Oct 29

QE Finished, Gold Fans Clearly Crackpots

Gold Price Comments Off on QE Finished, Gold Fans Clearly Crackpots
The US Fed just ended quantitative easing. Anyone thinking history or gold worth a look must be a crackpot for worrying…
 

TIME WAS the Gold Standard simply existed…like rain or snooker tables, writes Adrian Ash at BullionVault
 
Zero rates and quantitative easing are the monetary equivalents today. Doing anything else puts a cental bank into the “hall of shame” according to Bloomberg. The Financial Times gasps that today the US Fed’s “grand experiment is drawing to a close…”
 
Oh yeah? The world hasn’t yet seen the last of US quantitative easing, we think. Not by a long chalk. QE is getting new life after 15 years in Japan, the world’s fourth largest economy, and it has barely begun in the single largest, the Eurozone. 
 
Only China to go, and the QE Standard will be truly global. But financial markets and pricing mechanisms the world over are already through the looking glass. After $3 trillion of US Fed asset purchases, climbing back to the other side will take more than a month’s rest from extra money printing. 
 
The Gold Standard, meantime, now exists only to fill space when financial hacks run out of other silly things to talk about. 
 
Take this classic Phil Space nonsense, for instance, from the Washington Post.
 
To recap… 
 
Over a week ago, billionaire tech-stock investor and former PayPal boss Peter Thiel appeared on right-wing shock jock Glenn Beck’s TV show. He mumbled something about the value of money…reality…and the virtual world of monetary politics we’ve all lived in since 1971. 
 
Nothing to see or hear in that. Even the laziest gold bug can see US president Nixon’s decision to end the Dollar’s gold link changed nothing and everything all at once. Metaphysical mumblings are the best anyone’s since managed in trying to understand how humanity got beyond itself in that moment.
 
Yet on Friday, Thiel’s comments were picked up by a right-leaning think tank blogger…and finally last night, this “unthink” piece appeared at the Washington Post online. 
 
So what? Well, George Selgin, new Cato Institute director, said earlier this month that anyone challenging the way money currently works must do better if they want to be taken seriously. Amateur bug-o-sphere stuff only makes things worse.
 
But Selgin underplayed the task ahead, I fear. QE, zero rates and unlimited money-supply growth are big, important issues. Today’s US Fed meeting proved that once again. 
 
On the other side of the debate however, even the most qualified and serious economist daring to doubt the sanity of printing money to buy up government debt, mortgages, stocks or other nation’s currencies now looks like a “crackpot” to most politicians, financiers and reporters today.
 
Because, hey! Nothing bad has happened. No inflation, currency destruction or financial apocalypse fuelled by money-from-nowhere. 
 
Not yet. And now the Fed is turning off the taps. For now.
 
What could possibly go wrong? We must be crazy to bother owning gold as financial insurance, never mind worrying about how money itself…as basic to civilization as the written word…is being bent and remade in the latest central-bank experiments.
  • Reddit
  • Facebook
  • Twitter
  • Google
  • Yahoo
  • LinkedIn
  • Digg
  • StumbleUpon
  • Technorati
  • del.icio.us
Tagged with:
Oct 21

Swiss Gold Vote: Should You Be Worried?

Gold Price Comments Off on Swiss Gold Vote: Should You Be Worried?
Switzerland’s gold referendum will force the SNB central bank to buy more than it sold in 2000-2008…
 

The SWISS GOLD VOTE in November – “Should I be worried?” asks a BullionVault user owning metal in Zurich, writes Adrian Ash at the world-leading physical gold and silver exchange online.
 
It’s no idle question. Governments do nasty things when they need to buy or keep hold of an asset.
 
Witness the United States’ compulsory gold purchase of April 1933 for instance…and its ban on hoarding, exporting or trading gold. 
 
Big difference here is that the Swiss public gets to vote on what drives such measures. Thanks to their petition system, the country’s junkies get junk on prescription…while minarets are banned. The changes proposed for 30 November would compel the Swiss National Bank to:
  • hold all its gold reserves in Switzerland; 
  • raise gold holdings to 20% of the SNB’s total assets; 
  • never sell gold ever again. 
This is a Swiss decision, and with the Franc effectively “backed” by gold again if this passes, it’s really not for us British turkeys…earning and holding British Pounds Sterling…to say whether or not a foreign nation should vote for Christmas.
 
But personally speaking, I’m no fan of central-bank gold hoarding. It tends to mark dark times, and still darker plans on the part of government.
 
The Swiss government is in fact pitted against this new gold plan. But still, it’s better by far to let gold circulate freely, I believe…outside state vaults and in private hands…just like the truly classical Gold Standard worked.
 
But let’s put my hopeless idealism, and the economic wisdom (or otherwise) of this 1930s-style Gold Standard proposal aside (for that is what it is). Just how desperate might the Swiss authorities become if the vote passes? Put another way, what impact might it have on the supply/demand balance worldwide, and hence prices?
 
First, the security of gold property held in Zurich or Bern, under the tarmac at Kloten or beneath the Gotthard mountains. Switzerland is a highly open economy, with financial services earning a huge portion of its tax revenues and employing nearly 6% of the working age population. Its banking reputation may have been dented in recent years (and its hard-won bank secrecy laws look set to be crushed by the European Union kowtowing to the US juggernaut). But physical gold storage, alongside refining imported gold bullion for export, continues to be a crucial industry.
 
By our reckoning, the world’s investors added 1,400 tonnes of gold to private and bank vaults in Switzerland between 2009 and 2013. For non-bank storage of physical property, it remains by far the most popular choice amongst BullionVault users, holding nearly 75% of the current record-high levels of client gold. To the best of our knowledge, no country enjoying such revenue – nor any state enjoying such confidence from foreign wealth – has ever turned it away. 
 
Even during the UK’s balance of payments’ crisis of the 1970s, foreign-owned bullion was allowed to enter and leave freely, sidestepping both VAT sales tax and the exchange controls blocking private British ownership of gold. London of course remains the centre of bullion dealing worldwide, just as Switzerland remains the No.1 choice for investment storage. It’s very hard indeed to see Switzerland attempting any kind of expropriation, compulsory purchase, exchange controls or punitive taxation – most especially of foreign-owned gold. 
 
So, with theft highly unlikely (especially against the popular pro-gold backdrop of a successful referendum), might the SNB rush to buy gold in December after the 30th November vote? Complicating factors start with the referendum process itself. Next month’s question gives no time limit for completing the extra gold buying, nor for repatriation of existing stock from foreign central-bank care. But if voters look harder (and they’ll be urged to think hard by the pro-gold billboard campaign set to start mid-November), then supporting documents set a deadline of 2 years for bringing the current gold home, and 5 years for reaching that 20% target. However, the clock will start running from the date of “acceptance”. But is that acceptance by voters (ie, November 30th) or by parliament and thus the regional cantons (ie, into Swiss law)?
 
This matters, because Swiss referenda, when approved by the public, can take up to 3 years to become law. So the whole process…if the SNB accepts its fate and doesn’t work with the government to refuse, reject or somehow revoke the Swiss public’s decision…could last up to 8 years.
 
Expect delays. SNB president Jordan has long spoken against the vote, and vice-chair Danthine did so this month (invoking the threat of deflation and Euro-led recession). Those policymakers are unelected, so Switzerland’s referendum pits popular, if not populist will against the technocrats. But elected politicians also oppose the move (and by a wide margin). Even if passed, in short, the spirit of the new rules will likely be hampered by those people charged with enshrining and then enacting them. 
 
The SNB is also a signatory to the fourth Central Bank Gold Agreement. Running for 5 years from 27 Sept. this year, it obliges the 22 central banks involved to “continue to coordinate their gold transactions so as to avoid market disturbances.” The expected transactions were of course sales (the first CBGA was signed after the UK’s sudden and clumsy gold sales announcement of mid-1999), but this treaty only offers further cover for delaying, going slow, or otherwise tempering the impact of buying.
 
An object lesson in central-bank recaltricance is the repatriation of Germany’s gold. Wanting some 300 tonnes from New York and 374 from Paris, the Bundesbank’s plan announced in January 2013 is scheduled for completion in 2020. Yet last year, only 5% of that total was shipped, barely one-third the average run rate required. Whatever the reasons, there really isn’t any hurry, not for the central bankers involved at either end of the transfer.
 
As for retrieving Switzerland’s current overseas gold holdings, we’re given to believe the Bank of England can “dig out” a 20-tonne shipment every two days. So if 20% of the SNB’s metal is still there in London, it could expect to get back the UK holdings inside 1 month. But only if the Bank of England devotes its entire vault staff to that task alone (it holds another 5,000 or so tonnes belonging to other customers besides the UK Treasury), and only if central-banking’s “old world” handshakes and winks are thrown over to appease public opinion.
 
Again, don’t bet on it. Central bankers have fat brass necks when it comes to defending themselves under cover of mutual independence from national governments and their voting publics. So might history offer some clues to the timing of Swiss buying?
 
Sucking in foreign money around WWII, and with exchange controls blocking many citizens abroad from buying investment bullion, Switzerland’s own gold reserves grew from 450 tonnes to 1,940 between 1940 and 1960. The sales starting 2000 took eight years to dispose of that much again, this time into a bullish free market (and again, after a public vote). Now something around 220 tonnes per year might be wanted – sizeable quantities to be sure, but in line with recent sources of demand like gold miners buying back the huge forward sales they’d made to insure against lower prices at the turn of the century (dehedging averaged 260 tonnes per year between 2000 and 2012) or the growth rate of new Chinese consumer demand (100 tonnes per year 2004 to 2013).
 
That extra demand, however, came during a strong bull market in prices. Miner dehedging in particular put a strong bid in the market, helping drive prices higher both mechanically (see the spike of early 2006 for instance) and psychologically (if gold-miner hedging had been bad for investor sentiment, then de-hedging could only be good). Many people now believe that forcing the SNB to hold 20% of its assets as gold will clearly drive market prices higher. Added to the repatriation of all Switzerland’s existing gold reserves…which could catch the cosy world of central banking asleep as Swiss law demands the gold is returned…it is expected to spark a huge squeeze on physical supplies worldwide.
 
We’re not so sure. Heavy central-bank gold sales during the 1990s are widely held to have pushed gold prices down. But those sales continued until the financial crisis began. By then, gold prices were 3 times higher from their lows of 2001, replaying what happened in the late 1970s, when the US Treasury was a big seller. Relatively heavy purchases – this time by emerging-market states – then coincided with the 2011 peak. But again, those purchases have continued as prices fell steeply.
 
Yes, back in 1998-2000, the Swiss gold sales discussed and then begun at the turn of this century helped drive the final nails into gold’s coffin-lid. But sandbagging the price, and dismaying dealers (as well as “bitter end” investors enduring the two-decade bear market starting with 1980’s peak at $850 per ounce), those huge sales in fact laid the floor for the 12-year bull market which followed.
 
Free from central-bank vaults like no time since before the First World War, gold rose and kept rising as private Western households, then Asian consumers, money managers and emerging-market central banks joined the gold miners themselves in buying bullion.
 
Gold is nearly as rich in irony as it is in politics. If the Swiss pro-gold campaign is trying to gerrymander a price-rise by forcing the SNB to turn buyer, history may yet – we fear – have the last laugh.
  • Reddit
  • Facebook
  • Twitter
  • Google
  • Yahoo
  • LinkedIn
  • Digg
  • StumbleUpon
  • Technorati
  • del.icio.us
Tagged with:
Oct 07

Gold Replays 2013 Price Crash. So Does Private Gold Sentiment

Gold Price Comments Off on Gold Replays 2013 Price Crash. So Does Private Gold Sentiment
Self-directed Western investors’ gold sentiment leaps to 7-month high as price drops…
 

The GOLD PRICE, after a quiet summer, last month delivered the sharpest Dollar drop since 2013’s crash found its floor, writes Adrian Ash at BullionVault.
 
Private Western investors reacted the same way as last year too, with buyers outnumbering sellers to push our Gold Investor Index up to a 7-month, rising at the fastest pace since April 2013.
Gold Investor Index, September 2014
 
The Gold Investor Index is calculated using proprietary data from BullionVault, the 24-hour precious metals exchange which leads the online market for physical bullion.
 
Instead of surveying intentions, the index shows the balance of net buyers over net sellers across the month as a proportion of all gold owners at the start, rebased to 50.
 
To learn more, see this May 2013 article in the London Bullion Market Association’s Alchemist magazine. The chart above shows how the Gold Investor Index has varied over the last three years.
 
As you can see, the balance of buyers over sellers jumped during gold’s spring 2013 crash. It rose sharply again last month. But while the number of people choosing to hedge against financial risk with gold’s lower-cost insurance continues to grow, it must be said: Whether from Asian jewelry buyers or self-directed Western investors, a gold market led by bargain-hunting alone cannot run sharply higher. 
 
September typically sees Dollar gold prices rise. It remains the best-performing month historically since 1968. But gold last month lost 5.8% to $1216 per ounce, the sharpest month-end drop since June 2013.
 
Back then, Dollar prices fell 14.5% to hit $1180 per ounce – then a 3-year low – capping a quarterly plunge of some 25%. The spring 2013 gold crash unleashed a surge of private investors wanting to buy. But these new buyers each tended to buy smaller amounts than those existing holders who sold. 
 
September 2014’s new discounts in Sterling and Euro terms were more muted. Because those currencies also slipped against the Dollar. Gold ended the third quarter of 2014 at 3-months of £750 and €964 per ounce, down 3.7% and 1.7% respectively from the last day of August. But the reaction amongst self-directed investors was the same – a jump in the number of bargain-hunters using BullionVault to buy gold both from North America and Western Europe.
 
By weight, and in contrast to the spring 2013 crash, that also led to a further rise in the total quantity of gold bullion now held by Bullionvault users…up 0.3% to new records near 33.2 tonnes. Again, this marks a stark contrast to what money managers are doing with gold. Exchange-traded gold trust funds (gold ETFs) saw monthly outflow of $1.67 billion, according to the Markit data agency – the biggest this year. Leveraged speculators betting on prices through Comex futures and options meantime slashed their net bullishness nearly 50% to the lowest level of 2014 so far.
 
For now then, the running in prices is being dictated by money managers continuing to cut allocations, or grow their betting against gold going higher.
 
Self-directed private investors, on the other hand, continue to buy the dips. They are, after all, managing their own money and their own risk.
  • Reddit
  • Facebook
  • Twitter
  • Google
  • Yahoo
  • LinkedIn
  • Digg
  • StumbleUpon
  • Technorati
  • del.icio.us
Tagged with:
Oct 01

Gold Prices Killed by Not-So "Super" Dollar

Gold Price Comments Off on Gold Prices Killed by Not-So "Super" Dollar
Gold prices have been hammered by the rising US Dollar. What might October hold…?
 

DOLLAR UP, gold down, writes Adrian Ash at BullionVault.
 
That’s pretty much the lesson for precious metals investors looking at any long-term rise in the US Dollar since exchange rates began floating in 1973.
 
And now in late 2014, says former chief economist at Swiss bank UBS, George Magnus “It looks as though the third US Dollar uptrend of the post-Bretton Woods era may be underway.” Just so long as you also ignore his warning against “extrapolating” short-term noise into long-term forecasts…
Gold price vs. US Dollar Index, 1973 to 2014, daily data
Might Magnus be right? For gold prices, as the chart shows, it’s less the absolute level than the Dollar’s direction of travel that counts. Starting from all-time lows in spring 2011, today’s greenback hardly matches the “Super Dollar” of the early 1980s. Yet the background rhymes…
  • Commodities glut after a long bull market? Check…
  • Disinflation in consumer prices? Check…
  • Weak competitor economies in Europe? Check…
  • Over-borrowed emerging markets? Check…
  • Strong US monetary policy, raising rates on the Dollar? Well, no. Not by a long way.
Even with the Federal Reserve still sticking however to its “considerable” delay for raising rates from zero, the third-quarter of 2014 proved ugly for Dollar investors holding non-US assets.
 
Gold for US investors marked the end of Q3 by hitting new 2014 lows, losing 5.8% on the London PM Fix for the month of September alone. Silver fell to the lowest Dollar price since May 2010…down more than 12% from the end of August.
 
Yet gold priced in Euros, in contrast, remains near the top of its 12-month range. Even in the British Pound…flattered by Tuesday’s GDP revisions…gold has held 3% higher from New Year.
 
Gold’s recent drop, in other words, is entirely relative. And this split between Dollar and non-Dollar gold prices might widen in October.
 
First there is the European Central Bank’s meeting concluding Thursday. Mario Draghi and his team have long hinted at some kind of QE-style money printing. The latest inflation print of just 0.3% per year across the 18-nation union will loom large.
 
Then, in the last week of October, the US Federal Reserve will face the opposite problem. It is set to taper the last $15 billion of its monthly QE printing. That leaves rising inflation, and strong GDP, begging for an end to the “extended time” promised for zero US interest rates. 
 
Before then, we’ve got US jobs data Friday (with an early look in ADP’s private-sector estimate mid-week). Then, mid-month, the European Court of Justice will hear a legal challenge to the Eurozone central bank’s Outright Monetary Transactions (OMT)…the 2012 plan which finally stemmed the single currency’s debt crisis. 
 
Mario Draghi hasn’t actually fired any OMT money at weak-economy bonds yet. But if the Court decides the plan is illegal (insomniacs will enjoy reading the arguments here. Or better still here) it could spark fresh panic…out of Greek, Spanish and other debt-heavy markets…pulling the Euro lower again. 
 
Analysts are of course aligned with the Euro bears betting against the currency in the forex market. Barclays Bank today cut its 12-month forecast for EUR/USD from $1.25 to $1.10 – a move which, if matched by the Dollar’s other major crosses, would take the trade-weighted index to a decade high of 90 or so. Gold prices in 2004 were trading below $400 per ounce. So a blunt analysis, never mind the momentum in gold futures and options betting, says a fall in the Euro must push bullion prices lower again as the US Dollar surges. After all, it worked like clockwork in the other direction.
 
Gold up, Dollar down” was so solid between 2002 and 2008, it became a no-brainer trade for no-brain hedge funds. The US currency fell 30% against its major trading peers on the forex market. Gold meantime rose 160% in Dollar terms. But this relationship broke down during the financial crisis. Because gold kept rising…and rising…while the Dollar whipped higher.
 
What are the odds today? Playing the averages, and reviewing the last 40 years (daily data, 12-month change), gold has been twice as likely to rise when the US currency is weakening on the forex market than when the Dollar Index is getting stronger. And when gold drops hard…down 10% or more from 12 months before…the Dollar has been rising 91% of the time.
 
No-brain traders are betting this rule-of-thumb will hold firm as 2014 ends, and gold will keep falling in Dollar terms as the US currency gains versus the Euro, Yen, Pound and the rest. 
 
But watch out. Because since 1974, gold and the Dollar have also moved in the same direction some 30% of the time. And when gold rises as the Dollar also goes up (21% of the last 40 years), its gains have been markedly better on average than when the Dollar is falling. 
 
Yes, really. When gold has risen against a background of Dollar strength, gold priced in Dollars has gained 24% year-on-year on average. It’s averaged 18% gains when the Dollar’s been falling. 
 
Of course, investors tend to buy gold and the Dollar together when crisis hits. Not only, but not always either. You could cite any number of crises where gold failed to rise with the Dollar, and pitch them against the gold price surge of Soviet Russia invading Afghanistan in 1979, the 2008 Lehmans crash, or the 2010 Eurozone meltdown.
 
Never mind if those events sound at all familiar here in late 2014. Ignore the fact that a rising Dollar…plus rising gold…adds up to 30% more fun for non-US investors trying to defend their money against crisis. Financial markets have avoided seeing any trouble ahead all year. So far. As an investment banker puts it to the Financial Times today…applauding this year’s surge in global mergers and acquisitions…”I have never seen a market more resilient than it is today, in terms of absorbing geopolitical and financial risk.”
 
Such complacency is the reason gold investing exists, whatever the outlook for the Dollar (and “Everything seems to be Dollar positive,” says another forex strategist…also tempting fate).
  • Reddit
  • Facebook
  • Twitter
  • Google
  • Yahoo
  • LinkedIn
  • Digg
  • StumbleUpon
  • Technorati
  • del.icio.us
Tagged with:
Sep 26

End of the Central Bank Gold Agreement

Gold Price Comments Off on End of the Central Bank Gold Agreement
Well, end of one CBGA, start of another. Which says a lot about the Eurozone crisis…
 

THIS isn’t your father’s gold market, writes Adrian Ash at BullionVault. It isn’t even the same market as 10 years ago.
 
Because the buyers are different. So too are the sellers. 
 
During the 1970s, demand was led by investors…primarily in the rich West. Whereas today, the biggest buyers by far are Asian consumers, as the World Gold Council notes in its latest Gold Investor report.
 
Despite much lower incomes, India and China save a huge proportion of their earnings…and spend an ever greater share on gold the more income they earn. 
 
This makes it a “superior good” says Professor Avinash Persaud. Commissioned by the World Gold Council to study world gold buying demand, he says it increases faster than household income or GDP…something we’ve noted of Chinese gold demand before. 
 
On the supply side too, the gold world has changed. Besides a small rise to record mining output, the key source of the last 5 years was “scrap” sales from people needing to raise cash amid the financial crisis (a flow that’s now drying up. Fast). During the 1980s and 1990s, in contrast, central banks were the big source of existing above-ground metal, selling it down as prices fell…and worsening the drop by helping gold miners “hedge” their production by lending them metal to sell as well. 
 
Instead of the gold, Western central banks bought more “productive” assets. You know, like US Dollars, Euros, and government debt. 
 
Come the financial crisis however, central banks as a group worldwide turned into net buyers for the first time since the mid-1960s. First because emerging-market nations wanted to lose some of the Dollars piling up in their vaults (thanks to America’s perpetual trade deficit). Second because Western central banks…most notably in Europe…decided that selling gold during a crisis isn’t so clever. 
 
So, despite having an agreement in place to cap annual sales…aimed at avoiding the clumsy, price-damaging gold sales made by the UK in 1999…central banks in the West have stopped selling gold altogether. We think that’s likely to stay true all through the new 5-year agreement, signed in May and running from tomorrow until September 2019. 
 
The current CBGA (as we gold nerds know it) has seen European states sell barely 10% of their agreed limit. The new agreement doesn’t bother setting a cap at all. That might suggest they’re secretly planning big sales in future. But on the contrary, the lack of sales under the current CBGA made its 400 tonnes per year limit look stupid. 
 
Fewer than 18 tonnes were sold over the last 3 years in total…all of them from the German Bundesbank to mint commemorative coins. 
 
Just what would be the point of setting a sales limit from here? Fact is, central banks sell gold when times are good. They buy or hold when things are bad. They are not selling today.
 
We don’t think Eurozone central bank chiefs have any plans to sell until 2019 at the soonest. We do think there’s a message in there about the Eurozone crisis.
  • Reddit
  • Facebook
  • Twitter
  • Google
  • Yahoo
  • LinkedIn
  • Digg
  • StumbleUpon
  • Technorati
  • del.icio.us
Tagged with:
Sep 24

India’s Changing Gold Culture

Gold Price Comments Off on India’s Changing Gold Culture
India has been the world’s No.1 gold buyer for thousands of years. But traditions are changing…
 

TODAY marks the last day of Shradh, writes Adrian Ash at BullionVault, the period of “closed observance” on Hindu calendars when it’s deemed “inauspicious” to start new ventures or make new investments.
 
The end of Shradh has a political angle. Also known as Pitru Paksha, the early autumn shutdown has been used to delay nominations for upcoming elections, reports The Times of India.
 
Fighting such “superstitions” can be dangerous. Rationalist campaigner Narendra Dabholkar was murdered in summer 2013 when pushing anti-superstition laws. This summer’s delay to India’s electoral process has angered many who want to reduce what they see as the stifling (and corrupting) effect of India’s deep culture of religious observance.
 
Gold looms large in that culture of course (and also in India’s huge bribery and corruption culture). The peak demand season in the world’s heaviest consumer market starts now, running on until Diwali at the end of October. But long term, many analysts think the wider availability of luxury goods in India will dent India’s gold demand, overcoming superstition where rationalism cannot. Many financial services providers think the same of their products…from bank savings to stock-market funds.
 
India’s younger citizens are indeed breaking with tradition over gold, suggests this story on Mineweb. But not how Western observers might expect. Instead, some younger people have broken Shradh to buy gold at the recent low prices.
 
Forecasts of Asian households “substituting” out of gold into hi-tech consumer goods and packaged financial services are as old as the global bull market in gold, if not older. But they’ve proven very wrong to date. The only thing to dim India’s appetite for gold has in fact been government anti-import rules…imposed because 2013’s demand was so huge in response to the price slump.
 
India’s gold industry is finding ways around that…literally smuggling gold in “through the backdoor” (ahem) as one expert analyst joked to me last week. News today also says the old VAT round-tripping scam…where the same metal is imported and then re-exported in a loop to earn sales tax rebates illegally…has found a new use, helping get around India’s strict and stifling 80:20 rule.
 
Ancient Rome’s Pliny the Elder started the trend of European commentators calling India the “sink of the world for bullion” more than 2,000 years ago. Can that culture, and the flow of metal West to East it has demanded for so long, ever be changed by flat-screen TVs or iPhones?
 
Keep a close eye on how India’s demand…and the floor it’s clearly helped put beneath gold prices to date…develops as Diwali investing, gift-giving and temple offering draws near in 2014.
  • Reddit
  • Facebook
  • Twitter
  • Google
  • Yahoo
  • LinkedIn
  • Digg
  • StumbleUpon
  • Technorati
  • del.icio.us
Tagged with:
Sep 17

Shanghai Gold Trading: The Real Challenge to London

Gold Price Comments Off on Shanghai Gold Trading: The Real Challenge to London
If China remains a one-way street for gold, it cannot become the world hub…
 

SHANGHAI this week launches a new international gold exchange inside the city’s free-trade zone, writes Adrian Ash at BullionVault.
 
Most everyone thinks this is important because “global gold traders [see] the zone as a gateway to China‘s huge gold demand.” But that’s the wrong way round. Because if it’s to have any real importance, the Shanghai FTZ gold bourse must mark a step towards China’s gold output and private holdings flowing out into the world, not the other way round.
 
Start with the situation today. China and the UK could hardly be more different when it comes to gold. China is the world’s No.1 gold-mining producer, the No.1 importer, and the No.1 consumer.
 
The UK in contrast…and despite spending its way to household debt worth 140% of income…has no gold jewellery demand to speak of. Private investment demand is also tiny compared to Asia’s big buyers
 
On the supply-side the UK hasn’t had any gold-mine output worth noting since 1938. Nor does it currently have any market-accredited refineries for producing large wholesale bars.
 
So you might think China plays a bigger role in the international gold market than does the UK. Yet nearly 300 years since it first seized the job, London remains the center of global gold flows, trading and thus pricing. For now at least.
Net UK gold imports, monthly data in tonnes, 2005-2014
 
Since 2004, and with no domestic mine output and next to no end demand, the UK has imported over 6,800 tonnes of gold, according to official trade statistics – more than China but behind India, the former No.1 buyer. It has also exported nearly 5,000 tonnes, more than any country except No.1 bar refiner, Switzerland.
 
That’s in a global market seeing some 4,500 tonnes of end-user demand per year. Because London is the heart of the world’s gold bullion market, and the central vaulting point for its wholesale trade. (Same applies to silver, by the way – the UK was the world’s No.1 importer and exporter in 2013.)
 
The relationship with prices is clear. When UK trade data (hat tip: Matthew Turner at Macquarie) show metal piling up in London’s vaults (which also offers the deepest, most liquid place for large investors to hold their gold in secure vaults, ready to sell or expand at the lowest costs) prices have tended to rise. But when the rate of accumulation in London is slowing, prices have tended to fall. Gold prices have sunk when London’s vaults have shed metal. 
 
On BullionVault‘s analysis, those months since end-2004 where Dollar gold prices rose saw net demand for London-vaulted gold average 38 tonnes. Falling prices, in contrast, saw London’s vaults lose 16 tonnes per month on average (imports minus exports). Exclude the gold-price crash of 2013 and we get the same pattern. Average net inflows when Dollar price fell were only 15 tonnes per month between 2005 and 2012. Rising prices, in contrast, saw London vaults add 48 tonnes net on average per month.
 
So what’s happening with London-vaulted gold really does matter to world prices. Far more, to date, than what’s happening to China’s flows.
 
Why? The Middle Kingdom’s modern gold boom has come in mining, importing and refining. But in exports it just doesn’t figure. Because bullion exports are banned, thanks to Beijing deeming gold to be a “strategic metal”.
 
Never mind that China now boasts 8 gold refineries accredited to produce London-grade wholesale bars. Out of a world total of 74, that’s more than any other country except Japan. But Chinese-made wholesale bars never reach London (or shouldn’t…) because they are dedicated by diktat to meeting its world-beating domestic demand alone.
 
China’s inability to export gold bullion puts a big block on it affecting world prices. Because while metal is drawn into China when domestic prices rise above London quotes (the so-called “Shanghai gold arbitrage” trade) it cannot flow the other way when Shanghai goes to a discount. Traders can only exploit the price-gap through in one direction.
 
Global investment flows are further locked out by Beijing’s block on foreign cash coming into China – another key difference between the UK and China in all financial trading, not just gold. Shanghai vaults have therefore been closed to international gold investment to date. So the impact of global flows on pricing has completely passed China by.
 
This may change this week however, when the Shanghai Gold Exchange launches its new international gold exchange inside the city’s huge free-trade zone on Thursday. Six major Chinese banks will provide clearing and settlement services. The first 40 approved members of the exchange include London market makers HSBC, UBS and Goldman Sachs. But whether global investors will choose to hold gold in Shanghai vaults remains to be seen. China remains a Communist dictatorship, after all. Whereas London, even in the dark days of 1970s exchange controls – which barred UK investors from buying gold, as well as moving cash overseas – still freely allowed foreign money to come and go as it pleased, not least through the City’s world-leading gold and silver markets.
 
Remember, China’s gold market has only answered Chinese supply and demand so far. Its mine-supply leads the world…but cannot reach it. China’s demand has meantime needed imports from abroad to supplement what Chinese mines produce. That demand leapt when world prices fell in 2013, doubling China’s net imports through Hong Kong from 2012 to well over 1,000 tonnes, and clearly showing that – for now – its gold market remains a price taker, not a price maker. The running is made instead by free-flowing investment cash choosing to buy or sell down gold holdings worldwide, and that decision shows up in London, center of the world’s bullion trade.
 
Yes, Shanghai’s new free-trade zone gold market marks one step towards changing that. Yes, the FTZ is very likely to replace Hong Kong as the stop-off point for gold imports entering the world’s No.1 consumer market. But only a truly liberalized gold trade, with foreign cash and gold flowing in…and out…right alongside China’s domesic flows will challenge London’s 300-year old dominance.
  • Reddit
  • Facebook
  • Twitter
  • Google
  • Yahoo
  • LinkedIn
  • Digg
  • StumbleUpon
  • Technorati
  • del.icio.us
Tagged with:
Sep 05

What I Told Alan Titchmarsh About $1920 Gold Prices

Gold Price Comments Off on What I Told Alan Titchmarsh About $1920 Gold Prices
Three years to the day since gold prices peaked. Did you call it wrong…?
 

IT’S SAFE to say gold hasn’t been much fun since prices peaked three years ago this weekend, writes Adrian Ash at BullionVault.
 
Maybe I should have guessed at the time. Because the same day that spot prices hit $1920 per ounce…Tuesday 6 September, 2011…I got to talk gold as a guest on UK television’s biggest afternoon chatshow.
 
Gold on national daytime TV…? What more warning could gold bugs want? Hindsight screams sell.
 
Sadly for irony (and for all-knowing traders), my slot on The Alan Titchmarsh Show didn’t air until the Thursday, two days later.
 
But the die was cast. Or so hindsight says. The drop which began the very next day was obvious.
 
Emerging-market central banks should have stopped buying. Gold miners should have sold forward their future production to lock in record prices. And gold investors should have taken profits…quick! 
 
Gold sank 20% between September and the last day of 2011. It then rallied only to plunge 25% in spring 2013. Since then it has now traded dead-flat for 12 months, some 35% below its peak of three years ago.
 
Should we all have seen it coming? I think not. 
 
“Business is certainly strong,” as Paul Tustain, founder and CEO, noted to me here at BullionVault that same, hectic week in 2011. “But it’s still a tiny proportion of the investing public.
 
“The huge majority of people and portfolios still have no gold at all. What we’re seeing across the market is the prices being marked up by the dealers in search of supply, but no-one is being flushed out. 
 
“Gold owners simply don’t want to sell, not while the economic situation threatens the wholesale destruction of value in currency assets.” 
 
Re-read that last sentence again. Then cast your mind back to late-summer 2011…
  • US government debt was downgraded by the credit agencies; 
  • English cities and towns descended into rioting, looting and arson; 
  • Europe’s single currency experiment looked set to explode in general strikes and violence. 
Put another way, unemployment in rich Western countries was surging to Third World levels. The state was losing control. And nothing was “risk-free” anymore.
 
Clearly, some smart traders chose to quit getting long of gold. Because prices fall when bids refuse to meet offers, and fall they did. But to the best of my knowledge, no pundits or analysts called the top in gold prices. Not with any more confidence than the perma-bears who repeatedly called the top from 2009.
 
How could they? The economic, financial and social situation across the West hadn’t been this bad since perhaps 1939. 
 
Oh sure – Warren Buffett, the world’s most famous money manager (and one of its most successful) once advised investors to “Be fearful when others are greedy and greedy when others are fearful.” But you’d need some damned cold logic to overcome the fear sweeping the rich West in late-summer 2011. 
 
Indeed, you would have needed to get your head examined. 
 
Just what were the odds of a Eurozone break-up back then – better than evens? And the consequences of that? They could scarcely be imagined. Not when the only paper “safe haven”…US Treasury bonds…faced a genuine threat of default thanks to Washington politicians scoring points against the White House via the debt ceiling farce
 
In short, the gold market was NOT mis-pricing risk in September 2011. Nor were new buyers. That summer’s surge to record levels simply reflected the very strong chance that the crash of 2008 was only a warm-up. Investors, households and media all agreed. This time, the financial crisis really had landed. 
 
So forget hindsight. Buying gold at 2011’s record prices was not a “mistake”. Even if it has proven costly to date. 
 
There’s nothing today which makes those losses less painful. But if you view every decision you make as an all-in bet, then insurance will always look like “dead money”…unless disaster strikes. 
 
What if the crisis of September 2011 hadn’t eased off? Which outcome would you really prefer?
 
As I told Alan Titchmarsh three years ago:
“If you think the financial crisis is all over and everything’s going to be sorted out, then gold [at $1920…£1194…or €1375] probably looks pretty expensive as insurance for your other investments right now.” 
Gold is a lot cheaper today. Yet I’m far from sure the financial crisis has truly passed over just yet. 
 
I guess the European Central Bank agrees, now printing money to try and stoke the economy. Odds are that every other monetary power holding the cost of money at zero for the fifth year running thinks the same.
 
Maybe someone should tell the stockmarket. But then, no one rings a bell at the top. Not one you can hear at the time.
  • Reddit
  • Facebook
  • Twitter
  • Google
  • Yahoo
  • LinkedIn
  • Digg
  • StumbleUpon
  • Technorati
  • del.icio.us
Tagged with:
Sep 03

What Equilibrium Looks Like in Gold Prices

Gold Price Comments Off on What Equilibrium Looks Like in Gold Prices
Looking for stability in gold prices? You’ve got it. Or had it, at least…
 

GOLD PRICES rise more often than not in September, writes Adrian Ash at BullionVault.
 
Twenty-nine times in the last 46 years to be precise…better than February (28 times) and equal to November. But pundits and hacks trying to urge you play gold’s historical odds this month have met a nasty start to September 2014.
 
Because gold prices are still “searching for a new equilibrium after last year’s plunge,” reckons a note from global bank and London market-maker HSBC.
 
We’re not sure equilibrium pricing can exist for financial insurance. The risks you need to cover, and the lost rewards from over-insuring, are constantly moving.
 
But if there can be a price where bids and offers balance to some kind of happy stability, then gold in fact found it 12 months ago. Indeed, it’s now more likely to turn volatile than not we think.
 
How come?
 
This week’s “plunge” in gold prices (as headline writers calls it) has shed some $25 per ounce so far. But that leaves the metal well within the $1200-1400 trading range now running since September 2013.
 
Moreover for long-term investors, last month’s average Dollar price…of $1296 per ounce…was almost precisely the average gold price of the previous 12 months ($1297.50).
 
How’s that for equilibrium?
 
Whether or not this range and stability will hold further, we can’t know for sure until the future crashes into the present. But the peak gold price of the last 12 months has been a mere 17% above its low of the same period. And barring the 16% lull of 2012, that makes Sept. 2013 to Sept. 2014 less volatile than any time since 2005.
 
For the record, the simple average of all 12-month ranges in Dollar gold prices since 1968 has been 37% top to bottom.
 
Peak volatility was a huge 270% gain during 1979. The tightest 1-year range was a mere 6% in 1995. And gold’s median range…meaning that half of all 12-month periods since 1968 were more violent, and half were less…has been 27% over the last 46 years.
 
Looking to the horizon, and after hitting the doldrums for the last 12 months, there’s no certainty that gold’s volatility will make landfall or crash into the rocks. Besides the relative calm as shown on our chart, only one other point looks plain:
 
No sustained bull market in gold prices has come with a smaller 12-month trading range in percentage terms.
 
But if it’s price stability you want from your gold, you’ve already got it – or had it, at least compared to gold’s historical path.
 
Gold’s equilibrium may now break, just as analysts start seeking it.
  • Reddit
  • Facebook
  • Twitter
  • Google
  • Yahoo
  • LinkedIn
  • Digg
  • StumbleUpon
  • Technorati
  • del.icio.us
Tagged with:
Sep 02

Gold Investment Positive, But Only Just

Gold Price Comments Off on Gold Investment Positive, But Only Just
Summer 2014 sees larger accounts adding gold, but “safe haven” demand still missing…
 

GOLD INVESTMENT demand held positive last month, but only just, writes Adrian Ash at BullionVault.
 
Geopolitics has nothing to do with it. The lesser-spotted “safe haven” demand for gold is notable by its absence, despite the unholy mess in Ukraine, Gaza and Iraq.
 
Who says? Real investor activity does. Bullionvault is the world’s largest gold and silver exchange online. Our Gold Investor Index measures the number of people using BullionVault to grow their gold holdings over those who cut or sold entirely during the last month.
 
The index isn’t a survey of intentions or plans. It is calculated solely from real investment activity in physical gold bullion.
 
A reading of 50.0 would signal a perfect balance of net buyers and net sellers across the month. The peak to date was at 71.7 in September 2011. And in August 2014, the Gold Investor Index edged back to 51.7 from July’s rise to 51.9 – the first rise since February, and only a little above June’s 4.5-year low at 51.2.
Bullionvault's Gold Investor Index
 
Gold investment also stayed positive last month by weight. Indeed, BullionVault customers as a group added gold for the third month in succession – the longest such stretch since New Year 2013.
 
But while the quantity of client gold grew (with Far East storage the stand-out choice), it grew by only 50 kilograms. That took the aggregate across London, New York, Singapore, Toronto and Zurich to a new record for our 10-year old business of 33.1 tonnes.
 
So private investors do continue to grow their holdings. Coupled with that low reading on the Gold Investor Index however, it’s clear that larger accounts are leading – just as they did in June and July. The mass of private investment cash is leaving gold by the wayside, and continues to opt for equities at record or near-record prices instead.
 
Yes, concerns over the equity market are growing. Eurozone investors tell us they’re also increasingly anxious about the shift to money-printing QE set to start in Frankfurt this autumn. But contrary to newswire journalists (or rather, their headlining editors), both prices and gold investment demand remain unmoved by today’s geopolitics.
 
Argentina’s default, the death toll in Gaza, LOL jihadis in Iraq…nothing shook gold from its summer slumber. In case you missed it – because you passed out with boredeom – this is how tedious precious metals became in August 2014…
  • Gold traded in the narrowest monthly price range for five years, a mere $40 per ounce;
  • The monthly average price of $1296 was almost precisely the average gold price of the previous 12 months ($1297.50);
  • Speculators and commercial traders both cut their holdings of Comex futures & options. In fact, open interest (ie, the number of contracts now open) fell to a series of 5-year lows;
  • Investment funds also shrugged and took to the beach. The giant SPDR Gold Trust (NYSEArca:GLD) shrank by 6 tonnes, reversing July’s addition and erasing all 2014 growth so far at 795 tonnes – a 5-year low when first hit this January.
Why no gold investing surge on summer 2014’s geopolitical headlines?
 
History shows gold offers you financial insurance, not a speculation on other people’s troubles. So it’s worth noting that – while gold priced in Dollars ended August unchanged from July at $1285 per ounce – it rose 1.6% for Euro investors and 1.8% against the British Pound.
 
Trouble ahead for the UK and Europe? If only gold investment were that simple. But with geopolitics leaving prices and demand unmoved, longer-term investors…wanting to book a little of that financial insurance for their own savings…do continue to quietly and steadily accumulate metal.
 
That insurance is one-third cheaper now that it was at the peak of the financial crisis (2011 in Dollars and Sterling, 2012 for the Euro). Gold has been flat for the last year. A small group of investors are choosing to make their own decisions…instead of relying on headlines of death and destruction elsewhere for their cue.
  • Reddit
  • Facebook
  • Twitter
  • Google
  • Yahoo
  • LinkedIn
  • Digg
  • StumbleUpon
  • Technorati
  • del.icio.us
Tagged with:
preload preload preload
Get Adobe Flash player