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Precious Metals Price and Real Markets

We posed the question on Monday "When will 'real' win?". In just a few days this question has become even more prevalent. Today's front page of the Australian Financial Review asks "China shares are in crisis, commodity prices are crashing and Europe is split over another Greece bailout. Then why did Australian shares yesterday experience their biggest rally in five months?". Good question

The Chinese government has tried every trick in the book to artificially stem the huge losses on their sharemarket - from rate cuts, liquidity injections, banning IPO's, lowering reserve requirements, loosening rules for pension funds, reducing costs of trade etc etc. The US Fed's well documented markets intervention team (affectionately called the plunge protection team) does a similar (albeit more effective) job of stimulating markets at critical times. Not real.

Overnight we learn that the US Mint has simply sold out of Silver Eagle coins (the world's biggest selling silver bullion coin) with no more available until August after another record run of sales. They have sold more gold Eagles so far in July than all of May. Real.

Indeed the answer to the AFR's question may well be the growing trust amongst investors that central banks and governments will always be there to put out the various fires fuelled by unsustainable debt with, well, more debt. Somehow people think that debt is not 'real'. Greece is just a little example of how real it is as we discussed yesterday.

Finally the following is another quote from analyst Ted Butler after the belated release of last week's COMEX Commitment of Traders report which showed another huge drop in the commercial's short positions and corresponding increase in the managed money's shorts. Read here if you miss the significance (https://www.ainsliebullion.com.au/g...eal-e2-80-99-win-/tabid/88/a/976/default.aspx).

"It would not be an understatement to say that gold looks locked and loaded to the upside. There have been some times when the net long position of the managed money traders has been slightly lower than it is currently in gold, but only by very small amounts and there's a lot about the current setup that makes it look like the best ever. And based upon the price action in gold (and silver) since the Tuesday cut-off, it may have gotten better thru today.

But I will say that the concentrated net short position of the 8 largest shorts has grown again to 81,444 contracts (more than 407 million oz) an obscenely large and unprecedented market share that is manipulative to price on its face. The offset, of course, is that there are a number of managed money traders in the ranks of the big 8 and for the purposes of inflaming a short covering rally or panic, these are the very best arsonists possible.

In a nutshell, the new COT report was all aces and underscores the remarkably bullish market structure. And there was certainly no deterioration thru today in trading since the Tuesday cut-off. I don't know what the spark will be that sets off the silver rocket, as much as I know whatever the spark turns out to be, it really doesn't matter. Not when the fuel tanks are loaded like they are."

 

'Financial Smoke' Before the Fire?

Oh these are interesting times Let's, for something different, look at some of the headlines you'd wake up to on Bloomberg's home page today

"DJIA -261 (-1.47%), Nikkei -638 (-3/.14%), Shanghai -220 (-5.9%)"

"NYSE Resumes Trading After Hours-Long Halt" (paper v hard asset https://goo.gl/37fZT5)

"More Loans Consumer Borrowing in US Increased $16.1b in May" - (debt party continues https://goo.gl/pef9zx)

"Nuclear Negotiations Obama Reduces His Odds on Iran Nuclear Deal to Less than 50-50"

"Greek Under the Gun to Produce Debt Reform Plan to Keep Euro" (bank closure extended https://goo.gl/qtQyOr have you got money outside the system?)

"FOMC [Fed] Minutes Released Fed Officials Tempered Economy Optimism With Concern on Greece" (more words in lieu of rate rise https://goo.gl/a3TjyU)

"Gundlach Sees Greek Euro Exit Opening 'Pandora's Box'"

"China ETF Posts Record Drop Amid More Efforts to Arrest Rout" (Chinese market crash https://goo.gl/29E5r1 - same happened just before GFC)

"Risky World Makes Treasury 10-Year Auction a Buyers' Paradise" - (yet many calling the bond market the likely trigger for next crash)

"We Break From the NYSE Crisis to Ask: So How Are Commodities Doing?"

"Yield Curve Shows Greece, China Wreaking Havoc on U.S. Outlook"

If you didn't have home insurance and could take it out when you smelled smoke you definitely would wouldn't you? Gold and silver are wealth insurance and the above represent just some of the 'financial smoke' wafting right now. The thing is house insurance only pays replacement gold and silver at these low prices could pay the jackpot

 

Good post - but the jackpot ending is a little over the top.
If gold and silver go to the moon - it doesn't matter.
It just means that our paper is worth much less.

 

Is 5000 Years of History Wrong?

Ross Norman is CEO of Sharps Pixley and has been the LBMA's (London Bullion Market Association) top forecaster for 15 years he knows gold. He has also generally steered clear of buying into the gold price suppression arguments. But this week he has come out and stated he believes somebody big is sitting on the gold price and that we could well see a rally when the Fed raises interest rates.

In an interview this week he had this to say:
"Either 5,000 years of safe haven buying has just become bunk, or there is a desire to portray what it is evidently a financial and economic crisis as nothing to be concerned about."

"I think a rate hike must rate as the most telegraphed move in the history of financial markets and as such it must be fully factored into the price. When it does eventually come, say in Q1 2016, I could see a relief rally in gold as a distinct possibility."

Just as we've seen in Australia, with gold and silver comfortably up in Aussie dollar terms and more joy to come with predictions of low 70's and even 60's by years end, he points out the same is for European gold holders whose currency has depreciated about 15% against the USD:

"European gold investors saw a 10 per cent gain last year and are up eight per cent year-to-date. So again gold is doing what it should do, and that is to provide a means of hedging ones exposure to a currency crisis."

As we explained in todays Weekly Wrap (https://www.ainsliebullion.com.au/g...uly-ainslie-radio/tabid/88/a/981/default.aspx) too, there is a thesis that the gold price is under pressure due to highly leveraged Chinese investors selling gold to pay their margin calls. We've also seen the largest ever short contracts set up on COMEX by the speculative, and totally "naked" managed money sector whilst the big commercials shorts way down. As discussed this week https://www.ainsliebullion.com.au/g...-and-real-markets/tabid/88/a/978/default.aspx, those naked shorts need to cover some time soon

 

It's called "The Golden Rule"

He who holds the gold, makes the rules.

 

I think the point is that someone with lots of money is keeping gold down because if gold was at $2000 it would signal big problems with the economy and a fears of inflation.

 

Moving From 'Synthetic' to Physical Gold Price

The Tocqueville Gold Strategy Investor Letter has a vast following and the 2nd Quarter 2015 one just came out and is posted HERE (https://www.ainsliebullion.com.au/g...cond-quarter-2015/tabid/88/a/984/default.aspx). It's quite a brief one this quarter but topically given the epic set up of speculative shorts on COMEX at the moment and its effect on keeping the US spot price low amongst Greece and China, they had this to say:

"Gold is migrating to Asia in vast quantities. What this means is that that the power of synthetic gold trading on Comex and OTC transactions in NY and London to influence metal prices could be ebbing. Synthetic gold is traded by algorithmic and HFT strategies in which no gold actually changes hands, only paper derivatives connected notionally to physical bullion. The well documented disappearance of bullion from Western vaults means that credit required for transactions in synthetic may become increasingly difficult to obtain. China has built a market infrastructure in the form of the Shanghai gold exchange and will soon initiate gold fixes in renminbi that will be backed by physical gold, unlike Comex. We believe that the Chinese intend to use physical gold in partial settlement of cross border trade transactions to bypass the US dollar. These developments will eventually in our opinion make Western synthetic gold trade less influential in determining bullion prices."

We recommend reading the article in full (https://www.ainsliebullion.com.au/g...cond-quarter-2015/tabid/88/a/984/default.aspx). Silver is arguably more 'synthesized' as captured beautifully in the following chart which puts the size of these futures short contracts against days of production for the 'metal' traded. The trades dwarf what is physically available so if things deteriorate in markets and someone actually asks for metal the whole thing explodes. This graph puts that into perspective even more so. Do you have your real stuff?

 

Move Along, Nothing to See Here

So we awake to the news that all is fixed in the Euro spurring the Dow Jones up 1.2% overnight. Gold fell 1% too, for a while, then largely rebounded as if 'someone' thought, wait a minute. The $96b fresh bailout comes with a not so small caveat. Because we have been through this many times previously the Euro leaders want the deal passed by the Greek Parliament before they hand over a cent. And what is the deal? Well it is the very same austerity measures (some say worse) that were resoundingly rejected in the referendum as those to date have brought this little country literally to its knees! There are already early signs that this may not get through so then what? Also it was made very clear by Merkel in particular that there would be no 'haircut' to the EUR320 owed, just a 'restructuring'. Well that EUR320 represents 180% of Greece's GDP, GDP that is falling under the weight of austerity measures, bank closures etc. So on any 'restructured' level it is unsustainable and all of this merely delays the inevitable. Don't get us wrong, despite the odds being offered amongst economic commentators we don't think a "Grexit" is likely as the Euro leaders know it would be disastrous for the Euro despite Greece's scale. It would trigger Spain, Portugal etc to threaten the same. So it will take more extraordinary measures to prevent it, and it is those very extraordinary measures (just as we saw in China last week to turn around their sharemarket crash) that just inflate this global bubble further until suddenly and unpredictably it bursts taking all 'paper' financial assets down in a heap.
On a lighter note (pardon the pun)

 

Gold Defies the Shorts

We've spoken a little lately about the gold price amongst all this turmoil. The quote below from economic commentator Greg Canavan (of the excellent The Daily Reckoning) summarises it nicely and gives you an independent (non gold biased) take on it:

"For now, the crisis is 'solved'. Markets are in celebration mode. But we await the backlash. Capital may be amoral but it is also fickle and will turn on a dime.

The only certainty is that the crisis is not over. The only certainty is that this, which started out as a financial crisis, will soon morph into an economic, social and political crisis of massive proportions.
In terms of asset allocation and risk tolerance then, don't let your guard down. The storm has not passed.

As an aside, did you see how gold performed on news of the 'crisis resolution'? It fell sharply initially and then even further in early US trade, only to bounce back.

The failure of gold to break through the March lows around US$1,145 could prove ominous for those betting on more price falls over the next few weeks. As the below chart from Bullionvault shows, speculative short positions in the gold futures market (that is, bets on the gold price falling) are at an all-time high.



That a record number of short sellers have failed to push gold to new lows would be of concern to the bears. At some point, you'll see a large number of these positions bought back, which will provide the fuel for the next rally.
If gold can hold onto current levels without breaking to new lows, there's a good chance the bottom may be in. That's in US dollars terms at least. As I pointed out earlier this week, in Aussie dollar terms the gold price is very strong. It's currently trading over $1,560 an ounce.

Let's see what the next few weeks bring."

 

Salient Storage Lesson

In the lead up to the Greek crisis, many Greeks withdrew cash from banks and bought gold and silver prior to the inevitable capital controls being enforced and the possibility of a reversion to the Drachma and the just as inevitable hyperinflation. The problem is that many put that gold and silver in safe deposit boxes. in the banks! As they have learned now it is the same front doors that are closed and they cannot get access to that gold and silver. Greece's Deputy Finance Minister said they have imposed the restriction to prevent people withdrawing cash from safe deposit boxes amid the capital control period.

Whilst your cash in a bank sees you as an unsecured creditor (as we discussed here https://www.ainsliebullion.com.au/g...cash-in-the-bank/tabid/88/a/734/default.aspx) for what essentially becomes the banks' money, safe deposit boxes supposedly sit outside that right. What these restrictions imposed in Greece have many speculating is they will 'change the rules' and be able to seize safe deposit box contents as well.

Whilst many think 'it can't happen here', there are more and more respected commentators warning Greece is just a prelude of what is to come. Just recently the head of the UK's largest fund manager Fidelity said people should be cashing up but importantly he said that includes physical gold and silver and cash held outside a bank.

This is why we recommend Reserve Vault http://www.reservevault.com.au/ for secure storage. They are an ultra high security vault and independent of any financial institution or government body. They also offer All Risks insurance underwritten by Lloyds of London and a very cost effective independent audit service (ticking both boxes for Self Managed Super Funds https://www.ainsliebullion.com.au/SMSF.aspx).

 

I'm enjoying reading your thread...always interesting to see different perspectives.
+1 for avoiding putting gold & silver in your "safe" deposit boxes. lol

 

Canada Points to Lower AUD

The front page of today's Australian Financial Review has a headline about rate cuts in Canada and New Zealand being a precursor to Australia. Indeed Canada, like Australia, is highly dependent on resource exports for its economy. Wolf Richter of Wolf Street summarised yesterdays news well:

"The Bank of Canada took a good look at the Canadian economy, saw it was sinking into the mire, glanced at the collapsed prices of commodities, particularly oil, saw how they were wreaking havoc in Canada, and then looked at the global economy, particularly at China and the US, and it freaked out.

It cut its overnight rate 25 basis points to 0.5%, the second rate cut this year, and attached a gloomy view about the Canadian economy with as it said a "significant downgrade" from its last estimate issued only in April. Things are heading south fast."

As we deal with falling commodity prices we need a lower dollar and the RBA, as does Canada and NZ's central banks, knows this. This all adds enormous weight to extraordinary measures being employed to lower our dollar further. We saw a 6 year low this week at 73.5 but we have a number of world banks calling for 60's by next year. As we've discussed many times https://www.ainsliebullion.com.au/g...ley-calls-aud-62c/tabid/88/a/955/default.aspx this should be music to holders of gold and silver.

 

Chinese Gold Reserves Announced

After years of speculation since China last announced its official gold holdings in 2009 (1054 t) they shocked the world on Friday with an updated holding of 'just' 1658 tonne. Whilst this is a 57% increase it is considerably less than nearly all estimates. Bloomberg Intelligence this year estimated 3,500 tonne and some gold analysts were anywhere from 5,000 to 12,000 tonne. Why? Well apart from being very secretive for the last 6 years China has also in that time become both the biggest net importer and biggest producer (all of which they keep) of gold in the world. They have also been overtly making moves to internationalise their currency (Yuan/Renminbi) raising speculation of an end play of becoming the reserve currency and backing that with gold to differentiate it from the flawed US Fiat reserve currency. They were due to make this announcement before October when the IMF decides on whether to include the Yuan in the SDR (standard drawing rights) IMF based alternative 'reserve currency'.

The holding places what is now the like-for-like largest economy in the world at only the 5th largest holder of gold (U.S. (8,133 tonnes), Germany (3,383 tonnes), Italy (2,451 tonnes) and France (2,435 tonnes)).

Whilst few seem to believe the number, the speculation is rife on "Why?". The most plausible is that they just want to keep buying at these ridiculously low prices and didn't want to spook the market up with a big announcement. One thing for sure is the Chinese are strategic long term players and they will have their reasons. For the rest of us, it just prolongs this once in a life time buying opportunity.

 

I'm bullish on the low number, if it's true then it means rampant demand from Chinese institutions or the general public given what we know about the size of imports abc domestic production, either way it's good news. Of course like many China watchers I don't believe the figure, the actual figure is unknowable so I won't guess, except to say that I would happily put my name on something saying that the 30,000 ton estimates are nonsense.

Here's some of the reasons I think they are downplaying it: first, stability for the upcoming SDR decision. They put out a number that's confidence inspiring and positive, a big build on the previous announcement, without rocking the boat too much.

Secondly, they are trying hard to maintain their deliberately devalued currency peg, if they came out and said it was 9k tons then they would suffer a currency onslaught that would make the Swiss franc it danish krone look like a walk in the park. The currency was undervalued before, but a big announcement like that would have people flooding in to buy RMB instead of dollars. They would have all the benefit of buying USD vs other countries since the RMB is fixed with the dollar along with the knowledge that you are buying something undervalued and backed with the world's largest gold reserves. The Chinese are buying gold and reducing their T-bill purchases because they are trying to limit their exposure in holding too much foreign currency, they'd have to accept billions a week until they revalued the peg which would put the competitiveness of their economy on the line.

Thirdly, I think AB is right about them enjoying being able to buy at these prices, but I think that has broader implications than just gold, if they announced 5k tons then you would see a big bump in gold and silver and possibly broader commodity metals. Because of the peg to the dollar, exports to their largest market (the US) aren't seriously affected by dollar deflation and dollar strength matched with falling commodies, including commodity gold, is great for them. Oil and iron are their bread and butter, why do something that could move the commodity space and push the USD down at the same time making all the raw materials they buy more expansive?

Lastly, they want a lever to pull if things go badly. If the Shangai comp drops to 1750 over the next 3 weeks and Chinese capital is fleeing the RMB as it goes to overseas investments then they want to be able to pull a rabbit or of their hats when people start to publicly state their concerns over their dwindling foreign currency reserves. This happened during the 97 Asian melt down, when reserves ran low panic set in, people pulled out what wasn't already taken from equities and other local markets and did crazy things like buying cameras and watches just to get out of the local currency into something hard even though they might have to sell them at a 50% loss later on. If this extreme situation happens to China and they can announce that the PLA has 5000 tons in a mountainside out in the gobi then they might not even have to sell any, knowing that the currency can be supported prevents a flight.

There's also the conspiracy reasons, like their having gold stored in friendly countries or ready to ship to support a communist government in exile if things ever get hairy. Or that they want to save as much up as they can to announce all at once to deal a crippling blow to other economies should they choose.


When China starts divesting itself of big portions it's forex reserves and dollar denominated debt then it's probably a sign that a number closer to the real one is coming.

Whatever the reasons I think we can all agree, as I think would lots of very mainstream and even anti-gold commentators, that this is pretty close to the lowest plausable number they could have put forth. If it was much lower I think you would have seen outright derision across the board. It's just high enough for journalists and talking heads to reasonably dismiss it as maybe almost possibly just on the short side of true perhaps, rather than an obviously falsifiable lie.

 

Awesome commentary, thanks Phrenzy!

 

Gold Flash Crash 'Winds the Spring'

For those watchers of the gold and silver prices (and we have one of the best live tools around with our gold and silver trend graph on the home page) yesterday was an extraordinary day. In a matter of minutes we saw gold drop near vertically by 4.2% or around $50 to just $1,086/oz. That is its lowest point in over 5 years and it took the other PM's with it. So what happened? It looks as though $2.7b or around 5 tonne of gold was dumped onto the market on COMEX in one hit. That is a fifth of a normal day's trade in minutes. It wreaked very much of a similar event in February 2014, one in which just a month ago the orchestrator was prosecuted for "unusually large and atypical trading activity by several of the Firm's customers and caused the mass entry of order messages by Zenfire, which resulted in a disruptive and rapid price movement in the February 2014 Gold Futures market and prompted a Velocity Logic event." Now past events don't necessarily prove similar repeats but one only has to ask one's self 'If I wanted to exit a 5t gold contract in the most profitable way, would I dump it on an obscure time in the market with thin liquidity almost guaranteeing a precipitous price drop as I triggered stop loss orders and panic on the way down or would I sell gradually into a more liquid time in the market...?' The answer may be in whether you were a big player and may profit on the short side

We posted last night (previous post) a nice succinct, Aussie, balanced article by Greg Canavan from The Daily Reckoning. In that article, topically given yesterday's flash crash, he quotes Martin Armstrong as follows:

"At the top, the majority islongand they become the fuel to make any market crash and burn. [shares or property anyone?]

'At the bottom, the opposite unfolds for everyone will beshort. They will pile on looking for $600 gold and will count their profits upon entering the trade. They become the fuel to send the market higher for it always begins with a short-cover rally; people continually try to sell each rally, looking for that new low, just as the people at the top remain convinced that a decline would follow with new highs."

 

China's Careful Gold Play

There has been much media about China's disclosed gold holdings as we reported on Monday. What many of the more 'zealous' gold commentators miss on predicting an imminent crash of the USD and being replaced by the Chinese Renminbi/Yuan is that China a) has a long way to go, and b) are long term strategic players in the grand economic game. One of the more credentialed currency commentators is Jim Rickards. It's worth reflecting on what he wrote back in May of this year (well before Friday's announcement)

"Meanwhile, China will probably announce its increased gold holdings later this year. But don't expect fireworks. China has three accounts where they keep gold the People's Bank of China, PBOC; the State Administration of Foreign Exchange, SAFE; and the China Investment Corp., CIC.

China can move enough gold to PBOC when they are ready and report that to the IMF for purposes of allowing the yuan in the SDR. Meanwhile, they can still hide gold in SAFE and CIC until they need it in the future."

And when it comes to analysis of China's gold few come near Koos Jansen who this week had this to say:
"With the US having the power to obstruct renminbi inclusion into the SDR, the Chinese have to play it safe. They are required to be transparentabout their true gold reserves, but may notwant to upset the US by disclosing an official gold reserve figure at 3,500 tonnes. The1,658 tonnes figure, whichis too littleto rock the global financial order, though a sign that China assesses gold to be "an important element of international reserve diversification" may thus be an appropriate figure. It's not in China's interest to rush into a new international monetary system as they continue to diversify away from the US Dollar.



From the above chart, we can see China is not net selling US treasuries, but that they have stopped increasing their accumulated holdings since 2010. The Chinese aren't ready for a major shift in the international monetary system yet. They are still working on further internationalization of the renminbi, the SDR inclusion, developing their financial markets and opening up their capital account. Only then will they unwind the US dollar. Until then, China will continue to adopt a slow step by step approach."

There is little doubt in our mind that China has accumulated substantially more gold than that reported, and that at the right time that will be revealed. Monday's flash crash of 4.2% on only 50 tonne of trade shows the lack of liquidity in the system at present. The whole set up appears to be tinder-box like where those who already have physical positions may well be hugely rewarded on the first real spark.

 

Anslie - what is your opinion on their reported 1,600 ton holding?
You think it's accurate? If so, why so little??

 

JP,

Thinking it is accurate to best represent their current economic interest and future economic goals.

 

Gold Faith, History, and Timing

Billionaire hedge fund manager George Soros, on how to make money, famously said - "Find a widely held precept that is wrong and bet against it". On Tuesday Jim Rickards tweeted "#Gold is plunging because China has less than expected, & Fed is raising rates. Except that China lied and Fed can't raise rates. Go figure.".
These 2 quotes fit nicely for those that understand. We are in the middle of a central bank induced (printed money and ultra low interest rates) asset bubble with weak fundamental support (low GDP growth, financial instability) whilst carrying and rampantly adding unsustainable debt.

There are no end of mainstream press commentaries about gold falling out of favour. In the Wall Street Journal in the weekend there was an article describing gold as "like a pet rock" and owning it as an "act of faith".

The annotated chart below (courtesy of ZeroHedge) revisits the timing of a similar article from 1999 in the New York Times. In essence the choice and faith equation is very simple. You can trust that central banks (the US Fed has been around for just over a century but only 42 years without gold backing the currency) can steer us out of a situation they created by continually creating more credit / Fiat currency - OR you can trust 5000 years of history of gold being the only real money, money that we humans revert to every time the credit experiment goes wrong.

Soros's quote may not be more relevant than it is right now.