold compared with the USA’s 74% and the German, Italian and French holdings in the upper 60%s according to IMF data.  Russia’s holding is around 13%.

But most analysts disbelieve the Chinese total gold holding statistics anyway, reckoning they are almost certainly far higher with large amounts of gold held in non-reported accounts which it may move into its forex holdings, and report, when it is considered politically expedient to do so.  Consequently there are also openly expressed doubts about the now monthly reported additions to the Chinese reserves.  These seem to be smaller than might appear likely given the various officials’ and academics’ professed opinions on the importance of gold as a reserve asset in any global monetary re-alignment and the small proportion of the country’s forex reserves which gold represents.  China may reckon on only announcing small gold reserve increases so as not to unduly influence the metal price, but one suspects that the market could absorb higher Chinese gold purchases than are being announced at present.

All this is said to be a sign of greater transparency ahead of the delayed decision for the Chinese currency’s inclusion in the IMF’s Special Drawing Rights (SDR) basket of currencies.  This is seen as a precursor to the Yuan’s acceptance by many more countries as a global reserve currency to rival the US Dollar.  Already China has been setting up bilateral agreements with a number of nations to be able to conduct trade in Yuan and its acceptance in the SDR basket would move this process along much further.  Re. the SDR, the make-up is theoretically weighted to the GDPs of the nations whose currencies are included in the basket [currently US Dollar (41.9%), Euro (37.4%), Pound Sterling (11.3%) and Japanese Yen (9.4%)].  The inclusion of the Yuan, given that China is reckoned by the IMF to have already surpassed the USA in GDP in terms of Purchasing Power Parity (PPP), although not in nominal terms where it sits in second place, would mean some very significant changes would need to be made.

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.

China gold reserves up 19 tonnes in July. Really?!

The People’s Bank of China (PBoC) – the Chinese central bank – had been somewhat reticent about reporting increases in its gold reserves as part of its total forex holdings having previously stated them as being at the same 1,054 tonne level for six years up until June before announcing that they were then actually magically 1,658 tonnes that month.  This amount was received with widespread scepticism, with most analysts reckoning they are actually far higher and there had also been criticism of the way the bank had been reporting its gold holdings – or rather not reporting them.

Now the PBoC seems to have changed tack and appears to be reporting its ‘official’ gold reserve figures on a month by month basis and for the latest month – July – now puts them at 1,677 tonnes – a rise of 19 tonnes in the month out of its now $3.65 trillion in total forex reserves – still equivalent to only around 1.5% of its total.  Per contra, the U.S. claims to hold an official gold reserve, of 8,133.5 tonnes – or 72.6% of its total forex holdings – and Germany 3,384.2 tonnes (67.8% of its forex total).  China thus would still seem to have an awful long way to go to catch up with the top Western nations’ holdings in purely tonnage terms and hugely more in percentage of its foreign exchange figures.

But how accurate are official gold holdings for any country as reported to the IMF anyway – at least in terms of nationally-owned gold?  There have been widespread doubts expressed about the true physical gold reserve figures of many Western nations – The U.S. in particular – as IMF rules allow leased and swapped gold to remain in the reserve figures as if they were still physically present.  Similarly, but on the other side of the coin, most Western analysts believe the Chinese reserve figures are hugely understated with massive amounts of gold held in ‘non-reportable’ government-controlled accounts, thus enabling the Chinese to avoid having to report much larger gold holdings to the IMF with a straight face.

And how important is the amount of gold held anyway?  Western central banks seem to decry any value to gold – yet still continue to hold vast amounts of it.  The Chinese and Indians, and a number of other nations too, seem to see gold as the ultimate money.  Whether gold is just a ‘pet rock’, as a recent disparaging article in the Wall Street Journal described it, or true money as perhaps half the world or more sees it, it still has a tremendous psychological hold.  It has been money, and been seen as the ultimate indicator of wealth, since time immemorial.  It is inbuilt into the collective psyche and that certainly will not change overnight – if ever.

It also seems to be the situation that in China, a very substantial gold holding – far above the currently stated ‘official’ figure – is considered to be a prerequisite for attaining a stronger position for the yuan in global trade.  However there are political niceties to be observed here in that China does not – at least for the time being – want to rock the U.S. economic boat and a huge increase in its announced gold holdings might be seen as doing so.  China’s initial aim would seem to be having the yuan accepted as being part of the SDR bundle, which would effectively bring with it reserve currency status.  Once this is achieved – who knows?

China’s limited yuan devaluation and controlled floating of the currency is being seen as a way of meeting at least part way some of the criticisms levelled at it by the IMF leading to a delayed inclusion within the SDR basket – which has to be inevitable ultimately.  If this SDR decision is delayed too long, given the U.S. dominance of the IMF in terms of voting power, China could see this as an unfriendly act stimulated by the Western superpower and make moves to destabilise the latter’s global position – and it has a strong capability for so doing given its huge forex holdings, mostly in U.S. treasuries.  But the time is not yet right, though if China has its SDR and reserve currency ambitions thwarted again the game could well change.  China thinks long term in a way the West mostly does not.  It may lose the odd battle but ultimately aims to win the economic war and who would give odds against the growing Asian superpower so doing!

Gold around where it was before bear raid

On Wednesday New York closed at $1,123.80 up $15.10. The dollar was slightly stronger at $1.1111 up from $1.1144 with the dollar Index unchanged at 96.58. This morning the LBMA gold price was set at $1,117.35 up $03.55. The euro equivalent was €1,003.23 up €2.40. Ahead of New York’s opening, gold was trading in a very narrow 30 point spread around $1,117.75 and in the euro at €1,005.00.

The silver price closed at $15.52 up 18 cents in New York. Ahead of New York’s opening today it was trading at $15.35.

While the Yuan fall is still the globe’s financial market’s focus the People’s Bank of China has made clear they are operating a “managed float” of the Yuan, allowing market forces to dictate the rate, but they will intervene if the market forces ‘brutal’ moves on the exchange rate. This is the case with the euro and the dollar too. Financial markets are stabilizing. Until the new exchange regime has settled down the PBoC will intervene should it deem it necessary.

We believe that the process has been very bullish for gold in that it has risen as the Yuan has fallen against the dollar and will continue to do so.

What has become clear in the actions of the Chinese government and central bank is that they are determined to accelerate the Yuan’s passage to a reserve currency, hopefully with the cooperation of the IMF, but if not, they will walk their own road. China is determined to become the globe’s No. 1 economy by all definitions.  With the weight of their 1.4 billion population behind them and bearing in mind the progress made already, this process appears unstoppable. With their love of gold, the gold price can only benefit over time.

We are pretty close to the levels from which the bear-raid of the last month was launched.  It seems the short positions are not profitable but close to losses and yet remain in position. What we saw yesterday was what appears to be some short covering in the SPDR gold ETF where there were purchases of 4.173 tonnes of gold. But in the Gold Trust we saw sales of 0.36 of a tonne of gold leaving the holdings of the SPDR gold ETF at 671.867 tonnes and 161.02 tonnes in the Gold Trust.  Will we see more short covering?

Silver is marking time waiting for gold to point the way.

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