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.
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Sep 29

Gold Bullion "Faces Aggressive Shorting" as Hong Kong Protests Grow Ahead of China’s Golden Week Holidays, US Jobs Data Loom

Gold Price Comments Off on Gold Bullion "Faces Aggressive Shorting" as Hong Kong Protests Grow Ahead of China’s Golden Week Holidays, US Jobs Data Loom
GOLD BULLION prices rose to $1223 per ounce in London on Monday, 0.4% higher from last week’s close, before slipping back as world stock markets cut their earlier losses.
 
Hong Kong’s main stock index lost 2.0% as pro-democracy protests spread across the city.
 
The US Dollar dropped from new 4-year highs on the currency market, helping food commodities bounce from multi-year lows.
 
Silver dropped in early Asian trade, before tracking gold bullion’s rally to stand unchanged from Friday’s finish above $17.60 per ounce.
 
“Quiet physical demand in China this week could leave gold lacking crucial support,” writes Jonanthan Butler at Japanese conglomerate Mitsubishi, pointing to the Golden Week holidays starting Tuesday.
 
“Though short covering may offer upside,” Butler adds, noting heavy bearish betting by speculative traders in US futures and options, “quarter-end squaring may leave investors with little appetite for gold in the coming days.”
 
Tuesday also marks the new Martyrs’ Day in China, aimed “to commemorate those who sacrificed for their country,” according to the New York Times.
 
Tens of thousands of protesters continued to block Hong Kong’s main business district Monday, extending the weekend’s march against Beijing’s refusal to allow a free choice of candidates in the city’s 2017 leadership elections.
 
Beijing’s censorship of social media site Weibo hit new record levels during this weekend’s protests, says the South China Morning Post.
 
“Usually a lot of Chinese tourists come to Hong Kong for the holiday,” Reuters quotes German bullion refining group Heraeus’ general manager in the city, Dick Poon.
 
“[Typically] they end up buying jewellery, but this time they might be turned off by the protests.”
 
This week’s absence of China’s wholesale dealers, says Swiss refiner MKS’s Asian desk, “could heap added pressure on gold,” especially if “combined with another strong US payrolls figure expected this Friday.
 
“This is a very similar scenario to last year where gold was aggressively sold by speculators during the absence of the Chinese.”
 
Consensus forecasts for Friday’s US employment data say 203,000 net jobs were added to non-farm payrolls this month, reversing August’s shock reading of just 142,000.
 
Thursday’s European Central Bank decision “could weaken the Euro and strengthen the Dollar,” adds Butler at Mitsubishi. “[But] the impact of this on bullion prices could be offset by safe-haven buying of physical gold.”
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Sep 24

And the Rain It Raineth…

Gold Price Comments Off on And the Rain It Raineth…
Climate change is a divisive topic. But nothing like how it will divide investors from their money…
 

The RAIN poured at a rate of one inch an hour, writes Addison Wiggin in The Daily Reckoning.
 
By the time dawn broke, five inches had fallen. Much of the water had nowhere to go. Basements were flooded for miles around.
 
What happened in the Chicago area on April 18, 2013, was no ordinary downpour: It was the leading edge of a financial storm front that will alter the flow of billions of Dollars in the years to come. Your assets need to seek shelter…and today we’ll show you exactly where that shelter is.
 
Beware, dear reader: We are tiptoeing around the edges of “global warming”.
 
We’re not taking a stand about whether global warming is occurring, or whether human activity is causing it. Rather, we’re approaching the topic with a quote attributed to Trotsky in the back of our mind: “You might not be interested in war, but war is interested in you.”
 
To be sure, global warming is interested in you – or, more precisely, the widespread belief in global warming by movers and shakers.
 
For starters, imagine a “climate change surcharge” tacked onto your sewer bill.
 
Wealthy elites are already shifting money flows based on a belief in global warming.
 
One year after the metro Chicago floods, Farmers Insurance Group filed an unprecedented lawsuit against 200 local governments. The lawsuit’s premise? Farmers incurred losses because the cities failed to expand their sewers and stormwater drains…and the cities should have known better because climate change had been making Chicago-area rainstorms more frequent, more intense and longer lasting since the 1970s.
 
For real.
 
In the end, Farmers backed off the suit. Legal experts said it didn’t have a prayer: Governments are usually immune from this sort of litigation, dontcha know.
 
“We hoped that by filing this lawsuit,” said a Farmers spokesman, “we would encourage cities and counties to take preventative steps to reduce the risk of harm in the future.” Farmers says it is satisfied this has now taken place.
 
Still, the suit is “the first loud shot in what I think will be a long-term set of litigation battles over failure to prepare for climate change,” says Michael Gerrard, director of the Center for Climate Change Law at Columbia University. Governments may be immune…but private companies are not. “One could easily imagine architects and engineers being accused of professional malpractice for designing structures that don’t withstand foreseeable climate-related events,” Gerrard tells NBC News.
 
The world’s wealthy will become interested in global warming when it starts costing them money, says the celebrity astrophysicist Neil deGrasse Tyson.
 
“The evidence will show up when they need more evidence,” Tyson told MSNBC in June. “More storms, more coastlines getting lost. People beginning to lose their wealth. People, if they begin to lose their wealth, they change their mind real fast, I’ve found – particularly in a capitalist culture.”
 
Tyson is behind the curve. Wealthy elites are already shifting money flows based on a belief in global warming.
 
“Global warming will be the most important investment issue for the foreseeable future,” wrote celebrity asset manager Jeremy Grantham in 2010.
 
In early 2014, The New York Times reported Coca-Cola “has embraced the idea of climate change as an economically disruptive force” that’s limiting access to the water it needs for its beverages. What’s more, “Coke reflects a growing view among American business leaders and mainstream economists who see global warming as a force that contributes to lower gross domestic products, higher food and commodity costs, broken supply chains and increased financial risk.”
 
But it’s not all grim: “I met hundreds of people who thought climate change would make them rich,” writes journalist McKenzie Funk in his 2014 book Windfall: The Booming Business of Global Warming. Funk traveled to 24 countries over six years.
 
Along the way, he met people who expected to profit from drought – like Avraham Ophir, a Holocaust survivor who founded the firm Israel Desalination Enterprises. Its reverse-osmosis techniques can produce snow in warm climates. Thanks to Ophir’s firm, the slopes at the Winter Olympics in Russia this year had a steady supply of fresh powder despite temperatures approaching 50 degrees Fahrenheit.
 
Funk also met people who expect to profit from rising sea levels – like Koen Olthuis, a Dutch architect who’s used his country’s extensive experience with seawalls to develop solutions for island nations that might be threatened with inundation, like the Maldives in the Indian Ocean. Still other entrepreneurs are cooking up solutions to prevent another Hurricane Sandy from doing a number on New York City.
 
And he met people who expect to profit from melting polar ice – like Mininnguaq Kleist, who runs Greenland’s department of foreign affairs. With the ice cap melting, he’s looking for ways Greenland’s population of 57,000 can prosper from fossil fuels and minerals that were previously inaccessible.
 
“Hot places will get hotter. Wet places will get wetter. Ice will simply melt,” writes Funk.
 
Even the aforementioned Farmers Insurance makes an appearance in his book, based on the first of those three assumptions. Farmers has contracted with a private firm called Firebreak Spray Systems. Its co-founder Jim Aamodt made a name for himself developing the automatic sprayers in the produce section of the grocery store. His next big thing was a way to coat houses with a chemical retardant offering eight months of fire protection.
 
Firebreak swings into action in Southern California hot spots, spraying down Farmers-insured homes even as wildfires bear down on the neighborhood. It’s a throwback of sorts to 17th-century London, when insurance companies were the ones offering fire protection, not governments.
 
So there’s no shortage of money flowing because people believe in global warming. Alas, for you, the retail investor, catching some of those flows for your own portfolio can be a dicey proposition.
 
Funk opens his book with “The Investment Climate Is Changing” – a lavish dog and pony show put on by Deutsche Bank replicating Amazon jungle on Wall Street when it was 39 degrees outside. It was the launch event for the DWS Climate Change Fund, trading under the symbol WRMAX.
 
Missing from Funk’s book is the follow-up: The fund had the ill fortune of debuting in September 2007. The broad stock market topped a month later, and then came the Panic of 2008.
 
Unlike the broad market, WRMAX never came back. A new manager arrived in 2011 and the fund was spiffed up with a new name – DWS Clean Technology Fund. No matter: In October 2012, Deutsche Bank pulled the plug.
 
Hmmm…Surely, there’s something you could do to take advantage of this trend, no?
 
After all, “the impact is across many industries,” writes our friend Barry Ritholtz, money manager, blogger extraordinaire and author of Bailout Nation. (It was Barry who planted the seed in our head for this essay. Understand he is an unabashed believer in global warming caused by human activity. Again, we’re taking a strictly apolitical follow-the-money approach, but if you’re still offended, write him a nasty email. He’ll be sure to delete it before going out to engage in his carbon-spewing hobbies of high-end sports cars and boats. Heh…)
 
The investing implications, he says, “go far beyond energy, to include agriculture, insurance, transportation, construction, recreation, real estate, energy exploration, food production, health care, minerals and even finance.” Among the possibilities he urges us to consider…
  • “Insurers stand to make larger payouts because of more severe weather and more frequent natural disasters. However, this will inevitably lead to appreciably higher insurance premiums and potentially rising profits
  • “The travel and hotel industry is facing specific challenges. Ski resorts that were in prime snow-making areas may find themselves no longer ideally located; warm weather destinations boasting access to reefs for snorkeling and scuba diving have troubles as reefs die out
  • “Energy exploration and mining is about to get a huge boost as formerly inaccessible Arctic regions are soon to have huge untapped resources exposed. Shipping across formerly unnavigable seas could alter transportation costs and ship designs
  • “Agriculture is turning to genetically modified crops to create drought-resistant and heat-tolerant varieties. Disease-carrying insects are now traveling farther north, creating a potential health care problem.
“Farmland, oil and mineral exploration rights, timber and water are the commodities of the future,” declares Mr. Ritholtz.
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Sep 19

15 Firms Interested in Replacing London Gold Fix

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Reuters reported that at least 15 firms have shown interest in replacing the London gold fix. A replacement is expected to be chosen by the end of the year.

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Sep 18

Bad News for Gold from the Strong Dollar

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Expect a drop to $1200 near-term, says a man who called the bull market in 2001…
 

ERIC COFFIN is the editor of the HRA (Hard Rock Analyst) family of publications.
 
With a degree in corporate and investment finance, plus extensive experience in merger and acquisitions and small-company financing and promotion, Coffin has for many years tracked the financial performance and funding of all exchange-listed Canadian mining companies, and has helped with the formation of several successful exploration ventures.
 
One of the first analysts to point out the disastrous effects of gold hedging and gold loan-capital financing in 1997, he also predicted the start of the current secular bull market in commodities based on the movement of the US Dollar in 2001 and the acceleration of growth in Asia and India. 
 
Now Coffin tells The Gold Report how the continuing strength of the US Dollar is bad news for the price of gold, and believes that in the short term a price of $1200 per ounce is possible, though there is room now for an oversold bounce…
 
The Gold Report: You told us last year you were “neutral” on the state of the US economy. Since then, the headline unemployment number has improved. Even so, as David Stockman, former director of the Office of Management and Budget, says, there have been no net new jobs created since July 2000, and jobs paying over $50,000 per year have disappeared by 18,000 per month since 2000. What is your view of the health of the US economy?
 
Eric Coffin: I’m more positive than neutral these days, but I do agree somewhat with Stockman. As unemployment falls toward 6%, we would expect an increase in wage gains. But we’re just not seeing that. And five years into the latest expansion, we’re not seeing the economic growth spurts that tend to occur coming out of a really bad recession. I don’t see how the US economy keeps reproducing the 4% growth of Q2 2014 if we don’t see higher wage gains and higher paying jobs created.
 
TGR: You’ve used the term “smack down” with regard to the recent falls in the gold price. What do you mean by this?
 
Eric Coffin: It’s a wrestling term and means being thrown to the mat. This is what has happened to gold time after time, after every uptrend. The current smack down is due more to strength in the US Dollar than anything else. Gold does trade as a currency sometimes and for the past few weeks it has held a strong inverse correlation to the US Dollar. I think physical demand will ultimately determine the price level, but ultimately it can be a long time when you’re trading.
 
TGR: Why isn’t physical demand determining the price now?
 
Eric Coffin: It’s because of trading in the futures market. When somebody dumps 500 tons there, gold has to drop $200 per ounce. The futures market can overwhelm the physical market in terms of volume and often does. Most traders in the futures market (NYMEX or COMEX) are not buying gold and taking delivery. They are trading as a hedge, or just trading. The physical market, the place where people actually buy bullion, coins and bars, is not predominantly in London or New York but rather in China and India. And because of the smuggling that has arisen in India to circumvent increased tariffs, and imports moving to cities that do not release import statistics in China, it is difficult to know how much bullion Asia is buying right now.
 
TGR: Large short-term trades in paper gold could be used to manipulate the market, and an increasing number of people believe gold is being manipulated downward in this manner. Do you agree?
 
Eric Coffin: I’m not really a conspiracy guy. That said, when we see things like the sale in August of 400 tons in about 10 minutes, we have to wonder what’s going on. Again, when Germany requests its gold from the US and is told delivery will take seven years, it makes you wonder how much of that gold has been hedged or lent already.
 
TGR: Where do you see gold going for the rest of the year?
 
Eric Coffin: I think we are going to be trapped in this currency trade cycle for a little while. The European Central Bank (ECB) cut its rates. One of its deposit rates is now negative. Mario Draghi, the president of the ECB, is talking about starting up quantitative easing. If that happens, or if traders believe it will, the Euro, which has already fallen from $1.40 to about $1.28 to the Dollar, could fall to $1.20 or $1.10. And this strengthening of the Dollar is not good for gold.
 
The other factor of gold being traded on a currency basis is the possibility of Scottish independence, fear of which has already resulted in a significant decline in the British Pound.
 
TGR: Will $1250 per ounce gold lead to gold miners suspending production?
 
Eric Coffin: If gold stays at $1200-1250 per ounce for an extended period, there will be mine closures. Obviously, not all mines have the same costs, but the average all-in cost per ounce for gold miners is about $1200 per ounce. Already, some mines are high-grading to keep profit margins up.
 
Most of the large miners have already cut exploration budgets pretty significantly. We can assume that the pipeline is going to get smaller and smaller when it comes to new projects, even high-quality projects.
 
TGR: How badly will this gold price decline hurt the junior explorers?
 
Eric Coffin: It’s hurt a lot of them already. It’s much more difficult to raise money than it was two or three years ago, although it’s probably slightly better now than early this year. That could change on a dime, of course, if the gold price falls to $1200 per ounce or rises back through $1300 per ounce. Already, quite a few companies are keeping the lights on but not much else. We desperately need a few good discoveries – companies going from $0.20 to $5/share and getting taken out. 
 
TGR: You’ve been visiting mine sites in the Yukon. What do you like about this jurisdiction?
 
Eric Coffin: It’s a great area geologically, but it has some challenges. It can be an expensive place to work, so being close to infrastructure or designing an operation that doesn’t require a huge amount of nearby infrastructure is critical. Power costs are a big item. There’s no end of places in the Yukon where hydropower could be generated fairly cheaply, but that is not going to happen on a large scale unless the federal government steps up, and that would be nice to see.
 
TGR: How does Alaska compare to the Yukon as a mining jurisdiction?
 
Eric Coffin: They’re similar in many ways. Alaska, like the Yukon, is not low-cost, but it is mining friendly and even farther down the road when it comes to settling aboriginal issues. The key to success in Alaska is being close to the coast or major population centers or infrastructure.
 
TGR: How do you rate copper’s prospects?
 
Eric Coffin: There are several large producers that have either recently come onstream or will come onstream in the next few months. So copper is probably going to be in at least a small surplus for the next year or two. The price could fall back to $2.50-2.75/pound ($2.50-2.75/lb). I’m not terribly concerned about that. Copper should be fine in the long term and a good copper operation can make plenty of money at those prices.
 
TGR: The bear market in the juniors is now 3.5 years old. Should investors expect a general upturn any time soon?
 
Eric Coffin: I doubt it if you mean a broad market rise that lifts all boats. My expectation at the start of this year, which is looking fairly dodgy right now admittedly, was for a 30% TSX Venture Exchange gain for 2014. That is possible with only a small subset of companies doing very well, which is my expectation. Investors always want to look for the tenbaggers. It doesn’t matter what the market is like and, obviously, potential tenbaggers often turn into actual one and a half or two baggers, which is just fine. You want to find the projects with the highest potential for resource growth or new discovery and management teams that know how to explore them and finance them on the best possible terms. That is the combination that gives you the potential biggest wins.
 
TGR: Eric, thank you for your time and your insights.
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Sep 18

"Gradual" Gold Bull Market to Start 2015, "Next Floor at $1200" Says GFMS

Gold Price Comments Off on "Gradual" Gold Bull Market to Start 2015, "Next Floor at $1200" Says GFMS
Further gold price falls seen before flatter mine output meets new inflation concerns…
 

GOLD’s decade-long bull market is set to resume in 2015, albeit “gradually” from a new bottom according to a new forecast from the market’s leading data analysts, Thomson Reuters GFMS.
 
Thanks to gold’s rally over the first half of 2014 from $1200 to $1400, the consultancy says today in the first Update to its Gold Survey 2014, “Price sensitive [consumer] markets have seen sales slow.
 
“We believe it will take prices in a $1200-1250 range in order for physical buying from Middle Eastern, East and South East Asian markets to begin to increase.”
 
Low volatility and gold’s tightening price range form “the other defining feature” of the 2014 market to date, GFMS adds, noting that volatility on a 100-day basis has fallen to its second-lowest level since 2005, “undermin[ing] trade volumes.”
 
Launching the Update on Thursday, “The lack of a clear price direction,” said Rhona O’Connell, the London-based consultancy’s head of metals research and forecasts, “[plus] the expectation of lower prices have been key drivers in deterring purchases among private buyers and a similar mentality has prevailed in the professional sector.”
 
A recovery in European economic growth is “pivotal” to GFMS’s longer-term gold price forecast, because only then will investor attention focus on the “inflationary pressures” built up by what it calls “the massive injections of liquidity into the financial system” from central banks worldwide over the last 7 years of financial crisis.
 
China’s central bank reportedly injected $81 billion of cash into the country 5 largest banks this week. The European Central Bank is scheduled to begin a new round of cheap, open-ended bank lending today.
 
“There has been a whiff of professional investor interest [in gold] this year,” Thomson Reuters GFMS says, “but this is still very tentative” thanks to US tapering of the Federal Reserve’s quantitative easing program, plus the perceived risk of rising interest rates once tapering ends.
 
Noting the problems facing Middle Eastern gold demand thanks to political and military strife, “Any price fall towards $1200 is expected to see a strong resurgence in physical interest” from price-sensitive consumer markets, says O’Connell.
 
Demand from China in particular has been stifled so far in 2014 by consumers’ bargain-hunting on last year’s price crash, plus huge stockpiling by wholesalers.
 
Year on year, the first half of 2014 saw gold bar investment demand fall 50% globally, with a greater drop in both China and India – the world’s top 2 consumer nations.
 
Gold prices at $1200 now mark “the next big level to watch on the downside,” says GFMS – a level likely to be seen “in the coming months”.
 
But with central banks in emerging economies “continu[ing] a sustained strong buying policy,” GFMS also forecasts global gold mining output will peak and then plateau from 2014. Coupled with a likely return of inflation concerns, this should see “the fundamental position” of the gold market’s supply and demand balance “start to tighten during 2015 as underlying demand strengthens, taking the market into a deficit.
 
“The price is therefore expected to bottom out during 2015 before embarking on a gradual bull market.”
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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.
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Sep 15

All Eyes on US Fed as Gold Price Bears Risk "Short-Covering Rally" from Lowest Weekly Close in 36

Gold Price Comments Off on All Eyes on US Fed as Gold Price Bears Risk "Short-Covering Rally" from Lowest Weekly Close in 36
GOLD PRICES rallied $10 per ounce from a new 8-month low of $1225 hit at the start of Asian trade Monday, trading 0.5% above last week’s finish in London.
 
European stock markets held flat ahead of this week’s US Federal Reserve statement on rates and QE on Wednesday, plus the start of the Eurozone central bank’s new round of long-term bank financing on Thursday.
 
Losing 2.7% against the Dollar, gold prices ended last week with their lowest Friday PM Gold Fix in London since 27 December 2013, down at $1231 per ounce.
 
Silver on Monday held steadier than gold prices, unchanged around $18.65 per ounce to trade some 1.0% above last Thursday’s new 14-month low.
 
“With last year’s double bottom of $1180 not too far off,” says Jonathan Butler at Japanese conglomerate Mitsubishi, “attention will be on the Fed’s comments on Wednesday.”
 
“A hawkish stance” – such as the loss of the words “considerable time” from  the Fed’s forecast for its likely delay to raising interest rates from zero – “could see further strengthening of the Dollar and potentially a further gold capitulation,” says Butler.
 
“If the market view the Fed’s comments as too dovish, gold could stage a reversal.”
 
“We could see a short-lived technical bounce,” reckons Ed Meir at US brokerage INTL FCStone, but “traders will likely use any rallies as a selling opportunity.”
 
In US derivatives, “Some short covering and bargain hunting [was] seen down at the lows overnight,” says a note from brokerage Marex Spectron’s David Govett in London.
 
Latest data on US futures and options show speculative traders as a group grew their “short” betting against gold for the 4th week running in the week-ending last Tuesday, taking their “net long” gold position (of bullish minus bearish bets) to its lowest level since mid-June.
 
Speculative betting against silver prices meantime rose for the 6th week in a row, up to a level only surpassed 3 times in the last 20 years, all in early summer 2014 when the metal began a rapid 16% rally.
 
“Money managers have contributed to the fall in both gold and silver prices,” says the commodities team at Germany’s Commerzbank.
 
“Given that prices have dropped further since the reporting date, net long positions have no doubt also been reduced further.”
 
“The market remains under pressure,” Reuters quotes analyst Andrey Kryuchenkov at Russian bank VTB Capital in London, “from expectations for a stronger US currency in the longer run.
 
“Physical buyers are still absent, unwilling to support prices on fresh lows.”
 
With Tokyo closed for Japan’s national Respect for the Aged holiday, “Liquidity was already on the thin side,” says the Asian desk of Swiss refining and finance group MKS, “but once the Shanghai Gold Exchange opened up more physical interest began to trickle in – finally!”
 
Despite slipping from Friday’s close in Yuan terms, Shanghai’s main gold contract more than doubled its premium Monday to more than $5 per ounce over comparable London quotes.
 
With Scottish opinion polls meantime putting the “Yes” and “No” camps neck-and-neck for Thursday’s independence vote, the British Pound held onto last week’s bounce from new 2014 lows.
 
That cappped gold prices for UK investors at £760 per ounce, some 0.6% above Friday’s 7-week low.
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Sep 04

Century-old London Gold Price Benchmark Getting Overhauled

Gold Price Comments Off on Century-old London Gold Price Benchmark Getting Overhauled

The operator of the London gold price benchmark said on Thursday it had begun the process of looking for a new administrator that will replace the traditional twice-a-day phone call used by institutions.

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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.
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