Oct 24

Silver Buyers "Not Investing, But Stacking"

Gold Price Comments Off on Silver Buyers "Not Investing, But Stacking"
Silver investing analyst “gets why people are buying”, forecasts record-high prices…
 

SILVER INVESTMENT demand has receded since 2011, according to a detailed new report, but it remains “the single most important driver of prices” and is set to return, perhaps with force, over the coming decade.
 
On “current trends”, says the new Silver Investment Demand report from US consultancy the CPM Group – commissioned by the Washington-based Silver Institute –  investors worldwide could grow their aggregate holdings by 50% between now and 2024.
 
This level of investing “would be expected to push annual average silver prices to a fresh record high further out,” says CPM Group’s managing director, Jeffrey Christian.
 
Relaying an overview of silver’s historical use as reliable money, notably in China for 400 hundred years to the mid-20th century – as well as across the United States before the 1913 foundation of the Federal Reserve – Christian recounts a modern silver investor’s comment to him regarding what many chatrooms call “stacking”.
 
“With due respect,” the investor said, “you need to know that we do not invest in silver. We stack it.”
 
What the comment means, says Christian, is that silver investors in the developed West – whose demand has surprised analysts and defied the metal’s 60% price-drop since 2011 – “[do] not see silver as an investment, but as a store of wealth, an alternative to holding one’s wealth in a nationally issued currency such as the US Dollar.”
 
Instead of viewing silver as a speculative or short-term investment, Christian goes on, these buyers see the metal “as a core part of their long-term assets, the base in some cases of the individual’s wealth…much more meaningful and visceral to the owners than shares in a stock or a series of bonds they may hold for a period of time.”
 
Weighing against the silver stackers, however, other more “short-term” investors have driven the metal’s sharp price falls since it hit near-all time highs in spring 2011, CPM Group’s Silver Investment Demand report explains.
 
So-called “trend followers”, as well as “opportunistic” traders switching into equities, have added to sales from disappointed investors who had “over-blown expectations” that the bull market of 2006-2011 would continue. And because net investing demand shows what CPM Group calls “a strong 59.1% correlation” with real silver prices (after accounting for inflation), this sell-off by shorter-term money drove the crash.
 
Ultimately, the report for The Silver Institute concludes, future net investment demand “can only be guessed [and] will depend on how investors view the world around them.” But investors “may begin to increase their net silver purchases in the years ahead.” Because with Western economies failing to redress their financial imbalances since the 2007-2012 crisis, the concerns over inflation and credit-default which “motivated” the surge in demand from 2006-2011 could soon return.
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Oct 23

US Oil & Global Gold

Gold Price Comments Off on US Oil & Global Gold
US oil stocks have soared as shale pushes crude prices down. But gold…?
 

The UNITED STATES is doing better than it has in years, writes Frank Holmes on his Frank Talk blog at US Global Investors.
 
Jobs growth is up, unemployment is down, our manufacturing sector carries the rest of the world on its shoulders like a wounded soldier and the World Economic Forum named the US the third-most competitive nation, our highest ranking since before the recession.
 
As heretical as it sounds, there’s a downside to America’s success, and that’s a stronger Dollar. Although our currency has softened recently, it has put pressure on two commodities that we consider our lifeblood at US Global Investors: gold and oil.
 
It’s worth noting that we’ve been here before. In October 2011, a similar correction occurred in energy, commodities and resources stocks based on European and Chinese growth fears. 
 
But international economic stimulus measures helped raise market confidence, and many of the companies we now own within these sectors benefited. Between October 2011 and January 2012, Anadarko Petroleum rose 58%; Canadian Natural Resources, 20%; Devon Energy, 15%; Cimarex Energy, 15%; Peyto Exploration & Development, 15%; and Suncor Energy, 10%.
 
Granted, we face new challenges this year that have caused market jitters – Ebola and ISIS, just to name a couple. But we’re confident that once the Dollar begins to revert back to the mean, a rally in energy and resources stocks might soon follow. Brian Hicks, portfolio manager of our Global Resources Fund (PSPFX), notes that he’s been nibbling on cheap stocks ahead of a potential rally, one that, he hopes, mimics what we saw in late 2011 and early 2012.
 
A repeat of last year’s abnormally frigid winter, though unpleasant, might help heat up some of the sectors and companies that have underperformed lately.
 
On the left side of the chart below, you can see 45 years’ worth of data that show fairly subdued fluctuations in gold prices in relation to the Dollar. On the right side, by contrast, you can see that the strong Dollar pushed bullion prices down 6% in September, historically gold’s strongest month. This move is unusual also because gold has had a monthly standard deviation of ±5.5% based on the last 10 years’ worth of data.
 
 
Here’s another way of looking at it. On October 3, bullion fell below $1200 to prices we haven’t seen since 2010, but they quickly rebounded to the $1240 range as the Dollar index receded from its peak the same day.
 
 
There’s no need to worry just yet. This isn’t 2013, when the metal gave back 28%. And despite the correction, would it surprise you to learn that gold has actually outperformed several of the major stock indices this year?
 
 
As for gold stocks, there’s no denying the facts: With few exceptions, they’ve been taken to the woodshed. September was demonstrably cruel. Based on the last five years’ worth of data, the NYSE Arca Gold BUGS Index has had a monthly standard deviation of ±9.4, but last month it plunged 20%. We haven’t seen such a one-month dip since April 2013. This volatility exemplifies why we always advocate for no more than a 10% combined allocation to gold and gold stocks in investor portfolios.
 
Oil’s slump is a little more complicated to explain.
 
Since the end of World War II, black gold has been priced in US greenbacks. This means that when our currency fluctuates as dramatically as it has recently, it affects every other nation’s consumption of crude. Oil, then, has become much more expensive lately for the slowing European and Asian markets. Weaker purchasing power equals less overseas oil demand equals even lower prices.
 
What some people are calling the American energy renaissance has also led to lower oil prices. Spurred by more efficient extraction techniques such as fracking, the US has been producing over 8.5 million barrels a day, the highest domestic production level since 1986. 
 
We’re awash in the stuff, with supply outpacing demand. Whereas the rest of the world has flat-lined in terms of oil production, the US has zoomed to 30-year highs.
In a way, American shale oil has become a victim of its own success.
 
 
At the end of next month, members of the Organization of the Petroleum Exporting Countries (OPEC) are scheduled to meet in Vienna. As Brian speculated during our most recent webcast, it would be surprising if we didn’t see another production cut. With Brent oil for November delivery at $83 a barrel – a four-year low – many oil-rich countries, including Iran, Iraq and Venezuela and Saudi Arabia, will have a hard time balancing their books. Venezuela, in fact, has been clamoring for an emergency meeting ahead of November to make a plea for production cuts. 
 
 
Although not an OPEC member, Russia, once the world’s largest producer of crude, is being squeezed by plunging oil prices on the left, international sanctions on the right. This might prompt President Vladimir Putin to scale back the country’s presence in Ukraine and delay a multibillion-Dollar revamp of its armed forces. When the upgrade was approved in 2011, GDP growth was expected to hold at 6%. But now as a result of the sanctions and dropping oil prices, Russia faces a dismally flat 0.5%.
 
The current all-in sustaining cost to produce one ounce of gold is hovering between $1000 and $1200. With the price of bullion where it is, many miners can barely break even. Production has been down 10% because it’s become costlier to excavate. As I recently told Kitco News’ Daniela Cambone, we will probably start seeing supply shrinkage in North and South America and Africa.
 
The same could happen to oil production. Extraction of shale oil here in the US costs companies between $50 and $100 a barrel, with producers able to break even at around $80 to $85. If prices slide even further, drillers might be forced to trim their capital budgets or even shelve new projects.
 
Michael Levi of the Council on Foreign Relations told NPR’s Audie Cornish that a decrease in drilling could hurt certain commodities:
“[I]f prices fall far enough for long enough, you’ll see a pullback in drilling. And shale drilling uses a lot of manufactured goods – 20% of what people spend on a well is steel, 10% is cement, so less drilling means less manufacturing in those sectors.”
At the same time, Levi places oil prices in a long-term context, reminding listeners that we’ve become accustomed to unusually high prices for the last three years.
“People were starting to believe that this was permanent, and they were wrong,” he said. “So the big news is that volatility is back.”
On this note, be sure to visit our interactive and perennially popular Periodic Table of Commodities, which you can modify to view gold and oil’s performance going back ten years.
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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 28

Cash Starved Mining Stocks Go Bang

Gold Price Comments Off on Cash Starved Mining Stocks Go Bang
Tough times for Australian miners are not letting up…
 

RICHARD KARN is managing editor of the Emerging Trends Report.
 
Speaking here to The Gold Report, he notes how nearly 150 mining companies listed on the Australian Stock Exchange went into bankruptcy during the fiscal year that ended June 30, and another 23 have gone under since then. Now Karn believes a fresh wave of Aussie mining stock failures will hit when the current financial quarter ends September 30. A major shakeout at some point appears likely…
 
The Gold Report: When we interviewed you in April, you said the pending demise of zombie companies on the Australian Stock Exchange (ASX) was a good thing because there were too many deadbeats in the specialty metal sector. Has that process worked its way through the system or are there still some “walking dead” making it difficult for investors to pick out the promising companies?
 
Richard Karn: Unfortunately, the latter is still the case. According to the Australian Securities & Investment Commission (ASIC), 146 companies in the mining sector went into administration (bankruptcy) during the fiscal year ending June 30, 2014. As Luke Smith pointed out last month in your publication, yet another 226 resource companies did not have sufficient cash to meet their anticipated expenditures for this quarter.
 
Since then another 23 resource companies have failed, and as of Aug. 25, 2014, 17 more had not paid their listing fees and were suspended from trading on the ASX.
 
So no, we do not think the process is over.
 
TGR: How are companies accessing capital today?
 
Richard Karn: By and large, they’re not. We’ve been picking up on some positive activity in the base and precious metal sectors, but that mostly has yet to trickle through to the specialty metal sector.
 
In the case of specialty metal companies, most are unable to raise money either from the capital markets or from their shareholders. Failed or abysmal uptake of rights issues and the like continue to be common. Many companies are literally being starved of cash.
 
TGR: Can companies sell some of their assets to cover costs on other projects?
 
Richard Karn: Asset sales are difficult in the current environment because so many companies are now so desperate to sell that it has become a buyers’ market. That being said, the Chinese have been stepping in to snap up the occasional bargain.
 
TGR: If companies have no more options, how long can they keep the lights on?
 
Richard Karn: Not long. The end of the quarter is September 30, and companies will have to disclose their financial situations. We expect a fresh wave of failures within the next six to eight weeks as more resource companies become insolvent.
 
We don’t know what the catalyst will be, but for some time we’ve been expecting a final selling frenzy that will mark at least an intermediate-term bottom in the specialty metal sector.
 
Some assets are so mispriced that the market appears to be pricing in failure well before the fact. In fact, so sure is the market that a number of these companies will fail that they are trading for less than the cash they have on hand, literally placing no value whatsoever on their resource projects.
 
Final washouts often occur when markets are oversold, and the specialty metal sector remains oversold. The spark for the selloff could be another failed rights issue or poor uptake on an option scheme, either of which would reflect a fundamental lack of confidence in management.
 
It could be some unknown – perhaps an otherwise meaningless threshold event – that “spooks the herd,” and shareholders just start selling everything indiscriminately to ensure they recover some of the money they’ve invested.
 
It could be that it finally dawns on investors that a number of these junior resource companies hold a lot of each other’s stock, which they are carrying on their balance sheets at par as a liquid asset when in actuality those shares are so illiquid they could not be sold except at a steep discount – and could well crash the share price in any case.
 
As I said, we do not know what will spark the selloff – just that it is coming.
 
And when the selling has been exhausted, it will constitute at least an intermediate bottom in the specialty metal sector.
 
In the final shakeout, we are anticipating a number of mismanaged companies will deservedly go under – as, unfortunately, will some quite good companies – and some very good projects will be picked up very inexpensively.
 
And being able to pick up outstanding assets for very little money always marks the bottom of the cycle, because it increases the odds of success as the cycle turns up again.
 
TGR: What characteristics should investors look for to avoid these doomed ventures?
 
Richard Karn: At the moment I would avoid small-cap specialty metal companies that are carrying any debt, especially if they are not cash-flow positive. If or when their ability to service that debt is called into question, it will likely be too late to get out.
 
In addition to reading financial statements to get a grasp of their financial situations and those circumstances just mentioned, I would look at what managements are actively doing to help their long-suffering shareholders.
 
For example, have they reduced staff, cut expenditures and taken a cut in salary themselves or are they still maintaining a “resource boom” lifestyle at their shareholders’ expense?
 
Most important, I would look for either positive cash flow from operations or sufficient cash on hand to sustain operations through to some pivotal event the market has been waiting for, such as commencing production, receiving project funding, permits or approvals, or receiving the results of a bankable feasibility study, etc. – something that will demonstrate management is delivering on its promises.
 
TGR: Could the recent repeal of the mining tax in Australia help all of these companies, or will it only impact large operators?
 
Richard Karn: The Minerals Resource Rent Tax (MRRT) did not apply to the specialty metal end of the resource sector in Australia, so its repeal will have little direct impact on these companies.
 
Indirectly, however, repealing the tax serves returns Australia to the ranks of the safest, most mining-friendly jurisdictions in the world, and at some point that will indeed lead to increased investment flows into the specialty metal sector.
 
What markets fail to fully appreciate is that many, and arguably most, of the technological advances we enjoy today, whether found in consumer electronics or transportation or renewable energy sources or military hardware, rely on secure, uninterrupted supply of a range of specialty metals.
 
With military conflict raging across the Middle East and North Africa; a full-fledged arms race between the countries with claims to the South China Sea, notably China and Japan; and the numerous potential conflicts brewing throughout the world, now more than ever secure supply of these specialty metals should be a very high priority. Should a war erupt, common sense, as well as history, dictates the first victims will be the very notion of globalization, free market economics and “just in time” delivery.
 
If it were in China’s strategic interests to stop exporting rare earth elements or tungsten or antimony or graphite, to name just a few of the specialty metal markets China controls, all of which are crucial to a range of military applications, there is absolutely nothing anyone could do about it.
 
Of the 50 specialty metals we track, more than 40 could be mined economically in Australia alone, thanks to its unique geology.
 
We’ve been writing about this trend for more than six years now, but except for a relatively brief period from mid-2010 through late 2011, in the panicked response to China cutting off supply of REEs to Japan, the aftermath of the global financial crisis has squelched the market’s appetite for mining projects in general and specialty metal projects in particular. They require the long-term commitment of capital and a sustained effort to put into profitable production.
 
The flood of liquidity sloshing around the planet since 2008 in search of a return appears to have such a short investment horizon that mining projects are largely off the radar.
 
So nothing has been done. There’s been a lot of talk, a lot of bureaucratic posturing and comic sputtering as World Trade Organization complaints are ignored or unfair business practices perpetuated, but nothing has been done. And the longer this continues, the more vulnerable the West becomes.
 
The specialty metal price spike the West suffered in 2010-2011 in panicked response to the Chinese curtailing exports of REEs will be nothing compared to what a “shooting war” would provoke.
 
Thinking otherwise is the height of naiveté.
 
TGR: Thank you for your insights.
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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.
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Sep 24

China Factories Still Expanding

Gold Price Comments Off on China Factories Still Expanding
Better news than expected from the world’s biggest consumer of raw materials…
 

HSBC announced Tuesday that the preliminary purchasing managers’ index (PMI) for China rose to 50.5, writes Frank Holmes on his blog at US Global Investors, a modest improvement from August’s 50.2.
 
Analysts were expecting the index to decline to a neutral 50.0, based on softening factory employment, but this is a case when you’re relieved others were off the mark.
 
Any number above 50.0 indicates expansion in the manufacturing sector; any number below, contraction. This is the fourth consecutive month that China’s PMI has remained above that magic threshold, a sign that the country’s manufacturing is stabilizing. The last time we saw a winning streak of this sort was between August and December of last year.
 
Every month, we eagerly anticipate the results of the HSBC China Manufacturing PMI because it partially informs the investment decisions we make in our China Region Fund (USCOX). Also, since China is the world’s second-largest economy, its economic health greatly affects global markets and drives commodity demand.
 
 
GDP is helpful, as it measures a country’s economic health, but it tells an incomplete story. Whereas GDP looks only at how things are, the PMI looks forward to how things might be—invaluable information for active money managers like us in the emerging market and resource spaces.
 
Although the PMI has remained above 50.0, the three-month moving average failed to cross above the one-month, as it did in May and held through July. We like to see this golden cross occur because it historically indicates more robust commodity demand from the world’s second-largest economy.
 
 
China is responsible for about 40% of the world’s copper consumption, and when analysts on Monday expressed skepticism of the country’s industrial production, the metal’s price fell to a three-month low of $3.05 per pound. Once everyone’s jitters were abated with the release of the positive flash PMI results, however, the price of copper rose close to $3.10.
 
We won’t know the final PMI results until September 30, but for now the 50.5 is encouraging. This news follows the central bank’s announcement that it will inject $80 billion into the country’s five largest banks to jumpstart the economy and help Premier Li Keqiang make good on his reassurance to global CEOs that China will achieve its targeted GDP growth rate of 7.5%.
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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 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.
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Sep 01

Silver: A Pile of Money

Gold Price Comments Off on Silver: A Pile of Money
8 reasons silver prices could rise sharply from today’s “undervalued” level…
 

JIM ROGERS once quipped that he waits to invest until “there’s a pile of money just sitting there in a corner and I can walk over and pick it up,” writes Jeff Clark at Casey Research.
 
In other words, an asset that’s deeply undervalued, widely ignored, with potent fundamentals ready to kick in.
 
Is there such an opportunity in any of the precious metals right now?
 
One could make a case for all of them, given the likelihood of high inflation and the mainstream largely ignoring the industry.
 
But there’s one metal in particular that I think will deliver the most fireworks. Silver is selling at less than half its 2011 high, is ignored more than gold, and as you’ll see, has explosive fundamentals that point to a possible runaway price scenario.
 
To assess silver’s potential, let’s first ignore short-term factors that you might see in mainstream headlines, such as net short/long positions, fluctuations in weekly ETF holdings, or the latest open interest. Data like these fluctuate regularly and rarely have long-term bearing on the price.
 
Let’s instead consider the big-picture forces that could impact silver over the next several years. Here are the data that tell me “there’s a pile of money sitting in the corner…”
 
#1: Monetary Abuse
The most significant catalyst for silver is the government’s abuse of our monetary system. In a world of endless fiat money printing and unsustainable debt, silver (like gold) represents a wealth protection against systemic risk.
 
At no time in history has a government printed this much money. And not one currency in the world is anchored to gold or any other tangible standard. This unprecedented setup means that whatever fallout results, it will be historic and affect each of us personally. Silver will be one refuge from that storm – and given its higher volatility, could rise more than gold.
 
#2: Inflation-Adjusted Price Has a Long Way to Go
One specific indicator of silver’s potential is its inflation-adjusted price. I asked John Williams of ShadowStats to calculate the silver price in May 2014 Dollars (current data are not yet available).
 
Shown below is the silver price adjusted for both the CPI-U, as calculated by the Bureau of Labor Statistics; and for ShadowStats data based on the CPI-U formula from 1980 (the formula has since been adjusted multiple times to keep the inflation number as low as possible).
 
 
The $48 peak in April 2011 was less than half the inflation-adjusted price of January 1980, based on the current CPI-U calculation. If we use the 1980 formula to measure inflation, silver would need to top $470 to beat that peak.
 
I’m not counting on silver going that high (at least I hope not, because I think there will be literal blood in the streets if it does). But clearly, the odds are skewed to the upside – and there’s a lot of room to run.
 
#3: Tight Production Margins
Producers have been forced to reduce costs in light of last year’s crash in the silver price. Some have done a better job at this than others, but look how far margins have fallen.
 
 
Relative to the cost of production, the silver price is at its lowest level since 2005. Keep in mind that cash costs are only a portion of all-in expenses, and that the silver price has historically traded well above this figure (all-in costs are just now being widely reported). That margins have tightened so dramatically is not sustainable on a long-term basis without affecting the industry. It also makes it likely that prices have bottomed, since producers can only cut expenses so much.
 
Although roughly 75% of silver is produced as a byproduct, prices are determined at the margin; if a mine can’t operate profitably or a new project won’t earn a profit at current prices, output would fall. Further, much of the current cost-cutting has come from reduced exploration budgets, which will curtail future supply. Sooner or later this supply deficit will serve as a catalyst for higher prices.
 
#4: Low Inventories
Various entities hold inventories of silver bullion, which were high when US coinage contained silver. As all US coins intended for circulation have been minted from base metals for decades, the need for high inventories is thus lower today. But this chart shows that little is available.
 
 
You can see how low current inventories are on a historical basis, most of which is held in exchange-traded products (ETPs). This is important because these investors have been net buyers since 2005 and thus have kept that metal off the market. The remaining amount of inventory is 241 million ounces, only 25% of one year’s supply – whereas in 1990 it represented roughly eight times supply. If demand were to suddenly surge, those needs could not be met by existing inventories. In fact, ETP investors would likely take more metal off the market. (The “implied unreported stocks” refers to private and other unreported depositories around the world, a number that also has shrunk strikingly.)
 
If investment demand were to repeat the surge it saw from 2005 to 2009, it would leave little room for error on the supply side.
 
#5: Conclusion of the Bear Market
This snapshot of six decades of bear markets signals that ours is near exhaustion. The yellow line represents silver’s price action from April 2011 through July 11, 2014.
 
 
The historical record suggests that buying silver now is a low-risk investment.
 
#6: Cheap Compared to Other Commodities
Here’s how the silver price compares to other precious metals, along with the most common base metals.
 
 
Only nickel is further away from its all-time high than silver.
 
#7: Low Mainstream Participation
Another indicator of silver’s potential is how much it represents of global financial wealth, compared to its percentage when silver hit $50 in 1980.
 
 
In spite of ongoing strong demand for physical metal, silver currently represents only 0.01% of the world’s financial wealth. This is one-twenty-fifth its 1980 level. Even that big price spike we saw in 2011 pales in comparison.
 
There’s an enormous amount of room for silver to become a greater part of the mainstream investment community.
 
#8: Watch Out For China!
It’s not just gold that is moving from West to East. Silver market trading volumes rose sharply last year, mostly a result of the Shanghai Futures Exchange (SHFE) initiating overnight trading.
 
 
Don’t look now, but the SHFE has overtaken the Comex and become the world’s largest futures silver exchange. In fact, the SHFE accounted for 48.6% of all volume last year. The Comex, meanwhile, is in sharp decline, falling from 93.4% market share as recently as 2001 to less than half that amount today.
 
What’s more, domestic silver supply in China is expected to hit an all-time high and exceed 250 million ounces this year (between mine production, imports, and scrap). By comparison, it was less than 70 million ounces in 2000. However, virtually none of this is exported and is thus unavailable to the world market.
 
Chinese investors are estimated to have purchased 22 million ounces of silver in 2013, the second-largest amount behind India. It was zero in 1999.
 
The biggest percentage growth in silver applications comes from China. Photography, jewelry, silverware, electronics, batteries, solar panels, brazing alloys, and biocides uses are all growing at a faster clip in China than any other country in the world.
 
Based on this review of big-picture data, what conclusion would you draw? If you’re like me, you’re forced to acknowledge that the next few years could be a very exciting time for silver investors.
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