Friday, January 17, 2014

Gold items of note January 17 , 2014 - German Gold Manipulation Blowback Escalates: Deutsche Bank Exits Gold Price Fixing .....Shortage Of Gold Bars Develops In London - Follow The Money ......Spectacular Gold Demand (79 Tons) on SGE in Week 2, 2014

Sprott: "Manipulation Of Gold By Central Banks Cannot Continue In 2014"

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With Deutsche Bank quitting the price-setting panel for gold and Bafin bearing down on the manipulators, Eric Sprott provides some more color on where the manipulation in the precious metals markets is underway (and when it will end)...
Submitted by Eric Sprott of Sprott Global Resource Investments,
As we very well know, 2013 was a difficult but also puzzling year for precious metals investors. The price of gold, silver and their related equities declined by a significant amount while demand for physical bullion from emerging markets and their Central Banks was exceptionally strong.
A common argument that has been made to explain the precipitous decline of the price of precious metals in 2013 is of investors’ disenchantment with precious metals, which had been piling up in exchange traded products as a way for investors to gain exposure to the metals. Proponents of this theory point to the large declines in the total holdings of those ETFs as evidence of investors fleeing the precious metal trade. As shown in Figure 1, the price of both gold and silver suffered very significant declines throughout 2013. Therefore, if this explanation is correct, one would expect the total ETF holdings of both metals to be lower as well.
However, this is not the case. As shown in Figure 2 gold ETFs suffered large redemptions whereas silver ETFs saw their holdings remain more or less constant throughout the year, and this without any observable change in trading patterns in the two largest ETFs; GLD and SLV (Figure 3 shows the ratio of the trading values in the ETFs over time). If redemptions are a symptom of investors’ disenchantment with precious metals as an investment, shouldn’t silver have suffered the same fate as gold? Indeed it should have, but we think the reason silver ETFs were not raided like gold was that Central Banks do not have a silver supply problem, they have a gold problem. As we have argued before, the raiding of gold ETFs is bullish for gold because it reflects an imbalance in the physical market.1
Figure 1: Gold and Silver prices declined significantly in 2013
 Source: Bloomberg
Figure 2: ETF Holdings - Troy oz (millions)
Source: Bloomberg, tickers ETSITOTL & ETFGTOTL
In this article, we further argue that the April raid on gold and gold ETFs almost backfired by creating a tsunami of buying in India and increased demand to unsustainable levels. In May 2013 alone, Indians imported 162 tonnes2of gold in a market where monthly global mine production is about 182 tonnes. A continuation of this trend, coupled with strong buying from other Emerging Markets and their Central Banks, would have been overwhelming. But, the response was swift. We suspect that, at the behest of Western Central Banks, the Reserve Bank of India reacted by enacting, in incremental steps, restrictive measures to prevent gold imports (See Figure 4 for a timeline of the major changes made by the Indian Government).3
Figure 3: Traded Value - Ratio of SLV to GLD
Source: Bloomberg. Traded Value is calculated by taking the total trading volume for a quarter and multiplying it by the average price over that quarter. A ratio of 1 indicates that SLV traded as much, in $ terms, as GLD.
Figure 4: Efforts to Curb Indian Gold Imports
Source: Bloomberg, Economic Times 

Supply and Demand Imbalances: The Indian Effect 
We have already discussed at length the supply and demand imbalance in an Open Letter to the World Gold Council, asking them to revise their methodology because it grossly understates the amount of demand coming from emerging markets.4 Our gold supply and demand table (Table 1) reflects the latest available data (2013 Q3 in most cases). World mine production, excluding Chinese and Russian production still stands at about 2,100 tonnes a year. Chinese net imports most likely exceeded 1,700 tonnes for 2013 (81% of world mine production) and demand from the rest of the world is rather stable.5
The overall picture has not changed much since our last article, with the exception of Indian imports. As of the second quarter of 2013, India had cumulative net gold imports of 551 tonnes, which annualizes to 1,102 tonnes.6However, Q3 data shows net imports of only 31 tonnes (for a total of 582 tonnes YTD), which annualizes to 776 tonnes. 
This incredible loss of momentum for “official” gold imports was the result of concerted actions by the Reserve Bank of India and the Indian Government. While the “official” justification for those restrictions is the large Indian current account deficit, this argument makes little sense. According to government officials, Indian’s taste for gold and the corresponding imports worsens the country’s trade balance, worsens its current account deficit and puts downward pressure on their currency, the Rupee. 
But, without going into too many details, the classification of gold as a “good” in the trade balance is at best misleading. Since gold is more of an investment vehicle and is not “consumable” per se, it should instead be accounted for in the capital account of the balance of payments instead of the current account. Indeed, Switzerland, which is a large net importer of gold, reports its trade balance “without precious metals, precious stones and gems as well as art and antiques” to reflect fact that those are “investments” rather than consumption goods.9 In this case, why should India be any different and report their trade data excluding gold? To us, all the fuss about gold imports by the Indian Government is a red herring.
So, without the intervention in the Indian gold market, the shortage of gold would have wreaked havoc in the market, a situation that Western Central Banks could not tolerate.
 Table 1: World Gold Supply and Demand 2013, in Tonnes
Sources: GFMS data comes from the WGC’s “Gold Demand Trends” publications for 2013 Q1, Q2 & Q3. Chinese mine supply comes from the China Gold Association and is up to October 2013, the annualized number is a Sprott estimate.8 Russian mine supply comes from the Union of Gold Producers and is up to 2013 Q3. Chinese data is taken from the Hong Kong Census and Statistics Department and covers the period Jan.-Nov. 2013 and is annualized to account for the missing month. Changes in Central Bank gold reserves are taken from the IMF’s International Financial Statistics, as published on the World Gold Council’s website for 2013 Q1, Q2 & Q3 and include all international organizations as well as all central banks. Net imports for Thailand, Turkey and India come from the UN Comtrade database and include gold coins, scrap, powder, jewellery and other items made of gold. The data is for 2013 Q1, Q2 & Q3. ETFs data comes from GFMS as well.

Conclusion and Outlook for 2014
As demonstrated in our Open Letter to the World Gold Council, there was a large supply-demand imbalance in 2013. The evidence presented here suggests that the decline in the price of gold in mid-2013 and the subsequent raid of gold ETFs (but not silver ETFs) was engineered by Western Central Banks to help solve their physical gold supply problem. However, the resulting increase in Indian gold demand exacerbated the problem. The solution was to restrict Indians from importing gold by all means possible in order to help the Western Central Banks regain control of the gold market.
However, the rate of drain in gold ETFs cannot continue forever; at the current pace of 930 tonnes/year, there are less than two years of gold left in ETFs. Moreover, Indians have proved highly creative at finding ways around import restrictions.10 Smuggling is on the rise and will most likely increase as smugglers become more sophisticated. Overall, we believe that interest in physical gold from emerging markets will remain a driving force.
Besides, mine production is unlikely to grow, as reflected by the significant decrease in capital expenditures expected for the major gold producers (Figure 5).
Accordingly, we believe that the manipulation of gold prices by central banks, as demonstrated by the above analysis, cannot continue in 2014. Therefore, we expect substantial increases in the price of precious metals as the true shortages become obvious.
Figure 5: Capital Expenditures ($mm) - XAU Index Members
 Source: Bloomberg. Consensus analyst estimates are used for years 2013-2015.

P.S. Due to recent developments, we would also like to highlight some related media stories

1See, for example, “Redemptions in the GLD are, oddly enough, Bullish for Gold”.
3See “Do the Western Central Banks have any gold left?”. Sprott Asset Management LP, Markets at a Glance May 2013.
4See the full article at:
5As a reminder, because of our methodology which uses net imports as a proxy for total demand in countries that do not re-export gold, we exclude the “total industrial demand” estimate from the GFMS to avoid double counting. Thus, we underestimate total gold demand because we do not include industrial demand from the countries other than China, India, Turkey and Thailand.
6As reported by the UN Comtrade Statistics. We use the total dollar amount reported and average quarterly prices to infer the total amount of gold imported and exported.
7This is calculated by taking the total consumer demand for jewellery, coins and bars for 2013 Q1 & Q2 from table 10 of the WGC’s “Gold Demand Trends” and subtracting from it demand from the individual countries we have listed in the table (China/Hong Kong, India, Turkey, Russia and Thailand).
9See the Swiss Customs Administration website:
10See, for example:

Bullion banks run 'hurt and rescue' against miners, Maguire says

5p PT Friday, January 17, 2014
Dear Friend of GATA and Gold:
Bullion banks Goldman Sachs and Scotia Mocatta are leading "hurt and rescue" expeditions against gold mining companies, trying to induce new rounds of hedging just before the gold market is squeezed, London metals trader Andrew Maguire tells King World News:
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

Moody’s Investors Service cut its gold price forecast for the year, putting the credit ratings of Canada’s largest precious metal producers at risk of a downgrade as they battle an industry slump.
Reflecting the sharp drop in gold prices, Moody’s on Wednesday said it will use an average bullion price of $1,100 (U.S.) an ounce instead of $1,200 to determine a company’s credit rating.
“The increasing risk of lower prices suggests that key credit metrics of certain producers are stretched for current ratings in the absence of mitigation through cost reductions or other actions,” Moody’s said in a report announcing the lower gold price outlook.
Last year, gold fell nearly 30 per cent to $1,200 an ounce and has traded close to that level for the past few months. The weaker price forced producers to write down assets, cut jobs, and suspend dividends and projects.
A credit downgrade would put companies in a more precarious financial position and make it more expensive for miners to borrow funds.
It’s the latest threat to an industry still suffering the fallout from an ill-timed spree of high-priced acquisitions and expensive mine developments in recent years. Now, gold companies are far less profitable or losing money, and the weaker gold price puts some of their unmined reserves at risk.
“The next story is the writedowns of reserves because of the low gold price,” said John Ing, president of Maison Placements Canada.
“It won’t only be the gold price that will fall, but their expensive reserves and resources,” Mr. Ing said.
Gold companies’ current reserves were calculated using higher prices, when gold was on the rise.
For example, Barrick Gold Corp., the world’s biggest producer, used $1,500 to calculate its reserves. The company has said a $300 drop in its gold price assumption would result in a less than 10 per cent decline in its proven and probable gold reserves (if all other assumptions and inputs remained the same).
The world’s second largest producer, U.S.-based Newmont Mining Corp., used $1,400 to calculate its reserves. Mid-tier Canadian producer Agnico Eagle Mines Ltd. used a $1,490 price assumption for its mines that have a shorter life and $1,345 for its longer-life mines.
Credit rating cuts would compound the industry’s problems. Canada’s largest gold producers, including Barrick, Kinross Gold Corp. and Goldcorp Inc., all have coveted investment grade ratings. Still, the companies’ ratings are among the lowest investment grade ranks at Moody’s. Barrick is rated Baa2, the second lowest investment grade rating; Kinross is Baa3 (the lowest investment grade rating) and Goldcorp is rated Baa2.
Pawel Rajszel, an analyst with Veritas Investment Research, said there is a high risk that gold companies’ debt would be downgraded.
“Producers’ margins are already thin, so small changes to the assumed gold price will likely have a significant impact on the resulting credit metrics,” Mr. Rajszel said. “Credit downgrades are but another headwind for gold companies as access to capital becomes more costly.”
Moody’s said it will examine miners’ year-end results and will talk to the companies about further cost reductions.
“We think the fourth quarter of 2013 will provide key data points to help determine which if any of the ratings do need to come down,” said Moody’s senior credit officer Darren Kirk. “Certain ratings will likely be impacted.”
Barrick has taken the most drastic steps to improve its balance sheet. The company suspended development of its expensive Pascua Lama mine in South America, raised $3-billion to reduce its debt load, sold mines and cut jobs.
Similarly, Kinross slashed its capital expenditures, cut its dividend and delayed making a decision on expanding its Tasiast gold mine in West Africa.
Companies are due to start reporting their fourth-quarter results in February.

Sprott sees likelihood of gold delivery difficulties in February

3:25p PT Friday, January 17, 2014
Dear Friend of GATA and Gold:
Sprott Asset Management's Eric Sprott tells King World News that he is looking forward to the likelihood that February will bring delivery difficulties in gold futures contracts:
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

Cruising for a bruising charts......

German Gold Manipulation Blowback Escalates: Deutsche Bank Exits Gold Price Fixing

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Germany's blowback against gold manipulation is accelerating. Following yesterday's report that Bafin took a hard line against precious metals manipulation, after its president Eike Koenig said possible manipulation of precious metals"is worse than the Libor-rigging scandal", today the response has trickled down to Germany and Europe's largest bank, Deutsche Bank, which announced that it would withdraw from the appropriately named gold and silver price "fixing", as European regulators investigate suspected manipulation of precious metals prices by banks. As a reminder, Deutsche is one of five banks involved in the twice-daily gold fix for global price setting and said it was quitting the process after withdrawing from the bulk of its commodities business. The scramble away from gold fixing was certainly assisted by the recent first (of many) manipulation expose in the legacy media, when Bloomberg revealed "How Gold Price Is Manipulated During The "London Fix." And sure enough, with Germany already very sensitive to the topic of its gold repatriation, and specifically why it is taking so long, it was only a matter of time before any German involvement in gold manipulation escalated to the very top.

"Deutsche Bank is withdrawing its participation in the gold and silver benchmark setting process following the significant scaling back of our commodities business. We remain fully committed to our precious metals business," it said in a statement.

In mid-December, German banking regulator Bafin demanded documents from Deutsche Bank under an inquiry into suspected manipulation of benchmark gold and silver prices by banks, the Financial Times reported, citing sources.

Bafin declined to comment on Friday, but its President Elke Koenig said the previous day that it was understandable that the topic was attracting widespread concern.

"These allegations (about currencies and precious metals) are particularly serious, because such reference values are based - unlike LIBOR and Euribor - typically on real transactions in liquid markets and not on estimates of the banks," she said in a speech
Needless to say, manipulation of the gold market would not be exactly novel to a bank which has also been named in cases related to the sub-prime crisis, credit default swaps, mortgages, tax evasion and a decade-old lawsuit suit brought by the heirs of late media mogul Leo Kirch, who accuse the bank of undermining the business.
Reuters also reports that Deutsche is now actively marketing its gold and silver fixing seats to another LBMA member, however now that the cat is out of the bag on the gold fixing manipulation scheme (the first of many), it is likely that others will seek to follow in Deutsche's footsteps and seek to put as much distance between themselves and the wood-paneled room once located in the Rothschild office on St. Swithin's Lane in London.
We wonder which of these five gentlemen is from Deutsche?
So if everyone exits the London fixing market, what happens then?
"It wouldn't surprise me if the other banks were looking at pulling out as well. Why would they want the aggravation?" said the source, who declined to be named.

"The more worrying point is that, if you don't have the fixing, what do you have? There's a lot of contractual business done on the gold fix, and if you've got no basis for where the price is, someone is going to lose out."
Well considering that the fixing process over the years was manipulation pure and simple, those who will lose out are the... manipulators? it would seem rather logical. And speaking of manipulation, if indeed Germany is so keen on breaking the manipulators' back, perhaps it can demand that the pace of its gold returns from the NY Fed and Paris accelerates. It may be surprised at what it finds.

17 JANUARY 2014

Gold Daily and Silver Weekly Charts

Gold and silver had a little spirit in them today, with gold closing higher than its 50 DMA. The 100 DMA is a more important target, and even more important resistance above that.

But the structural buy signal is in place. Now we must see if the chart formations and price confirm it. In almost any other market I would say it was almost a 'lock,' but in the precious metals the truth always seems elusive, as if by intent.

Analysts purportedly acting for gold producers and suppliers constantly talk it down with a studied and persistent negativity, economists drop all pretense of thought to engage in simple mudslinging and propaganda, governments hide their own buying and leasing, large banks take huge positions thereby bending the rules of the exchanges with abandon, simple facts underlying supply and demand are treated as state secrets immune to audits, and disinformation campaigns ebb and flow.

Reading the cases made against 'the Aldrich Plan' in 1912 for a Third Bank of the United States, euphemistically later to be known as The Federal Reserve System, strikes a note when we see what has been happening over the last twenty years, in the rise of perverse and predatory banking, in the service of unfettered capitalism.

Yes it does sound like a bit much, conspiratorial and all that.  And yet what else are we to think, when looking at the events which have unfolded before and after this most recent financial crisis, in which the perpetrators are bailed out, and walk away with millions, while the relatively innocent are forced to bear the burden of their recklessness and greed?  And the political system is increasingly grown corrupt by big money, with record low approvals from the public, for whom they no longer have any decent regard?The will to the power of creating money and distributing it as you will is the idolatry of our age, and woe to the careers of those who fail to offer obeisance at its altar.  What a festival of intrigues and vanities. And what rough beast, its hour come round at last, slouches toward Bethlehem to be born?

How can one not be interested in it?  It is the very fulcrum of our age.

I may post something on Sunday evening.  Have a pleasant weekend.


Shortage Of Gold Bars Develops In London - Follow The Money

It appears as if that old adage that a rumor can't be confirmed as being true until its been officially denied several times applies to the London gold bar market, as it was reported last night by a London Metals Exchange reporter that premiums on "good delivery" bars are now above the spot price of gold, something which is rarely observed in London:  Gold Bar Shortage In London

Asian and Middle Eastern Central Banks and investors are hoarding an enormous amount of the 400 ounce  LBMA "good delivery" bars that make London the largest physical gold trading market in the world. As the price of gold was aggressively manipulated lower by the Federal Reserve and its agent bullion banks since mid-2011, eastern hemisphere sovereign, Central Bank and investment buying - especially the Chinese - intensified.

With negative "gold forward" rates having been negative for a predominant part of the last half of 2013,  I was wondering when a shortage of London bars would be reported. A negative "gold forward" rate means that the entity (bullion bank) who is borrowing or leasing the bars today in order to deliver them into buyers will pay more today for the ability to take delivery of bars now than it would cost to buy them for delivery in the London "forward" market - i.e. anywhere from a month to a year from now.

A rare premium for deliverable bars means a shortage of bars for immediate delivery -  directly to buyers not using an intermediary like a bullion bank -  has developed (as opposed to the GOFO rate, which applies to the brokerage firm intermediaries making markets in bars and who lease gold needed for delivery from Central Banks to deliver into the buyers who are buying from them).

We know that gold being drained from Comex warehouses and the GLD Trust ETF is being used to make good on deliveries into Asia's voracious appetite for deliverable gold.  Unless the Federal Reserve (Bank of England and ECB) can tap into new sources of above-ground gold stocks, we could well begin to see delivery defaults.Over and above the reports of gold shortages from traders and market professionals, there have been other signs of a developing gold bar shortage for several months.  Recall the stunt Goldman Sachs pulled about two months ago when it reported in the press that it had reached an agreement with Venezuela to lease Venezuela's physical gold - the gold Venezuela had repatriated in order to safekeep it under its own watch just two years ago.  That news item dropped by Goldman turned out to false.  Same for the report that Cyprus was going to sell its gold reserves to help pay for its bail-in.  That report proved to be false as well.

I always believed that these reports reflected nothing more than desperation by the big bullion banks like Goldman and JP Morgan - as agents for Fed - to get their hands on gold that could be delivered to Asian buyers who demand delivery.   Same for the fact it the U.S. refused to give Germany back its gold being held by the Fed as requested and instead agreed to a suspicious deal to ship back part of Germany's gold over seven years.

While I'm sure plenty of skeptics from Australia to New York to will issue well-crafted rebuttals to the view that there is now a shortage of physical gold in London and New York, the report last night that big buyers are paying a premium to get their hands on immediately on physical gold confirms the obvious.  Money speaks a lot louder than words in the world of finance - follow the money...

Spectacular Gold Demand (79 Tons) on SGE in Week 2, 2014

In the second weekly report, that covers the five trading days from 6-1-2014 to 10-1-2014, today released by the Shanghai Gold Exchange we can read a spectacular amount of physical gold has been withdrawn from the vaults; 79 tons. Last week I wrote withdrawals were down, but could well pick up this month as China will celebrate Chinese new year on January 31, 2014 according to the Chinese Lunar calendar. And withdrawals did pick up..

This type of demand puts the physical gold market under severe stress, hence the scramble for gold in London a few days ago. “There is a shortage of big bars, especially good-delivery 400-ounce bars”, said Bernard Dahdah from Natixis “One part of the problem is that large quantities of these bars that have come from ETFs, have now been moved to be re-refined into three-nines bars of smaller sizes and are therefore no longer available to the London market.”  The 1 month Gold Forward Offered Rate has been negative throughout the entire week Chinese demand was this strong. Until January 31 demand for physical could remain elevated, after which it will likely return to its average strong levels.

Next to insatiable physical gold demand from China, these are interesting times in the gold market as the German Federal Financial Supervisory Authority, Bafin, made allegations at banks saying ”possible manipulation of currency rates and prices for precious metals is worse than the Libor-rigging scandal“, on January 17. The Financial Times reported in December, citing sources, that Bafin demanded documents from Deutsche Bank as part of a probe into suspected manipulation by banks of benchmark gold and silver prices. Maybe it’s not a coincidence that Deutsche Bank, one of five banks involved in setting these benchmark gold and silver prices, stated today that they will stop participating.

Overview Shanghai Gold Exchange data 2014 week 2

- 79 metric tonnes withdrawn in week 2, 6-01-2013/10-01-2013
- w/w  + 120.9 %, y/y + 49 %
- 99 metric tonnes withdrawn year to date


My research indicates that SGE withdrawals equal total Chinese gold demand. For more information read thisthisthis and this.

SGE withdrawals 2014 week 2

This is a screen dump from Chinese SGE trade report; the second number from the left (本周交割量) is weekly gold withdrawn from the vault, the second number from the right (累计交割量) is the total YTD.

SGE withdrawals 2014 week 2

This chart shows SGE gold premiums based on data from the Chinese SGE weekly reports (it’s the difference between the SGE gold price in yuan and the international gold price in yuan).

SGE premiums 2014 week 2

Below is a screen dump of the premium section of the SGE weekly report; the first column is the date, the third is the international gold price in yuan, the fourth is the SGE price in yuan, and the last is the difference.

SGE premiums