Asia takes every ounce West unloads but gold will fall for two years,
GFMS says
Submitted by cpowell on Thu, 2014-04-17 11:54. Section: Daily Dispatches
Gold Price Likely to Average $1,225 in 2014 as Investors Shy Away: GFMS
By Ben Kilbey
Platt's Metals Daily
Thursday, April 17, 2014
Platt's Metals Daily
Thursday, April 17, 2014
LONDON -- A lack of investment interest in gold is starting to take its toll on the price, with an average of $1,225/oz forecast for 2014 and heading lower in 2015, GFMS said Thursday in its Gold Survey 2014.
The price forecast is 13% lower than the 2013 average of $1,411.23/oz.
"The price is expected to post 2014 lows in mid-year, with a fundamentally driven rally thereafter, but this is likely to peter out in early 2015," the Thomson Reuters/GFMS survey read.
Despite the "heavy visible sales from Exchange Traded Funds, driving a 25% price fall in the second quarter [of 2013], OTC investors were net buyers in 2013, notably in East Asia and the Middle East," the report read.
Physical demand -- including official sector purchases -- came in at an all-time high in 2013 at 4,957 mt -- "a 15% increase over 2012 and some 703 mt higher than the supply of new gold and scrap" during the year.
"While demand is forecast to outstrip new gold plus scrap supply in 2014, the market is expected to be closer to fundamental balance than last year."
Rhona O'Connell, head of metals, GFMS research, and forecasts at Thomson Reuters, pointed out that ETF holdings peaked at 2,698 mt at the start of 2013 and fell by 880 mt over the year, for a net dollar outflow of $40 billion, while gold inventories on the major exchanges fell by 99 mt, "so these sources between them released not far short of 1,000 mt into the market last year."
Still, the analyst pointed out that, "this was easily absorbed by the voracious appetites in East Asia and the Middle East. As a result, metal flowed rapidly out of North America and the United Kingdom and much went through Swiss refineries for recasting from London Good Delivery -- 400 oz bars -- into smaller products favored by Asian investors."
Bar investment in Asia "rocketed by 43%, rising to 1,060 mt, from 740 mt in 2012, contributing to the global increase of 341 mt. Investment-grade jewellery gained 21% -- or 326 mt -- in the region, comprising the bulk of the 362 mt gain on a worldwide basis."
Looking at price action, O'Connell said that fundamentals point to a trading range of $1,200-$1,300/oz in the short term.
"There is however a distinct possibility of a slump towards $1,100, while as the year unfolds, seasonal strengthening physical demand could then propel prices towards $1,400 again. Investor appetite is not strong, however, and without this important element the price is expected to resume a downward course in 2015," she said.
Paper gold falls in West but premium for real metal jumps in India
Submitted by cpowell on Thu, 2014-04-17 11:46. Section: Daily Dispatches
Official Gold Supply Dries Up Further
Hawala Premium Crosses 4% as Akshay Tritiya Boosts Demand; Spot Delivery Premium also Doubles
By Rajesh Bhayan
Business Standard, New Delhi
Wednesday, April 16, 2014
Business Standard, New Delhi
Wednesday, April 16, 2014
MUMBAI -- The premium for getting spot delivery for gold in the Indian market jumped to $70 an ounce from $35 a couple of days earlier, with a sudden scarcity.
While the trade is facing a scarcity of gold in official channels due to lower imports by private banks, the increase in demand in the unofficial market resulted in the hawala market premium crossing four per cent from 2.75-3 per cent a few days earlier and 2-2.25 per cent a month before, said a source in the Kolkata market, where smuggled gold inflow is said to be higher.
Recently, gold spot premiums were on a downward trajectory due to permission to five private banks to import gold. However as the new financial year had begun, a private bank bullion desk official said quarterly and yearly targets were being fixed, which is why their import was limited.
Gold prices in India were unaffected by the sudden sharp fall on Tuesday in the international market. In India, apart from the 10.3 per cent import duty, the premium for physical delivery is also counted and when the prices were falling on Tuesday evening Indian time, the premiums here were rising.
On Tuesday, international gold prices fell by three per cent in two hours. In the spot market here, the jump in premium to around $70 an ounce had continued on Wednesday. This artificially high price has not allowed buyers of gold to get the benefit of price correction. Trade sources say there is a shortage in the official channels with the rise in seasonal demand due to Akshay Tritiya, coming on May 2. The price in the spot market close on Wednesday at Rs 29,710 per 10g, compared to Tuesday’s close of Rs 29,680.
Rajiv Popley, director of Popley & Sons, said: “High premium, along with shortage of gold, is a big hurdle. We have orders for meeting demand for Akshay Tritiya but gold is not available. The scarcity in official channels creates unfair advantage for unorganised players.”
He said for their jewellery business in Dubai, they get gold by paying a delivery premium of only $1.2 an ounce, compared to $70 in India. After several curbs, Indian market has fallen prey to a cartel-like situation, where only a few are importing. The result is scarcity. Trade circles say any relaxation in import curbs is likely only after Akshay Tritiya and a new government in place.
Conspiracy fact: Top central bankers meet secretly every six weeks
at BIS
Submitted by cpowell on Thu, 2014-04-17 11:31. Section: Daily Dispatches
The Eroding Power of Central Banks
By Michael Sauga and Anne Seith
Der Spiegel, Hamburg, Germany
Wednesday, April 16, 2014
Der Spiegel, Hamburg, Germany
Wednesday, April 16, 2014
Since the financial crisis, central banks have slashed interest rates, purchased vast quantities of sovereign bonds, and bailed out banks. Now, though, their influence appears to be on the wane with measures producing paltry results. Do they still have control?
Once every six weeks, the most powerful players in the global economy meet on the 18th floor of an ugly office building near the train station in the Swiss city of Basel. The group includes United States Federal Reserve Chair Janet Yellen and her counterpart at the European Central Bank, Mario Draghi, along with 16 other top monetary policy officials from Beijing, Frankfurt, Paris, and elsewhere.
The attendees spend almost two hours exchanging views in a debate chaired by Bank of Mexico Governor Agustín Carstens. Waiters serve an exquisite meal and expensive wine as the central bankers talk about the economy, growth and market prices. No one keeps minutes, but the world's most influential money managers are convinced that the meetings help expand their knowledge in important ways. "We learn what makes our counterparts tick," says one attendee.
These closed-door meetings, which are held on Sunday evenings, have a long tradition. But ever since many central banks lowered their interest rates to almost zero, bought up sovereign debt and rescued banks, a new, critical undertone has crept into the dinner conversations. Monetary experts from emerging economies complain that the measures taken by Europeans and Americans are pushing unwanted speculative money their way. Western central bankers say they have come under growing political pressure. And recently, when the host of the meetings -- head of the Basel-based Bank for International Settlements Jaime Caruana -- speaks in one of his rare public appearances, he talks about "chronic post-crisis weakness" and "risk." Monetary institutions, says Caruana, are at "serious risk of exhausting the policy room for manoeuver over time."
These are unusual words, especially now that the world's central bankers, five years after the Lehman crash, are more powerful than ever. They set interest rates and control the money supply, oversee governments and banks and, like Bank of England Governor Mark Carney, are treated a bit like movie stars by the public. ...
... For the full story:
http://www.ingoldwetrust.ch/sge-withdrawals-equal-chinese-gold-demand-part-3
SGE Withdrawals Equal Chinese Gold Demand, Part 3
On April 4, 2014 Alasdair Macleod published an extensive analysis on the Chinese gold market. I felt obligated to respond to it by sharing my point of view and explain where I disagree with his analysis. I think his estimates are largely overstated because he double counts certain demand categories. He states Chinese gold demand in 2013 was 4843 metric tonnes, according to me it was 2197 metric tonnes (my estimate excludes some hidden demand and PBOC purchases on which I have no hard numbers). Setting out our differences was incidentally a good occasion for me to write another in-depth analysis on the Chinese gold market.
I highly respect Macleod, who was probably working in finance when I was in diapers, and I’m very grateful he has been using my findings about SGE withdrawals and the structure of the Chinese gold market. I see very little commentators stepping into this realm, though it’s truly the most important economic event happening in our time. Having said that, my concern is the accuracy of the data being spread. I present my analysis:
For all clarity please note I make a clear distinction between deliveries and withdrawals since a couple of months,as they do not relate to the same data. The SGE uses the term deliveries inconsistently which has caused for confusion.
Let’s go through the aspects of the Chinese gold market in random order; PBOC demand, the SGE, domestic mining, mainland net import and Hong Kong trade.
PBOC Gold Purchases
Macleod states all Chinese domestic mine supply is soaked up by the PBOC, according to my analysis this is not likely to be the case.
The main objectives for the PBOC to accumulate gold are:
- Supporting the renminbi for its internationalization (adding trust and credibility)
- Owning hard currency as the cornerstone of capitalism.
- Owning reserves that protect the Chinese economy from external/internal shocks and inflation.
- Owning reserves that are not controlled by a foreign nation (the US).
- Diversifying its excessively large USD reserves prior to an irrevocable USD devaluation.
- Hedge their exorbitant USD reserves.
In my opinion the PBOC (or its proxies SAFE and CIC) does not purchase gold from domestic mines or from the SGE. The PBOC’s incentive is to exchange USD’s for gold, preferably buying undervalued gold with overvalued dollars. Hence the PBOC buys in utmost secrecy, not to affect the market.
It wouldn’t make sense for the PBOC to buy gold from domestic mines because they would have to pay in RMB. This wouldn’t fit all their objectives mentioned above. Additionally Chinese law dictates all domestic gold mining output is required to be sold through the SGE (page 15). Last, I personally have never come across any evidence the PBOC has bought domestic mine supply in recent years.
Before the liberalization of the Chinese gold market in 2002 the PBOC did buy all domestic mine supply because the PBOC had the monopoly in the Chinese gold market; the PBOC was the Chinese gold market. A brief history lesson from SGE president Wang Zhe in 2004:
In April 2001, the governor of the PBOC announced the abolishment of the gold monopoly with a planning management system. In June of that year, the weekly quotation system for the gold price officially came into operation, which adjusted the domestic gold price in accordance with the price on the international market. The Shanghai Gold Exchange (SGE) officially opened on 30 October 2002, representing an important breakpoint in the revolution of China’s gold system, and reflected the great progress being made.From chairman of the SGE board, Shen Xiangrong, in 2004:After the PBOC abolished the monopoly on gold allocation and management, the SGE assumed the basic role of allocation and management of gold resources, stipulating the healthy and orderly development for gold production, circulation and consumption.
When the SGE was launched in 2002, the gold market wasn’t liberalized overnight, as one can imagine. It took a couple of years before the market functioned as the PBOC had intended. The intensions were, inter alia, to let the free market set prices and all imported and mined gold was required to be sold first through the SGE. The reason to channel fresh gold (import and mine supply) through one exchange is to keep track of the gold added to non-government reserves (jewelry, bar hoarding, institutional buying, etc). By requiring all fresh goldto flow through the SGE the PBOC can efficiently supervise the quality and quantity of the gold that enters the Chinese market place. The PBOC wants to know exactly how many grains of fine gold are being held among the people. Additionally scrap gold is allowed to be sold through the SGE, but because this type of supply doesn’t affect reserves, it isn’t required to be sold through the SGE (it doesn’t have to be monitored).
The structure of Chinese physical gold market with the Shanghai Gold Exchange at its core entails SGE withdrawals equal Chinese wholesale demand. This has been published by the SGE Annual Reports, China Gold Market Reports and CGA Gold Yearbooks 2007-2011 (I’ve written and extensive analysis on this theorem which you can read here). Unfortunately only a fraction of all these reports is publically available (here); if you study the rest and gather all bits and pieces you can make an informed analysis.
Through analysing data from 2002 to 2011, after 2011 the Chinese were reluctant to publish reports as this information became too sensitive, we can clearly see how the SGE and the Chinese gold market have developed.
The next table is from the China Gold Association (CGA) Gold Yearbook 2006.
I made a translated version:
Whilst we can see that SGE withdrawals grew from 2002 to 2006, moreover the table exposes SGE withdrawals grew relative to total supply.
The next table shows SGE withdrawals compared to total demand; the top row shows SGE withdrawals, note another typo, the bottom row is SGE withdrawals relative to (%) total demand. These tables illustrate the PBOC’s intention to match supply, SGE withdrawals and demand. Although they didn’t immediately succeed in 2002 when the gold market started to liberalize, in 2007 the CGA reported for the first time SGE withdrawals equalled demand for 100 %. As mentioned before, in the years after 2007 this continued to match (as I have demonstrated here)
From the CGA Gold Yearbook 2007:
2007年,上海黄金交易所黄金出库量363.194 吨,即我国当年的黄金需求量,比2006年增长了48.02%,低于供给增长率8.82个百分点。In 2007, the amount of gold withdrawn from the vaults of the Shanghai Gold Exchange, gold demand of that year, was 363.194 tonnes of gold, compared to 2006 increased by 48.02 percent, 8.82 percentage points lower than the growth rate of supply.
Regular readers of my research are familiar with the equation:
Import + Mine + Scrap = Total Supply = SGE Withdrawals = Wholesale Demand
In this post I will show/repeat two examples to proof this equation. Example one; this is a quote from the China Gold Market Report 2008:
For the sake of simplicity I left stock carry-over out of my equation. Second example; this is a screen shot from the China Gold Market Report 2010:
It states domestic mining output in 2010 was 340.88 metric tonnes, 40.72 % of total supply, net import (others) was 240 tonnes and total supply was 837.20.
Now let’s have a look at SGE withdrawals in 2010. From The SGE Annual Report 2010:
Exactly 837.2 metric tonnes. Last but not least, total demand as disclosed by the China Gold Market Report 2010:
Also 837.2 metric tonnes! We know this 100 % match has occurred from 2007 to 2011 by reading the reports from those years. There are no signs SGE withdrawals stopped matching total supply and demand ever since. In 2013 total SGE withdrawals accounted for 2197 metric tonnes (boxed in red, Kg – 本年累计交割量)
My point being, I think all this clearly exposes Chinese domestic mine supply is being sold through the SGE, not to the PBOC. Does the PBOC purchase gold on the SGE? I don’t think so because all physical gold on the SGE is quoted in RMB and, again, it wouldn’t fit the PBOC’s objectives mentioned above to exchange RMB for gold. On top of that I have several sources in the mainland, including a teacher in economics and the gold market at the Henan University of Economics and Law in Zhengzhou City, that all tell me the PBOC would never buy gold on the SGE.
Commercial banks like ICBC do offer a few trading products in USD, but these do not incorporate physical delivery/withdrawal. These products merely offer Chinese citizens and businesses more trading flexibility.
The PBOC (or SAFE) is more likely to make gold purchases overseas in exchange for USD; this way they can fulfill all their objectives. It’s not hard for the PBOC to do this without the shipments showing up in global trade data.
UK customs (HMRC) recently wrote:
The UK net exported 1425 metric tonnes in 2013, most of which ended up in China. When looking at UK trade we should bear in mind these enormous amounts of gold exclude monetary gold.
All data I gather from the SGE, UK customs, Switzerland customs and Hong Kong customs do not relate to any PBOC purchases (click here to see how much gold was exported from the UK, through Switzerland, through Hong Kong to the mainland in 2013). The amount of gold bought by Chinese consumers, investors and institutions I can make fairly good estimates for (it simply equals SGE withdrawals).
My estimates on PBOC official gold holdings are pure guessing, based on common sense and anecdotal stuff (though it doesn’t take a rocket scientist to know the PBOC has increased it gold holdings since 2009, when it was last updated to 1054 metric tonnes). More on that later.
SGE Vaults
In Macleod’s article there is much emphasis on SGE vaulting, though to my knowledge this amount is currently unknown. This is how the SGE works: SGE members make gold deposits, they sell this gold and the buyers have the option to withdraw the gold from the vaults. From the data I have we know yearly SGE deposits and withdrawals have been approximately the same from 2007 to 2011. Deposits can transcend withdrawals as some SGE account holders purchase Au (T+D) deferred contracts, perhaps later withdrawing the gold. Withdrawals can transcend deposits because there can be stock carry-over from previous years (see exhibit 4).
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