Oct 07

Gold Mining Costs "Led by Prices", Not the Reverse

Gold Price Comments Off on Gold Mining Costs "Led by Prices", Not the Reverse
Gold mining doesn’t put floor under prices, says study. Vice versa in fact…
 

GOLD MINING costs respond to changes in market price, according to a new study, rather than acting to support or push prices higher as commonly assumed.
 
“The gold price should and does cause changes in the cost of extraction,” says a summary published today in the London Bullion Market Association’s quarterly magazine, The Alchemist.
 
Writing jointly with Fergal O’Connor – senior lecturer at York’s St.John Business School in England – and data consultancy Thomson Reuters GFMS’s director of precious metals mining research William Tankard, “The theoretical and empirical evidence points to the fact that gold prices are a determinant of producers’ cash costs,” says Professor Brian Lucey of Trinity College Dublin.
 
Firstly any rise in market prices will encourage output from otherwise loss-making projects, note the authors, which will raise the industry’s average output cost per ounce. Secondly, annual mine supply (around 3,100 tonnes in 2014) is only a fraction of the amount already above ground (estimated at 180,000 tonnes). So the mining industry lacks the pricing power needed to impose higher costs to buyers, as scrap supplies from existing holders can easily reach market.
 
This claim challenges the widely-held view that gold mining costs should act as a floor for the gold price in the medium to long term – a view argued by fellow academics Eric Levin and Robert Wright, then respectively at the universities of Glasgow and Strathclyde in Scotland, in a 2006 paper for market-development organization the World Gold Council.
 
“The long-run price of gold is related to the marginal cost of extraction,” wrote Levin and Wright, whose broader claim – that gold has a close relationship with the rate of inflation in the wider economy – was based in part on the idea that inflation is transmitted to gold prices through rising production costs.
 
More recently, commodities analysts at investment bank Goldman Sachs said this summer that a likely drop to $1050 in world gold prices by end-2014 will prove “generally short-lived”. Because 90% of the world’s current mine output would be unprofitable on an all-in costs basis at that price, Goldman’s team peg $1200 per ounce as “a good estimate of the floor for gold”.
 
But looking at direct mining costs – known as “cash costs” in the mining industry – the new claim from Lucey, O’Connor and Tankard is that global averages track market prices, rather than the other way round. The same finding was “confirmed in the vast majority” of national-level gold mining data too, and “also using total production costs.” 
 
The accounting methodology behind “all in sustaining costs” – agreed and applied by the World Gold Council’s gold-mining members in mid-2013 – includes new exploration, capital expenditure and corporate running costs, as well as the direct production cost of each ounce.
 
Debate over the variability and comparability of such figures continues, but it’s the cost of developing economically sustainable mines, analysts argue, which explain why the last decade’s surging gold price failed to deliver stronger profits for the major gold miners.
 
All due to report third-quarter earnings at the end of October, the world’s top three gold miners – Barrick (NYSE:ABX), Newmont (NYSE:NEM) and Goldcorp (NYSE:GG) – last reported all-in sustaining costs of $865 per ounce (down 5% from mid-2013), $1063 (down 17%) and $1060 (down 19%) respectively.
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Sep 26

End of the Central Bank Gold Agreement

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

THIS isn’t your father’s gold market, writes Adrian Ash at BullionVault. It isn’t even the same market as 10 years ago.
 
Because the buyers are different. So too are the sellers. 
 
During the 1970s, demand was led by investors…primarily in the rich West. Whereas today, the biggest buyers by far are Asian consumers, as the World Gold Council notes in its latest Gold Investor report.
 
Despite much lower incomes, India and China save a huge proportion of their earnings…and spend an ever greater share on gold the more income they earn. 
 
This makes it a “superior good” says Professor Avinash Persaud. Commissioned by the World Gold Council to study world gold buying demand, he says it increases faster than household income or GDP…something we’ve noted of Chinese gold demand before. 
 
On the supply side too, the gold world has changed. Besides a small rise to record mining output, the key source of the last 5 years was “scrap” sales from people needing to raise cash amid the financial crisis (a flow that’s now drying up. Fast). During the 1980s and 1990s, in contrast, central banks were the big source of existing above-ground metal, selling it down as prices fell…and worsening the drop by helping gold miners “hedge” their production by lending them metal to sell as well. 
 
Instead of the gold, Western central banks bought more “productive” assets. You know, like US Dollars, Euros, and government debt. 
 
Come the financial crisis however, central banks as a group worldwide turned into net buyers for the first time since the mid-1960s. First because emerging-market nations wanted to lose some of the Dollars piling up in their vaults (thanks to America’s perpetual trade deficit). Second because Western central banks…most notably in Europe…decided that selling gold during a crisis isn’t so clever. 
 
So, despite having an agreement in place to cap annual sales…aimed at avoiding the clumsy, price-damaging gold sales made by the UK in 1999…central banks in the West have stopped selling gold altogether. We think that’s likely to stay true all through the new 5-year agreement, signed in May and running from tomorrow until September 2019. 
 
The current CBGA (as we gold nerds know it) has seen European states sell barely 10% of their agreed limit. The new agreement doesn’t bother setting a cap at all. That might suggest they’re secretly planning big sales in future. But on the contrary, the lack of sales under the current CBGA made its 400 tonnes per year limit look stupid. 
 
Fewer than 18 tonnes were sold over the last 3 years in total…all of them from the German Bundesbank to mint commemorative coins. 
 
Just what would be the point of setting a sales limit from here? Fact is, central banks sell gold when times are good. They buy or hold when things are bad. They are not selling today.
 
We don’t think Eurozone central bank chiefs have any plans to sell until 2019 at the soonest. We do think there’s a message in there about the Eurozone crisis.
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Sep 26

Rising GDP "Boosts Consumer Demand" to Buy Gold

Gold Price Comments Off on Rising GDP "Boosts Consumer Demand" to Buy Gold
Consumers buy 5% more gold for every 1% rise in GDP, study shows…
 

GOLD BUYING is boosted more by rising GDP and stronger consumer incomes than by financial crisis, according to a new study from a world-renowned economics professor.
 
Defying the developed West’s common belief that gold is only for bad times, the report confirms what market-development organization the World Gold Council calls “gold’s positive duality: its ability to benefit from both the contraction and expansion phases of the business cycle.”
 
The econometric study comes from Avinash Persaud – emeritus professor at Gresham College, visiting fellow at CERF-Cambridge University, and governor of the London School of Economics – who was commissioned by the World Gold Council to study consumer versus investment gold buying both globally and in 11 key countries.
 
Over the last five years, world demand to buy gold jewelry has accounted for 48% of annual purchases, and a further 10% has gone to electronic products such as PCs and smartphones. With central banks buying 7% on average, and despite the global financial crisis, gold investing has accounted for less than consumer demand – some 35% per year since 2009.
 
“The new analysis,” says the Council, presenting Professor Persaud’s findings, “shows that a 1% increase in GDP lifted jewellery consumption by an average of 5%, all else equal.” Because “gold jewellery is what economists refer to as a ‘superior’ good,” says Persaud, “where demand increases proportionally more than income.”
 
The same 5:1 relationship applies to electronics demand compared to GDP growth, too.
 
Although gold investment demand is “much smaller” than jewelry buying, however, “shifts in investment demand can be large and play a critical swing role in the market,” Persaud cautions.
 
Gold investment, agrees the World Gold Council’s commentary, “can exert strong pressure on prices over the short (and potentially medium) term.
 
“However, the longer-term trend is more closely linked to global consumption, savings and, at the same time, by the availability of supply.”
 
China gold buying vs, income per capita (World Gold Council)
 
India and China lead world demand to buy gold, accounting for one ounce in every two sold worldwide last year. Asian households’ propensity to buy gold is far greater than Western consumers’, the report says, because they “typically devote more money to savings” with a real average saving rate around 30% of income.
 
India gold buying vs. income per capita (World Gold Council)
 
Even so, half of US gold buying “is [also] linked to consumers”. US jewelry fabrication will rise 6% this year from 2013, according to leading consultants Thomson Reuters GFMS in the latest Update to their Gold Survey 2014.
 
On the supply side, says GFMS, US scrap sales – which soared as prices rose during the financial crisis, enabled by companies like Cash4Gold – fell 17% in the first half of 2014 from a year ago.
 
Such recycling flows from consumer worldwide fell 9% “as the need to raise funds by cashing in gold assets dwindled,” the consultancy says, “due in large part to an improved US economy.”
 
“Given a strong price elasticity of demand in many countries,” says Professor Persaud – pointing to Asia’s huge move to buy gold on 2013’s thirty per cent price drop – “a trebling in the gold price [from 2009-2014] should have led to an even greater decline in gold jewellery consumption, and if prices were to stay high, a permanent decline in consumption.
 
“However, jewellery consumption is also highly sensitive (elastic) to rising income.”
 
In short, concludes the World Gold Council, “It seems reasonable to suggest that positive GDP growth will not necessarily be negative for the gold market.”
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Sep 12

WGC, China Gold Association to Merge Gold Market Knowledge

Gold Price Comments Off on WGC, China Gold Association to Merge Gold Market Knowledge

Mineweb reported that the World Gold Council (WGC) and China Gold Association have signed a Comprehensive Strategic Cooperation Agreement aimed at increasing global understanding of the gold market and supply chain.

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Sep 08

India’s Gold Deposit Scheme Targets "Easy" 200 Tonnes

Gold Price Comments Off on India’s Gold Deposit Scheme Targets "Easy" 200 Tonnes
Refiner MMTC-Pamp aims to mobilize household gold as CAD hits 1-year high…
 

INDIA’s much-awaited gold deposit schemes can “easily” unlock 200 tonnes per year from existing household stockpiles, according to state-backed refiner MMTC-Pamp, helping boost legal supplies and reduce smuggling in the world’s No.1 gold-buying nation.
 
“The annual [private-sector] requirement is around 900 tonnes,” said managing director Rajesh Khosla last week, “and the economy can afford to import around 700 tonnes.
 
“The balance will be easily bridged by effective schemes.”
 
With no domestic mine output, India’s world-beating gold demand has to date been met by imports from abroad. But surging demand on the gold price crash of spring 2013 helped take the country’s current account deficit (CAD) with the rest of the world to record levels near 5% of GDP.
 
Faced with a sharp drop in the Indian Rupee’s exchange rate, the government and central bank responded with a raft of anti-gold import rules, effectively shutting legal inflows in summer 2013. Since then, and with perhaps 25,000 tonnes of gold held by Indian households and temples – the world’s heaviest buyers until mid-2013’s strict rules – banks and government officials have repeatedly talked about “mobilizing” some of India’s existing stockpiles.
 
MMTC-Pamp – a joint venture between the state-owned refiner MMTC and Switzerland’s Pamp – says it is now working with commercial banks to launch a savings account with a 3-year term, into which consumers can deposit physical gold.
 
The depositor’s gold will be sold to help meet new consumer demand. Then, on maturity, says managing director Khosla, “the interest is [paid] not in Rupees but in gold and the investor has more gold in the account.”
 
Similar gold deposit schemes announced by the All India Gem & Jewellery Trade Federation last October as ‘Suvarna Nivesh Yojna’ still have yet to launch, because although “the previous regime was happy, [it] could not decide upon” details, according to the GJF.
 
Illegal gold smuggling into India since the anti-import rules were introduced last summer has been estimated at perhaps 200 tonnes by market-development organization the World Gold Council.
 
In the last 2 months alone, security agents at Delhi’s Indira Gandhi Airport have recovered nearly 6 kilograms of gold – worth a quarter of a million US Dollars – from toilets in Terminal 3.
 
“The toilets,” says India Today, “are being used by inbound smugglers as a place to leave the gold, where it is picked later by an accomplice, almost always an airport employee.”
 
A slight relaxation of India’s gold rules in June saw imports of the metal jump 65% from May, helping take India’s CAD to a 1-year high during the April-June quarter at 1.7% of GDP.
 
News of that surge comes as trade body the GJF says investment gold sales fell 70% over the last 5 months compared with the same period in 2013.
 
The rising import level, says precious metals analyst Jonathan Butler at Japanese conglomerate Mitsubishi, “adds to evidence that physical gold demand in India is improving.
 
“With the busy wedding and festival season now getting underway, this may indicate a degree of price support for gold from the physical side in the coming weeks.”
 
Despite failing to roll back the key anti-gold import rules as many jewelers and supporters expected, India’s new BJP government – led by Narendra Modi – is likely to be relaxed about the rising CAD, other analysts believe.
 
“The deficit is getting easily financed,” Bloomberg quotes Nomura bank’s chief economist in Mumbai, Sonal Varma.
 
“As the economy grows, imports will grow, so there will be some widening in the CAD. But we don’t expect it to be above sustainable levels.”
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Aug 28

Gold Buying Well Behind 2013

Gold Price Comments Off on Gold Buying Well Behind 2013
Scale of last year’s surge shown by latest 2014 gold buying data…
 

MARCUS GRUBB is the managing director of investment strategy for market-development organization the World Gold Council.
 
Based in London, he leads both investment research and product innovation, as well as marketing efforts surrounding gold’s role as an asset class. Grubb has more than 20 years’ experience in global banking, including expertise in stocks, swaps and derivatives.
 
Here, and after the release of the World Gold Council’s latest quarterly Gold Demand Trends survey, Marcus Grubb speaks to HardAssetsInvestor‘s managing editor Sumit Roy about some of the report’s more surprising conclusions…
 
HardAssetsInvestor: Physical investments demand fell 56% in the second quarter from Q2 2013, but it’s still at a pretty high level historically. Do you think it’s going to rebound, stabilize or fall further from here?
 
Marcus Grubb: Gold bar and coin demand is substantial in the United States, but even bigger in Asia. The big falls were in a lot of those Asian countries. But we should put this in context. Last year in Q2 there was that big decline in the gold price to the tune of more than 20%. That triggered a big consumer-buying binge in Asia. We had great figures last year and so this year’s drop of 56% is from those high levels.
 
Looking forward, things are likely to get better – first of all, that comparisons get easier year in Q3 and Q4. That’s because Q2 was really where all the big events happened – the price drop, the huge redemptions in the ETFs, the big consumer demand response with the big jump in jewelry and bar and coin demand. So Q3 and Q4 are just mathematically going to look better.
 
The other thing is that you could say some of the softness in this latest quarter was due to the fact that the price trend has been ambiguous this year. Gold’s done better than many expected, and has returned quite well, better than some stock markets around the world. But it’s too early to really say there’s a strongly rising price trend for gold. And I think a lot of the bar and coin consumers in Asia are looking for that. There’s evidence they have held back on buying until there’s a clearer direction for the gold price. 
 
The final thing I’d say is that the figure for total investment for Q2 is actually up 4% compared with last year. And that’s really because the performance of the ETFs are so much better than they were in Q2 2013. They still saw redemption of about 40 tonnes, but there were redemptions of 402 tonnes in the same quarter last year. ETF investors are definitely more comfortable owning gold this year than they were last year.
 
HardAssetsInvestor: And those ETF investors, would you say they’re predominantly Western investors?
 
Marcus Grubb: Yes. The majority of the holdings in the ETFs are really in six to eight different instruments, either in the United States or UK or Europe.
 
The other thing is that the investors who were in gold ETFs for the price appreciation and for the financial system hedge after the Lehman failure in ’08 are the people who have left gold. They’ve reallocated into other asset classes. A lot of those investors will say, “We bought gold; we had it because we were worried about the Dollar and about the financial system. When things started to improve last year, we moved out of our gold position and we sold at a profit.” They often will say “gold did the job we wanted it to do.”
 
The people who are still left now – and remember there’s 1,850 tonnes globally still in gold ETFs – those investors are using gold as a hedge asset, as an insurance policy, as a hedge against inflation if it comes, a hedge against tail risks, and as a diversifier. So we see them as pretty strong holders of gold in small allocations in their portfolios.
 
HardAssetsInvestor: Are the remaining ETF investors basically going to be keying off Federal Reserve monetary policy and things like that?
 
Marcus Grubb: That’s certainly one key element. But also, central bank policy globally and interest rate policy globally. And that’s part of the reason things are actually better on the ETF front this year than they were last year.
 
If you look at the rest of the world, we’ve just seen pretty awful GDP number in Japan. A lot of that was due to the consumer tax increase in that country, but it’s still a big negative number. And then you see the most recent numbers in Europe, Germany and Italy showing that the Eurozone is also swerving down. It looks like the ECB is almost definitely going to ease policy further. Whichever tool they choose – whether it’s interest rates or even quantitative easing – most strategists and economists are betting on further monetary easing in Europe between now and the end of the year.
 
HardAssetsInvestor: And we did see the German 10-year bond yield fall below 1% recently. Is that bullish for gold, at least from an European perspective?
 
Marcus Grubb: Yes. And I think that’s why if you look at the latest ETF numbers globally in July and August, we’ve had net new creates. I think those two things are related.
 
HardAssetsInvestor: Looking at individual countries you mentioned earlier, how is demand from China and India faring so far this year after last year’s record year?
 
Marcus Grubb: If you look at the half-year, total demand in China is about 471 tonnes. That’s still a fall compared with the first half of 2013 to the tune of about 35%. And India is at 394 tonnes for the half-year, down about 33%.
 
Having said that, we have been in the weaker seasonal period for gold demand. We should now see stronger numbers in both Q3 and Q4. You’ve got the ending of the monsoon in India and then Diwali. And then you’ve got the same phenomenon in China. There are some festivals in China in the autumn, and then the run-up to the Chinese new year where you see increase in gold imports in that country.
 
We actually think by year-end you’re going to see China come in around 900 to 1000 tonnes for the full year. And we think India will come in around 850 to 950 tonnes. If that happens, that’ll still be the second-best year for China ever, and not a bad year for India either.
 
HardAssetsInvestor: It looks like central banks continued to accumulate gold steadily in Q2. But is Russia pretty much the predominant buyer when it comes to central banks?
 
Marcus Grubb: I would certainly say this year they have been. It’s also true to say that over the last decade, Russia is the largest central bank buyer of gold that we know about. The Russian central bank now has over 1,000 tonnes of gold. They’re holding just under 10% of reserve assets in physical gold.
 
But overall, central banks were strong, and in fact, we just revised our target for these figures for the year. We now expect central bank purchases around 500 tonnes for this year. If we get that, it will be the second-best year since the 1960s.
 
These central banks continue to buy gold as a currency diversifier because they’re very overweight US Dollars. Gold acts as a diversifier against sovereign debt and partly against equities too, because a number of central banks are now buying equities, which is a recent phenomenon. As you know, gold is a good hedge against equities.
 
HardAssetsInvestor: Any word on China’s central bank purchases?
 
Marcus Grubb: No, and they are not contained in these figures. We have no new information on that. Officially, Chinese gold holdings are around 1,054 tonnes. The last disclosure they gave was in 2009.
 
HardAssetsInvestor: Presumably those could be pretty big purchases going on behind the scenes, could they not?
 
Marcus Grubb: It’s hard to comment without any official releases or disclosure. But it is interesting to note that if you look at the Chinese gold market for the last seven years or so, there is a surplus in the demand and supply figures. In other words, more gold has gone into China through imports than you can account for through local demand from jewelry, bars and coins, technology, and other measured sources of demand from the private sector. Over the last several years, the total is that somewhere between 800 and 1,000 tonnes of supply has gone in and can’t be accounted for.
 
Now, some of that may have gone into inventories as the gold industry’s gotten a lot bigger in China over the last seven years because of the boom in the market. There are a lot more jewelry outlets, a lot more fabrication factories for jewelry, etc. In any case, some of that gold is sitting in holdings somewhere in China, and it’s not measured in the consumer demand. So people can draw their own conclusions.
 
HardAssetsInvestor: Turning to the supply side, we saw mine production up 4% from a year ago in the latest quarter. Is that significant?
 
Marcus Grubb: It’s likely we will see a slowdown in the rate of growth of mine production later this year. This latest increase is effectively a hangover from the expansion we saw before last year’s price decline. This may be the year for peak mine production in the medium term. 
 
It’s quite likely that sometime between now and the early part of 2015, gold mine production will peak, and after that, it will decline as a result of all the measures that have been taken in the last 12-18 months in response to low gold prices.
 
You’re seeing large amounts of cost cutting, delays and postponements to projects, some closures and some very large projects in the hundreds of millions or even billions being put on ice until the market improves and more funding is available. That takes time to kick in and affect supply, but we think it will start to do that later this year, and definitely into 2015.
 
Although the price isn’t affected directly by that in the short term, it reaffirms that, in the long run, gold is in limited supply against strong demand. The other key factor, which is much more price sensitive, is recycling. Year-to-date, recycled gold supply is actually down for the half-year by around 8%. The only way you can increase the supply from recycling is by having a significant increase in the gold price.
 
All of this says gold is returning to its longer-term position of being in a shortage or a deficit, where the demand from central banks, technology, jewelry and the consumer will push this market back in a deficit soon. If investors come back into the market, the deficit will be just that much larger.
 
HardAssetsInvestor: I want to get your take on the producer hedging that we saw last quarter. How does producer hedging impact supply?
 
Marcus Grubb: We did have the first hedge for some, which has tipped this quarter into net hedging of 50 tonnes, versus Q1 where we had a de-hedge. But it’s fair to say that this latest hedge is very mining project-specific. We don’t see this as marking a return to hedging generally. 
 
Moreover, the hedge book is still near an all-time low, with about 125 tonnes in total. Also, this hedging is not necessarily the same as the hedging we had in the bear market in gold either. That entailed borrowing gold from central banks, selling it at spot with the banks in the middle providing the financing, and then the mining company producing into the hedge to deliver gold back to the commercial bank. And then from them, back to the central bank.
 
My sense of these hedges is that they are more collateralized financings, where effectively the mining company is selling forward production at a fixed price to raise capital for developing the mine. In that sense, I would say it doesn’t have necessarily the same impact on supply that the old style of hedging did, where the gold was borrowed and sold in the spot market.
 
HardAssetsInvestor: That’s an interesting point. So it’s not really adding to physical supply, unlike in the past.
 
Marcus Grubb: I would say that it potentially isn’t, no. Without knowing more details about that particular transaction, I would say it won’t have as much effect on physical supply as the hedging did in the past.
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Aug 27

Gold Bullion Rallies Again from 2-Month Lows as Equities, Eurozone Bonds Hit Record Highs

Gold Price Comments Off on Gold Bullion Rallies Again from 2-Month Lows as Equities, Eurozone Bonds Hit Record Highs

GOLD BULLION prices rallied again from near 2-month lows against the US Dollar Wednesday morning, creeping 0.2% higher to $1287 per ounce as world stock markets extended their new record highs.

Now valued above $66 trillion, global equities have gained 3.5% so far this month, according to Bloomberg data.

Gold bullion in Euro terms has risen 1.8% as the single currency has dropped, holding near last week’s highs of €976 per ounce on Wednesday.

“It’s pretty straightforward,” Bloomberg quotes one German bank analyst.

“More and more investors are expecting something big to be announced [by the European Central Bank] at the beginning of September.”

“Whichever tool they choose,” agrees Marcus Grubb, investment director at market-development organization the World Gold Council, “whether it’s [lower] interest rates or even quantitative easing…if you look at the latest [gold ETF trust fund] numbers globally in July and August, we’ve had net new creates.

“I think those two things are related.”

Gold bullion held to back shares in the world’s largest gold ETF – the SPDR Gold Trust (NYSEArca:GLD) – slipped for a second day Tuesday, shedding another 1.5 tonnes to reach 795.6 tonnes, a five-year low when first hit in January.

With the European Central Bank set to meet and decide policy next week, rising bond prices today pushed yields on Eurozone bonds from Austria to Ireland and Italy down to new modern-era lows, after a drop was reported in both Italian and German consumer confidence.

Ten-year German Bund yields fell to fresh record lows beneath 1.0% per annum, with Berlin’s debt offering negative yields to new buyers of all maturities up to 3 years. 

German import prices fell last month at the fastest pace since March, new data said Wednesday, dropping 1.7% from July 2013.

US data in contrast continue to signal stronger growth, with Tuesday’s Durable Goods report giving the best print on record as consumer confidence hit a 7-year high.

“One has to say though that gold’s resilience is fairly impressive at the moment,” says David Govett at brokers Marex Spectron in London.

“The numerous sources of geopolitical crisis,” says Wednesday’s note from commodities analysts at Germany’s Commerzbank, “are evidently preventing the gold price from slumping.”

Over in China on Wednesday, Shanghai gold premiums slipped but held positive near $2.50 per ounce above London quotes on solid trading volume.

“There’s been some scattered bargain hunting by physical buyers,” says Swiss refiner and finance group MKS trader Bernard Sin in Geneva.

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Aug 15

Gold Prices Broke Range After a Week of Lateral Trading, First Day of the London Silver Price

Gold Price Comments Off on Gold Prices Broke Range After a Week of Lateral Trading, First Day of the London Silver Price

GOLD PRICES still lacked direction Friday morning in London at $1315.15 per ounce, 0.4% from last week’s close, as Asian stock markets rose overnight on expectations of European Central Bank easing policy decisions, followed by European equities.

At 1PM BST, gold plunged under $1300 per ounce and was on track for a weekly loss of at least 1%. The same happened to gold prices in Euros and in GBP. Silver tracked gold prices and was set for a weekly drop of more than 1.6% in Dollar terms.

Bonds were also on track for weekly gain on loose policy and Brent crude oil stayed mainly flat at $102.13.

EU ministers meantime discussed arming Kurds in Iraq as Russian army vehicles and tanks approached the Ukrainian border.

Meanwhile, the Euro versus the Dollar stayed below $1.3400 Friday morning, unable to successfully hold this level this week.

Swiss precious metals refinery group MKS sees gold prices in a range of $1305-1320 being capped by “selling pressure from producers and fast money profit takers.”

“While technical indicators are holding gold firm, other market forces we believe should continue to cap upside,” adds Standard Bank in its commodity daily note.

Gold spent the week range-bound but traded firmly “amid soft economic data support” said an analyst in Singapore.

Q2 UK GDP stayed flat on the month and was slightly higher than expected on the year, a shown by data published Friday. In contrast, the two European economic powerhouses saw their GDP fall in the second quarter of 2014, stalling the economic recovery of the single currency zone.

Pointing at directionless prices, “at the end of this trading week, gold remains impervious to events on the financial markets and to the various geopolitical crises,” concludes Commerzbank in Frankfurt, “and is still trading at around $1,310 a troy ounce.”

The last London silver price fixing took place yesterday and while investors waited impatiently for its replacement, no important volatility was reported this week. Today saw the first use of the new silver electronic-pricing method set to offer more transparency for price discovery.

The London Silver Price (LSP) following the new electronic-led auction was on the LBMA website at $19.86 per ounce Friday, in line with previous silver price fixings this week.

Silver traded laterally this week before the plunge of early Friday afternoon. This week, silver prices failed to hold on to the $20.00 per ounce level.

Gold demand in Q2 2014 was lower than during the same period last year. “Global gold market continues to recalibrate in 2014 in line with its longer term trend,” said World Gold Council Managing Director, Investment Strategy Marcus Grubb commenting on the Gold Demand Trends report released Thursday.

Institutional demand rose 28% on the Q2 2013 level, with 118 tonnes purchased by central banks on the second quarter of 2014.

Weakness of the jewellery demand mainly came from the number one and two world gold consumers, China and India.

The holdings for the giant Gold ETF, the SPDR Gold Trust (NYSEArca: GLD), remained almost unchanged on the week. June and July saw net inflows into general ETF holdings.

According to the Gold Demand Trends report, ETF outflows so far this year have not reached the level of 2013. Net reductions in H1 2013 were measured at 580 tonnes while the ETF holdings only shed 42.5 tonnes of gold over the first half of 2014.
 

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Aug 14

Gold Demand Returning to Long-term Trends: World Gold Council

Gold Price Comments Off on Gold Demand Returning to Long-term Trends: World Gold Council

The World Gold Council released its latest Gold Demand Trends report, commenting that it “shows that global gold demand continues to demonstrate a return to long-term trends after an exceptional year in 2013.” The report covers April to June 2014.

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Aug 08

The Dollar, Gold & Middle East Oil

Gold Price Comments Off on The Dollar, Gold & Middle East Oil
Prospects for gold and oil as the Middle East sectarianism rises…
 

In the LAST FEW WEEKS the story of Iraq has faded from the headlines to be replaced by the story on the Ukraine, Gaza and on the business front the tumble of the Dow on the New York Stock Exchange, writes Julian D.W.Phillips in this article first shared with subscribers to The GoldForecaster.
 
But right now in the world we are watching many structural changes taking place quietly but completely. One is the shift of wealth and power to the east, the rise of the Yuan and its use in a growing number of global transactions in the place of the US Dollar. At the moment Russia is turning its economic head towards China and the developed world doing its best to do so too. And still the east is gaining ground and its share of global cash flow has doubled from 20% to 40% since the beginning of the century. This is set to continue strongly. 
 
These developments are sending warning signals to us not just that the developed world’s share is waning, but the grip on the world’s currencies by the US Dollar has to weaken over time. Not only is the threat to the Dollar’s hegemony growing from the Yuan, but key to that role, its dominance over the oil price, is in danger.
 
Of comfort to the US is its rapid rise to oil self-sufficiency, shrinking the threat from the future oil market to the Dollar oil price. But this is extremely critical to the US because it has to retain Dollar hegemony primarily because it runs a constant Trade deficit. If it is required to pay for goods in currencies other than the Dollar it is in trouble. The Dollar’s loss of its role as the sole global reserve currency will happen, but of more importance will be the loss of its power over global financial markets.
 
As it is the US Dollar has lost its power over China. With $4 trillion in its reserves and its growing ability to trade in the Yuan and not the Dollar it seems secure from any US action to curb its financial power in the world. The only recourse the US has over China will be over that $4 trillion and we wonder if its actions to prevent BNP Parisbas using the US Dollar could possibly be considered by the US under some circumstances? 
 
Apart from that, the US considers the Middle East oil supplies as part of its ‘vital interests’ in terms of its global power and the power of the Dollar. Ask yourself, if most nations were able to pay Opec in any currency, what importance would the US Dollar hold. Its critical use would be limited to trade with the US The liquidity of the US Dollar market does prevent the easy use of ‘softer’ currencies but the liquidity of the Euro, Sterling, the Swiss Franc and then Yen, together with the arrival of the Yuan on the global scene would provide sufficient liquidity in place of the Dollar. Then where would all those excess Dollars go and what would be their value?
 
So it is in this context that the importance of the situation in Iraq now becomes of disproportionate importance to the monetary world. 
 
In trying to extrapolate what will happen there we have to look at the Middle East with eyes that are neither geographical nor political. We have to look at the religious battles going on there and see where they are going to see what will happen to the oil price and in what currency it will be traded.
 
As a glimpse of the importance of these issues, the seizure of an oil tanker sent to the US for the sale of oil by the Kurds of Iraq, by the US last week has caught our attention.
 
With the declaration of a new country straddling the borders of Syria in the west and Iraq in the east, the scene is set for the full disintegration of Iraq into three countries along sectarian lines. We now look at what countries lie ahead in the region.
 
Religious & ethnic groups in Iraq
 
Each of the borders to these countries will be embroiled in war against each other. The sectarian issues have overwhelmed any political issues, which are being swamped in the process. 
 
Even the US has lost its influence with the exception of supplying arms to the government it instituted before it left. This government’s history of corruption and prejudice against Sunnis is where the war will become centered.
 
We see the most northerly ‘country’ being Kurdistan (in cream on the, map), unlikely to want to give up its autonomy rapidly becoming sovereignty and so consolidating its hold on the oilfields of Kirkuk. 
 
The second ‘country’ is the new ‘caliphate’ under the Sunnis (in light brown on the map), again, because of bitter experience of its treatment under an integrated government in Bagdad, unlikely to want to merge into a future integrated government even if moderate Sunnis win out over ISIS (most unlikely). The third ‘country’ will be in the south (in the darker green) under the Shi’ites, in command of the bulk of the nation’s oil (3 million barrels per day) and export terminal at Basra.
 
While we see this as the outcome, the cost to the country is likely to be extraordinarily high as the polarization of the two sides of Islam, which will, no doubt, come, will leave the rest of Iraq facing religious ‘cleansing’ because of the many remaining mixed areas of the country, including Baghdad (in light green on the map), where blood baths have and will surely ensue as different groups tried to establish their dominance in these ‘undefined’ areas, as you can see on the map here and chase those not of their religion out of those areas.
 
With Iran, their historic enemy, now lining up drones and other military supplies to help the government of Prime Minister Nuri Kamal al-Maliki retake the north and protect the south, many Sunnis are becoming become further alienated from the state. But we do not see the current ‘support’ of the American instituted government in Bagdad, by Iran, as being committed to that government, but certainly committed to the Shi’ites in the country. This is not about secular government, or simple geography, it is about religion and oil.
 
The rapid invasion of Iraq by the Islamic State in Iraq and Syria, which supplied the shock troops of the assault on Mosul, has made vigorous efforts to inculcate a new identity for those living within its growing transnational sphere, setting up Shariah courts and publicizing videos in which its fighters burn their passports. Recently, the group issued an eight-page report denouncing the Middle Eastern border system as a colonialist imposition, and included photographs of its fighters destroying what it called “crusader partitions” between Iraq and Syria.
 
Across the border in Syria, a Kurdish region in the country’s north is also effectively independent of Damascus, with its own military and provisional government. And Turkey, which in the past strongly opposed an independent Kurdish state on its border, now sees the Kurds as a stable buffer between itself and the extremists of ISIS.
 
In Iraq, it has long been assumed that the Shi’ite heartland of southern Iraq, where the major oil fields are, would give the Shi’ites a tremendous advantage, leaving the Sunnis with only the vast landlocked deserts to the north and west. But northern Iraq also controls both of the country’s major rivers, the Tigris and Euphrates, which flow southward toward Basra. 
 
The prospect of a more formal partition in Iraq or Syria would also lead to mass migrations and further turmoil, judging by some recent examples of state partition, like the division of Sudan in 2011, or that of India and Pakistan in 1947. Those breakups were the result of long struggles and led to terrible violence.
 
While exports from the terminal at Basra are trying hard to make up for lost exports in the north and the oil price has only hit $115, should the conflict see ISIS try to attack the south-west of Iraq and Bagdad, we do see speculators pushing oil prices up to $140. 
 
We also see Iran taking far more aggressive actions by sending in troops overtly or covertly (which they are doing now) to secure the Shia ‘country’. If the current government collapses (looking very likely right now), we see Iran’s moves to protect the Shi’ites as certainly including controlling Basra. 
 
They would, we feel try to pacify the US and the oil world by maintaining the current production levels. A failure to work with Iran, no matter the political compromise involved, would see oil prices move up over $140 to the detriment of every economy on this globe!
 
But would Iran be paid in Dollars? Or as we see Iran, currently under the control of the US vis-a-vis its oil exports (until the nuclear issue is resolved), having these controls lifted. 
 
Already it supplies China and will have the option of doing so with Iraqi oil too. With the punishment of BNP Parisbas in mind, we would expect Iran to be happy to receive Yuan (Renimbi) in payment of its oil. This would weaken Dollar hegemony and blaze a trail for other nations to move away from the Dollar (as it is now more overtly political). This will directly impact the global monetary system and Dollar hegemony.
 
As to gold, three factors emerge: 
  • The forecasts of the World Gold Council’s report from OMFIF come onto center stage;
  • The actions of the Iraqi government in buying 90 tonnes of gold can now be seen in context as its currency begins to lose all credibility, as ISIS robs the banks it invades taking the management of that currency to untenable levels;
  • With the Middle East responsible for 20% of the world’s physical gold demand last year, we expect their demand to jump not simply at retail levels but at central bank levels. Whenever war comes into the picture, one of the first casualties is the local currency. The Ukraine is a recent example of this. Even though the country is not at full scale war levels, their currency has fallen 45% this year already.
 
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