Thursday, May 22, 2014

Gold and Silver News and Views May 22 , 2014 - Central Banks caught in a gold leasing bind ? ( Julian Phillips opines on what happens when the SHTF ) ..... India set to lift gold capital controls .........Gold holding in ETFs falls to lowest levels since 2008 ( GLD ETF now at 780 tons ) ...... Platinum deficit widening for 2014 .... Ed Steer's Wrap Up Report - focus on ongoing manipulations of the PMs .....

Will central banks need to buy Gold back from the Market?

-- Posted Wednesday, 21 May 2014 | Share this article | 3 Comments
By Julian Phillips

Gold Leasing – to what extent
There is a belief that central bank gold in the custody of the world’s leading central banks such as the Fed, the Bank of England and the Banque de France has been leased out to the market. Central Banks have confirmed this, but it remains a source of contention. Even where the gold of the world’s central banks are held in the world’s leading central banks in a custodial arrangement this is so and it is reasonable to assume that this could not be done without the gold’s owner’s permission. This is what we do know;

In the first “Washington Agreement” and repeated in subsequent Central Bank Gold Agreements [from 1999 to now and onto September 26th 2014], a principle laid down in these agreements was;

“The signatories to this agreement have agreed not to expand their gold leasings and their use of gold futures and options over this period.”

Does this mean that existing leases, once matured would not be ‘rolled over’? Or does it mean that the total number of leases covering a specific volume of gold would be ‘rolled over’ but not increased in volume?

We think the latter, because the German Bundesbank was one of the signatories to all the Central Gold Agreements. Germany has requested that 150 tonnes of its gold be repatriated and has been told this will take seven years to achieve. The difficulty in repatriating this gold is not in transporting that much gold, but clearly in receiving back the gold leased out to the market. Last year saw only five tonnes of this gold make its way home to Germany. We believe that all the signatories of the Central Bank Gold Agreements are in the same position as Germany with all their gold currently leased into the gold market.

Apart from Germany, which other central banks agreed to these terms in these agreements?

The signatories to the gold agreements were;

Oesterreichische Nationalbank - Banque Nationale de Belgique - Suomen Pankki - Banca d’Italia - Banque centrale de Luxembourg - De Nederlandsche Bank - Banque de France - Deutsche Bundesbank - Central Bank of Ireland - Banco do Portugal - Banco de Espana - Sveriges Riksbank - Schweizerische Nationalbank - Bank of England - European Central Bank

We can draw the conclusion that there have been no increases in leasing futures and options overall since 1999 because none of them have increased their gold holdings in that period, but at that time the amount of gold leased into the market was all the gold in their reserves [so as to make a modest income on the holdings]. Why and how can we draw this conclusion?

If this was not so, why could the central banks holding Germany’s gold, not deliver the tonnage of gold asked for by Germany immediately? If only a portion of that gold had been leased the balance not leased could have been delivered. But instead, only 5 tonnes of gold has been delivered back to Germany. The implication can only have one explanation and that is that all of it has been leased and only five tonnes of it has been returned to the Bundesbank. Some might argue that the gold needs to be re-refined. If that were the case then re-refining this gold would have produced far more than five tonnes in the last year.

The clause in the Gold Agreements looks very much like attempts to misdirect our attention into thinking that only a portion of that gold had been leased.

This has become even more apparent now that the details of the next Central Bank Gold Agreement have been released. No mention of leasing was made!

Where to store central bank gold
Gold investors may have thought that central banks hold and should hold their gold at home in their own central bank’s vaults. The reason central banks have gold in their reserves, in the first place is that if their local currency lost credibility internationally, they could turn to gold, in such extreme times.

If that gold were at home, its ability to act as collateral or even to pay the nation’s bills would be impaired, because it would have to be shipped to potential creditors first. By holding gold outside the nation it is instantly available. That is, provided it is not leased out. Yes, creditors may well accept the ownership transfer of leased gold because the owner’s ability to access it would have been removed, already. But it would lessen its accessibility, unless it was accepted practice that central bank gold almost in its entirety was leased!

The clear conclusion and only one that can be reached is that inevitably, all the gold of Germany and that of other nations held outside their borders is leased out.

Counter-parties to central banks
Who are the institutions to whom central banks lease their gold? They are the market makers, the Bullion Banks, who then onward lease the gold into the market to various counter-parties. It is very possible that if the gold price were to take off, these counter-parties would not be able to retrieve or buy sufficient gold to return the gold thy leased. After all, China has absorbed so much of the gold available on the open market and elsewhere, particularly in the last year.

So as to understand what potential situations could come about in the gold market we look back at the de-hedging process that took place among the gold mines who had hedged their production since 1985 though to 2005.

Parallel situations – De Hedging
Gold mining companies found such a situation after the gold price moved up through $400 levels. It was at these levels that they had hedged their gold as the gold price was falling back from $850 to its low of $275 in 1999. Once the gold price moved through $400, the hedged position began to lose out on the rising gold price, much to the ire of their shareholders. To keep hold of such hedges would then have meant lost opportunities on the hedges and charges of speculation by gold mine executives. The gold miners who had hedged future production covered the broad spectrum of the gold mining community.

In all, the gold mines needed to find around 3,000 tonnes to de-hedge their positions completely. The gold market by itself did not have enough gold to accommodate the mining companies. Gold production was not rising, nor has it, despite the huge jump in the gold price. This was because of the huge cost rises and political risks that had grown over time in the gold market. The accelerated production of gold since 1985 had plucked all the ‘low hanging fruit’ of gold deposits during that time. The same situation applies today.

This is where the central banks stepped in. Under the “Washington Agreement” and the subsequent two other Central Bank Gold Agreements, they came to the miner’s rescue through their sales of gold at 400 or 500 tonnes a year up until 2009 when the gold mining companies completed their de-hedging. That covered not just 3,000 tonnes of gold but saw the gold price run up from $400 to $1,200. In 2009 it was no coincidence that these European central banks stopped selling and all central bank selling of gold came to a halt. Central banks were wise in announcing the sales they did from 1999 onwards as this disguised the rescue of these gold miners very well.

Failing Counter-parties to leased gold agreements
Now we see the central banks of the world fully committed to leasing gold as a source of income. But the volumes we are talking about could approach up to the entire gold holdings of the world’s central banks, amounting to over 30,000 tonnes.

Imagine if the gold price broke out to record highs over $2,000 an ounce or higher. How many of the current counter-parties to the leased gold deals would need to get hold of it in any way possible? We believe that the picture would parallel that seen amongst the miners in the first decade of this century. We expect that not just the counter-parties could be bankrupt but the bullion banks too. In turn the central banks would have to admit huge losses on their gold reserves, destabilizing the entire financial system.

And, this time round, there would be no other central banks to come to their rescue with supplies of gold! The gold market itself certainly does not have enough gold [annual production 2,800+ tonnes per year] available. Even a massively spiralling gold price would not produce sufficient quantities of gold to cover even a small proportion of this leased gold. The hunt for ounces of gold would be on.

This is where they need to find their gold from places other than the gold market. There is only one other place where they can attempt to source the gold from and that’s from you and other gold investors, dealers and custodians!

Links from Ed Steer's Daily Report .....

Flooded By Gold Smuggling, India's New Cabinet Prepares to Lift Gold Capital Controls

When one thinks India, the generic thing that comes to mind is the outcome of the recent historic election which saw the worst performance ever of the once unbeatable Gandhi family and the ascent of what many hope is a more pro-business regime (because as America itself has shown, hope and changesell). However, what perhaps shouldcome to mind is something different: namely pent up demand for gold.
For better or worse, this attempt to crush popular demand for gold merely resulted in soaring and increasingly more ingenious attempts to smuggle gold into the country, which however do not register in the official data, and as such, the government no longer has an accurate perspective of what true capital flows look like.
However, the current regime of gold demand suppression may be ending soon, and all the demand for gold, pent up over the past year and likely amounting to billions of dollars, may soon bubble right back to the surface. Reuters reports that the Reserve Bank of India and finance ministry officials will recommend that the new government relax strict gold import rules to head off a surge in illegal buying, officials with direct knowledge of the plan said.

Gold Holdings in World’s Top ETP Reach Lowest Since 2008

Investors are shunning gold again, sending holdings in the world’s largest exchange-traded product backed by bullion to the lowest since December 2008.
Assets in the SPDR Gold Trust, which counts billionaire John Paulson as its biggest holder, dropped to 780.19 metric tons yesterday, as about $2.6 billion was wiped from the value of the fund in the past two months.
After reaching a six-month high in March, gold has dropped 7.5 percent as the U.S. economy recovered from a winter slowdown. Prices plunged 28 percent last year, the most since 1981, after some investors lost faith in the precious metal as a store of value, and more than $73 billion was erased from global ETPs.
The usual bulls hit Pabulum was served up by Bloomberg on Tuesday---and I could barely bring myself to read it.  I thank Nitin Agrawal for sending me this story in the wee hours of yesterday morning.

Platinum market deficit seen widening in 2014

The platinum market is expected to post a deficit of 1.218 million ounces this year, a report from Johnson Matthey showed on Tuesday, the largest shortfall since it began compiling data in 1975. 
South Africa, currently facing its longest and costliest platinum miners' strike ever, is expected to supply quarter of a million fewer ounces of metal in 2014 than last year - some 3.953 million ounces against 4.209 million in 2013.
With Russian output seen dipping by 15,000 ounces, total mined supply of platinum is expected to fall 267,000 ounces to 5.562 million ounces.

Ed's Daily Wrap.....


Many assert that the giant concentrated short position is just a hedge. The eight largest shorts on the COMEX hold 320 million oz of silver futures net short, or an average of 40 million oz each. [JPMorgan's short position is almost a third of that amount at 100 million ounces. - Ed] The eight largest silver miners in the world produced 255 million oz of silver in 2013 and little change is projected for 2014. I don’t think any of that production or future production is hedged. So if the world’s largest silver miners haven’t hedged their production, what is the legitimate economic explanation for the concentrated COMEX short position?

The concentrated short position is a matter of public record and the mining company data are in the just-released Silver Institute annual review (by GFMS), as well as the recent release on silver by CPM Group, yet neither report made any connection. Let me state the obvious – in having sold more than what the eight largest miners produced, the eight largest COMEX shorts exerted more influence on price than did the miners with their real production. But since the short selling was in no way related to legitimate miner hedging, the price influence becomes illegitimate. COT data indicate a concentrated short position of 320 million oz is held by 8 traders and the annual silver reviews indicate the miners aren’t hedging. So what’s behind the giant COMEX short position? - Silver analyst Ted Butler: 17 May 2014
As far as I could tell, Wednesday was just another day of quiet price management in all four precious metals---and I have no idea of the meaning of vicious down/up spike in the gold price that occurred at precisely 2 p.m. EDT.  We're still coasting along just under the 50-day moving average in gold---and the 20-day moving average in silver.  Here are the graphs from showing yesterday's trading data in both metals.
As I write this paragraph, London has been open just under 10 minutes.  Gold is up a few dollars---and silver is up less than a dime, but spiked higher by more than 20 cents right at the open.  Both platinum and palladium are up a buck each.  Volumes in both metals were microscopic during most of Far East trading, but have picked up a hair since the open, but are still very much on the lighter side.  The dollar index isn't doing a thing.
I haven't much to add to today's column.  I'm just sitting here my belly-button lint brush waiting for the precious metal markets to hatch into something---and that will happen when it's allowed to happen---and the return of India as a buying force [of an amount yet to be determined] will certainly change the dynamics in the gold market to as yet-unknown extent.
But, as the last paragraph in the Zero Hedge story on this issue posted in theCritical Reads section so succinctly put it, it depends on what the powers that be decide.  How much more Comex paper will they throw at these markets until they toss in the towel and attempt to control prices from much higher price levels?
Then the question begs to be asked as to what will become of the Big 4 and 8 short holders in both silver and gold---and the other two precious metals as well.  Some entities are going to have to burn in hell on that rally, if that turns out to be the action plan.
This is all speculation on my part, of course, but something has to give at some point.  The fact that Russia bought 28 tonnes of gold in April will not be lost on "da boyz"---and if these purchases extend into the future, the physical drain should have an impact sooner or later, especially if you throw a resurgent India into the mix as well. 
And as probable as this scenario may be, the situation in silver is most likely beyond critical, as the turnover at the Comex-approved depositories indicates that all is not well in that physical silver market, either.
The strikes in South Africa still show no signs of letting up---and one wonders what how much is left in the physical markets in both platinum and palladium as well.  If there is inventory on Planet Earth, it's a well-guarded secret, as there's certainly not much sitting in the Comex warehouses.
So, we wait.
And as I hit the send button on today's column at 5 a.m. EDT, not much has changed now that London has been trading a couple of hours.  The tiny rally in gold didn't amount to much---and the rather enthusiastic rally in silver got dealt with in the usual manner.  Volumes in both gold and silver have picked up quite a bit, but still not what I would call overly heavy.  Platinum and palladium are still trading around the unchanged mark---and the dollar index is up a handful of basis points.
That's it for today---and I'll see here tomorrow.