Discussion in 'General Precious Metals Discussion' started by AinslieBullion, Jun 12, 2014.
China's Big Four Join Yuan Gold Fix
In a big step towards the ability to set pricing for the metal, the Shanghai Gold Exchange has confirmed that China Construction Bank, Industrial and Commercial Bank of China, Bank of China and Agricultural Bank of China which comprise the list of China's big four state-owned banks will be the latest of 18 members to join the Yuan denominated gold benchmark set for commencement next week.
Like the London spot benchmark, the new benchmark will be set twice a day. Priced in dollars per troy ounce, the London spot is derived from electronic auctions; something introduced in 2012 to replace the inter-bank teleconference mechanism after the Libor scandal. China's benchmark will be derived from a period of trade time, will be priced in yuan per gram and will be based on a 1kg contract. The 18 members of the benchmark are reported as including gold miners, the world's biggest jewellery retailer, Chow Tai Fook and Swiss trading house MKS.
China has experienced difficulty regarding the involvement of international banks in the use of the new benchmark, citing concerns around regulatory scrutiny to name just one issue. This has seen China use its muscle as the largest gold market participant to make a persuasive case for membership. One tool at China's disposal in this regard was reported by the media in January and comprises of the ability to inhibit foreign bank operations in the local Chinese market.
Currently, two foreign banks have signed on as members of the new benchmark, namely ANZ and Standard Chartered. Interestingly, both banks have gold import licences in
Alan Greenspan on Monetary Policy and the Economy
"Monetary policy has reached its outward bounds of effectiveness". That is somewhat of a bold statement and could be easily dismissed as being overly pessimistic except for the fact that it is a statement made by former Fed Chair Greenspan. Overnight, he provided some views on monetary policy in recent times and poignantly pointed out that the various QE (quantitative easing) programs have "not helped all that much". Stating that there are two metrics for the effectiveness of QE, Mr. Greenspan confirms that we have indeed seen an expected impact of higher P/E ratios but have not seen any evidence of desired lending activity and the resulting pickup in the economy.
Mr. Greenspan attributes poor US and global growth to low output per hour (or productivity) citing the US productivity growth rate as around 5.5% for the past 5 years (depending on how it is measured). Indeed his recent analysis has indicated two thirds of 31 major countries examined have experienced less than 1% productivity growth over the last 5 years.
Furthermore, corporate investment everywhere has come down significantly as a percentage of GDP "and when corporate investment falls, productivity sags". So why have corporate investments declined? This is said to be due to the fact that gross domestic savings have been severely undercut by social benefit increases, themselves a result of demographic issues. Aging populations around the world are, he says, a political problem and one that is "extremely difficult to solve".
In disagreement with IMF Director Christine Lagarde, Mr. Greenspan is not convinced that negative interest rates are a net positive stating that they "hurt financial intermediaries that require positive interest rates". His focus was not on the policies of negative interest rates themselves, but the sequences of policies that have resulted in the need for their adoption now.
The interview illustrates Mr. Greenspan's willingness to voice opinion contrary to the mainstream zeitgeist; exemplified no better than by President Obama's State Of The Union quote "anyone claiming that America's economy is in decline is peddling fiction". One thing that can be said about Alan Greenspan is that just prior to the GFC he disseminated publicly his opinion of the growing risks. Some may recall his frequent use of the word "frothy" in the context of the housing market. The counter catchword use by then Fed Chair Bernanke and others at about that time was "contained". History serves to educate here regarding the accuracy of these two points of view.
Deutsche Bank Confirms Metal Price Manipulation
As we revealed at the end of our weekly wrap on Friday, news broke Friday morning our time regarding DB's amazing admissions regarding fixing of gold and silver pricing and its willingness to expose other complicit banks. The admission was made in attempted settlement of a U.S. class action accusing it of colluding with other banks to manipulate gold and silver prices at investors' expense for over a decade. The plaintiffs name Bank of Nova Scotia, Societe Generale, Barclays and HSBC as conspirators. Since the original class action, more have been lodged including two in the Ontario Superior Court of Justice seeking $1B in damages for Canadian based gold and silver investors. It is noteworthy that we have yet to see any significant precious metal price response to these events however one of the first obvious outcomes of this news is that those who discuss manipulation in the gold and silver markets can no longer be trivialised as "conspiracy theorists".
So why the admission now and why the willingness to turn informant on other banks? Jason Burack of Wall Street for Main Street hypothesises that DB is attempting to get ahead of a situation that they now see as becoming uncontrollable by looking for "the best deal first" in terms of fines and information dissemination. Part of the loss of control here may be related to the curious timing of the commencement of the SGE Yuan exchange starting this week as we reported last week. Mr. Burack notes how interesting it is that no major U.S. investment bank has been named yet and according to him, there are likely to be many more class actions filed against other large US and European investment banks. The reasoning here is that DB has agreed not only to testify against other banks but also to turn over evidence such as IMs between traders and interbank emails. Unexpected things are likely to come out of this evidence and Mr. Burack sees as a consequence that it will now be harder for precious metal prices to be artificially suppressed, especially considering the upward price pressure that we often report on.
For a counter view, historian Harley Schlanger who has covered the financial industry since the 80's suggests that we are unlikely to see any real consequences from DB's admission. Using HSBC as an example, Mr Schlanger suggests that "there's not a single case of criminal activity in which they haven't been involved yet nothing has been done; no one has gone to jail. They've been fined and they pay the fines, it's pocket change for them". In support of this is Goldman's recent payment of a $5B fine and it is understood that DB has set aside around 10B euros this year alone in expectation of fines. Mr. Schlanger concludes that it is quite likely that DB will continue engaging in activity such as FOREX manipulation, gold and silver price rigging and fraudulent reporting on derivative holdings without consequence.
For a final point of view, Craig Hemke of TF Metals Report calls this revelation very significant. Mr Hemke suggests that the German regulators have cracked down on DB and "convinced" them to settle these civil charges. "What's most compelling about this story is the fact that we've seen numerous bits of civil litigation against banks regarding manipulation over last decade or so and the banks have always worked hard to throw them out with the cooperation of U.S. courts". According to Mr Hemke, what's critical about them being thrown out is that each case was dismissed before the legal discovery phase where documents can be subpoenaed and people can be interviewed under oath. It has been understandably important to the banks to not get to this phase. No longer will this be the case as by virtue of this settlement, "the flood gates are open regarding class actions in the same way that they were when the first tobacco company finally broke ranks and admitted guilt".
The fact that DB's admissions have occurred after the unusual Fed behaviour of last week and just ahead of the commencement of the SGE Yuan gold fix suggests that something significant is in the making and promises interesting times in the days and weeks ahead.
I say number 2 is the correct answer and number 1 and 3 ONCE AGAIN underestimate the power of those in fianance and the control and political clout they have. They make things disappear and and can silence people. IMHO. I say nothing changes!!
Secret Fed Meetings Spark Gold Demand Surge
Last week we raised the idea that something unusual was happening at the Fed. In particular was the ominous first occurrence of President Obama and Vice President Biden both attending the same meeting with Chairman Yellen to "discuss the state of the American and global economy". Furthermore, discussions and inventive rumours have surfaced since our article of last week exploring the possible substance behind and consequences of the particular Federal Reserve Board of Governors meeting relating to a "Bank Supervisory Matter".
This week we are able to look at the investment impact of this news. Using only data spanning from Monday 11th of April to Friday 15th April inclusive we note that Gold Eagle sales at the U.S. mint have surged to their highest levels in around 3 months. Last month saw 38,500oz of Gold Eagle sales at the mint whereas last week alone saw 33,000oz of Gold Eagles and an additional 6,000oz of Gold Buffalos sold. For comparison using Eagles alone, the latest data would suggest a total of 132,000oz sold if extrapolated out to a monthly total. The vast majority of these sales were comprised of the 1oz Eagle coin as depicted in the following chart.
As an additional note, weekly allocations of Silver Eagles at the U.S. mint continue to be exhausted with sales currently 26% higher than the comparable period in 2015. With the SGE Yuan denominated gold benchmark opening today, it is reasonable to expect some changes in the gold market landscape in the future and data such as last week's Gold Eagle sales as presented here would certainly imply that the investing public at large is becoming more amenable to the virtues of physical gold holdings.
As the market sails to new highs...I think some words were spoken, "don't worry Biden and Odummer, we will take the markets higher, creating an illusion, so we kept the democrats in office, with HITLERY in office.' Kiss the U.S., goodbye if she is leading this nation. Geesh Louise!!
Gold and Silver Jump as SGE Yuan Benchmark Begins
This morning's two gold and silver USD spot price plots below look remarkably similar. Following the SGE's historic inaugural yuan denominated benchmark auction, wholesale gold reached a 4 session high exceeding $1255/oz. Impressively, silver hit a high not seen since May of last year after jumping around 5% to exceed $17/oz.
We've been covering the build-up to this event recently and now we can report that Tuesday's yuan fix was made at CNY257.29/gram in Shanghai at 2.15pm which equated to a small premium to international dollar spot prices at the time.
Deputy Governor at the PBOC Pan Gongsheng was quoted as saying "the Shanghai gold benchmark will provide a fair and tradable yuan-denominated gold fix price and will help improve yuan pricing mechanisms and promote internationalisation of the Chinese gold market."
Marwan Shakarchi, chairman of Swiss trading house MKS and one of the SGE benchmark's reference members said on CNBC that the new fix is supported by growing consumption of gold in China and that local pricing will support producers and consumers in that region. Mr Shakarchi describes a reference member as being one that participates in pricing but must pass through fixing members in order to buy or sell. Fixing members on the other hand are permitted to import gold into China and are required to be local. The purpose of members such as MKS is partly to attract more foreign interest and money.
Interestingly, Mr Shakarchi suggests that there is potential for opportunities in the future when the currency becomes fully convertible despite admitting that the short-term impact of the new gold fix will likely be limited. Mr Shakarchi said that he can ultimately "see them uniting the CNH (offshore yuan) and CNY (onshore yuan). The yuan will be fully convertible and it will be easier to import gold into China".
Moving over to silver and Reuters is largely attributing yesterday's price spike with the opening of the SGE benchmark. Ronald Leung, Chief Dealer at Lee Cheong Gold Dealers in Hong Kong attributes the silver spike to "heavy buying of silver in Shanghai, and that has triggered buying in gold as well". The result sees silver entering a bull market; up 22% so far this year and now surpassing gold as the best investment of 2016 as the one year plot below shows. The move in silver has reduce the gold/silver ratio to levels not seen since last November and notably below the recent highs around 80 which we have reported as being stretched.
William Engdhal: What China and Russia Plan With Their Gold
William Engdhal is the author of one of the most insightful accounts of American monetary history "The gods of money" and more recently "The Lost Hegemon: Whom the gods would destroy". Mr. Engdhal writes many topical articles and this week discussed his views on the broader picture behind Russia and China's involvement in the purchase of gold together with their political and economic cooperation.
Mr. Engdhal bluntly states that "we have a U.S. dollar supported by F16s and Abrams tanks" and concludes that China and Russia are working tirelessly at an alternative to this reality. To this end, he is convinced that the Chinese government through their sovereign wealth fund and central bank have perhaps three or four times the amount of gold they claim they have. The simple reason behind the obfuscation is that "they don't want to wave a red flag at the bull of Washington". In cooperation, Mr. Engdhal states that China and Russia are buying gold in huge quantities with the intention of very quietly building the basis of a Eurasian continent independent of NATO; one that is militarily defensible because as a land mass it is largely immune to U.S. naval projection. Furthermore, the foreign and domestic policies in Washington "have created a unity in the nations of Eurasia to defend against an enemy that is out to destroy them" and consequently China and Russia are creating military and infrastructure cooperation built upon a foundation of sound money.
In order to achieve these ends, Mr. Engdhal is convinced that the Chinese are building an alternative monetary system to the dollar. Having already built their infrastructure internally (roads, buildings, bridges etc.) they are transforming the economy by focusing on external transportation arms to link the entire Eurasian land space and bring infrastructure into agricultural areas, remote villages and mining areas that have never had access to a market before. Mr. Engdhal predicts that the markets that are going to be created across Eurasia are staggering with a potential to add trillions to the GDPs of those countries in participation. Mr. Engdhal indicates that his future view goes beyond simply cooperation between China and Russia and uses India as an example. India and China have been closer together than they have been in perhaps a century. Russia too has very good relations with the Modi government with defence sales and so forth and India is a member of the BRICS group. India is formally linked into the China Silk Road and along with Pakistan and Russia are together members of the Shanghai Cooperation Organisation. In conclusion, Mr. Engdhal states that "the world is changing and the main-stream-media in the West doesn't have a clue". The relentless acquisition of gold in the East is the prelude to significant global change and is ignored at great risk.
But you can bet the US government does have a clue. The question is, how will they respond to all of this if it looks like it may actually happen?
The US needs to realize that the future is multi-polar and it must give up its ambition of being the global hegemon. Alternatively it will need to go to war to preserve the hegemony and they'll need to do it before the debt burden forces them into the next financial crisis otherwise it will be too late.
Depending on who wins the coming US election either could happen.
SilverPete are you so sure that US government has a clue? I don't. I read Jim Rickards book "Currency Wars" and according to James not many people in government financial talking heads really understand the implications of the coming bust and treat the return to a gold standard with ridicule. I think the decision will be made for them. China now has real gold trading platform. When the market sets the price of gold and silver, the LBMA will need to meet either the market or the paper.
My guess is that China's SGE market will grow organically. I think they may sell some US Treasury Bonds or at least only buy 3 to 6 month bonds, then quietly dump those bonds on the market, which will send interest rates higher (I think). The Chinese then will not be beholden to the US Government for anything because its reserves will be Gold and Silver. Right now, China has to buy US Bonds every time the USD is devalued, to ensure the Yuan is pegged at a certain rate.
Gentle readers might want to help me out here, but I can only see chaos ahead. I have read that the ANZ is one of the banks which sets the gold price. That makes me happy, if this is true.
Admin, perhaps we need a separate thread for this. I will delete and start another discussion.
Yes, we do have a clue, after all, Jim Rickards just released his book, the "new case for gold,' and he makes a good case. Some of what he says discusses what tonight's article from Anslie Bullion references...the U.S. does have a clue. Jim Rickards has ties to the CIA. They know exactly what is going on. What they do about it, who knows, but I'm sure they are trying to figure out what to do.
Interest Rates Lower for Longer
The harsh realities of extended low interest rate environments will come as no surprise to those reliant on, or planning to be reliant on savings. Nevertheless, RBA Governor Glenn Stevens spelled out these realities in a speech delivered in New York earlier this week. Referring to superannuation accumulation, Mr. Stevens conservatively stated that "many of the owners of accumulation funds are going to feel disappointment" when referring to the growth performance of fund allocations in high volatility, low growth environments and further referred to the "difficulty, or impossibility, of defined benefit pension plans making good on their promises with long term rates of return so low".
At about the time of Mr. Stevens' presentation, an article was released by Mauldin Economics citing three arguments for an extended period of low interest rates from the U.S. perspective. The first of these is non-existent inflation. Arguments aside regarding how inflation is actually measured (a topic of some contention in the financial community), the article highlights the fact that official core inflation is stubbornly stuck below the Federal Reserve's target threshold of 2% and that this would need to change prior to any consideration of meaningful increases in interest rates.
The second reason raised by Mauldin is the absence of any economic recovery. With now wafer thin positive GDP prints and the plethora of bad economic metrics that we often report on, we fail to see anything near an economy that could be classified as "overheated" which is what is typically required for rate hike cycles.
Lastly, the issue of effectively absent wage growth is cited. Indeed the details behind the NFP prints that we present show evidence of the replacement of high paying jobs with those offering lower or even minimum wage incomes. In more recent years the issue of "employer-sponsored healthcare" is identified as a factor in the stagnation or deterioration of take home pay as pictured below.
It's this environment that sees people mover further out on the risk curve creating further suppression of value. With the strength in the AUD of late, media talk has focused on further cutting moves ahead and it is exactly this type of environment that makes alternative asset allocation even more attractive. In closing, we refer to the final point in our article of the 8th where Jim Rickards discusses precious metals in low yield environments.
And as the AUD strengthens, those who hold physical gold get less for their precious; hats off to those who can buy physical metal when spot in USD is low and the Australian Dollar is high.
Gold Still Pays the Rent
Every once in a while a story is released that reinforces not only the long history that gold has played as a monetary asset but additionally supports the idea that this history is not just a thing of the past. Today we present such a story from a court in Ohio where Federal judge George Smith has ruled in support of an issue relating to what is known as a "gold-clause" in a commercial property lease over the Commerce Building in downtown Columbus which dates back almost a century.
The gold-clause was a common inclusion in property lease documentation at the start of the 20th century and allowed owners to link rental rates to the price of gold at lease renewal in an attempt to combat inflation's destructive impact on income in a similar manner to CPI indexing today. An ambiguity arose after gold-clause usage was prohibited in accordance with the ban on private gold ownership from the mid-1930s to the mid-1970s. In 1977, gold clause usage was again established as legal and drew debate over contracts that had been entered into prior to the prohibition.
In a stark reminder of fiat currency's inept wealth preservation properties, the consequence of this ruling could see yearly rent for the commercial building in question jump from $6,000 to over $300,000 in accordance with the fact that gold at the time the 1919 contract was signed was just under $21 per ounce. With gold as the yard-stick, it is easy to see the destructive force of inflation over a relatively short period of time.
In recent decades there have been similar rulings within the U.S. in favour of upholding gold-clause components of property lease agreements. These include a 1990 appeals court case in Washington State, a 1999 case in Indiana where a company was ordered to pay around 8,000 ounces of gold in back-rent for land occupied by its commercial building and a 2008 case where an Ohio appeals court upheld a 1912 contract clause covering a building that was being rented for $35,000 at the time. In the latter case, upholding the gold indexing clause had the potential impact of applying an effective rent of $1.5M. History has seen that it does not always require a court to see such behaviour. In a broader observation, 2011 saw Donald Trump accept $200,000 worth of gold bullion in payment of a 10 year commercial lease deposit at 40 Wall Street in New York illustrating that gold still literally pays the rent.
Qianhai Based Physical Trading Hub Plans Revealed
It has only been seven days since we reported on the opening of the SGE yuan-based fix and already new plans are emanating from China. In another piece of the puzzle described by William Engdhal's predictions, this week the South China Morning Post revealed that a partnership has been formed between Hong Kong's sole exchange, the Chinese Gold and Silver Exchange (CGSE) and one of the world's largest banks, the Industrial and Commercial Bank of China (ICBC). The intention is to provide a range of gold trading, settlement and storage services based in Qianhai. The involvement of the ICBC is largely for the purpose of providing storage utilising their existing bonded warehouse in the Qianhai free trade zone and for their import and export capabilities which benefit Hong Kong traders and manufacturers. This is however a temporary measure with further plans for a new HK$1 billion establishment that will include permanent vaulting, a trading floor and supporting administrative infrastructure which is expected to take two years to complete and rival any gold services hub in the world.
Haywood Cheung, the honorary permanent president of the CGSE was quoted as saying that the "ICBC is the largest of 15 gold importers authorised in mainland China. It is the largest bank in the mainland and has an international branch network which could provide bank clearing and settlement services".
To understand the benefits of this new arrangement one must look at some of the shortfalls of the current system. Take for example gold used in the production of jewellery which must be transported to Shenzhen based factories from Hong Kong and Shanghai by the manufacturers; a process that can be time consuming. China has a staggering 3,000 manufacturers of this type and physical availability of gold in Shenzhen is critical as 70% of these manufacturers utilise factories based there. The new system will allow gold traded in Hong Kong, Shanghai and Qianhai to be available at the Qianhai bonded warehouse for settlement and given Qianhai's proximity to Shenzhen, physical availability of traded gold for use in production is much improved.
Although the official reason for the partnership is to benefit Hong Kong, other benefits are obvious. The option will be available for large bullion dealers to ship their holdings from Shanghai to Qianhai for example; an option also available to wealthy Chinese who may not feel comfortable storing large physical positions in Shanghai. Furthermore, as the ICBC's Macau branch supplies gold import and export services, the new partnership would connect Hong Kong, Qianhai and Shenzhen as described through Macau as a global gold trading hub.
If there was any doubt as to the importance of physical gold in global affairs, the news coming out of China over the past weeks has surely dispelled it. With the resources being devoted to facilitating physical trade and delivery of gold in the East, the importance of physical metal in any portfolio could not more stark.
Aussie Inflation and the Game of CapitalPreservation
The chance of an RBA rate cut roughly tripled yesterday after Australian CPI fell 0.2% when the average forecast was for a 0.2% increase. This represents the first decline since the last quarter of 2008 and is yet another "this hasn't happened since the GFC" type observation that we often point out. In response, the AUD dropped over 1.2% in its biggest fall in two months.
With the prospect of lower rates on the horizon, the arduous nature of investing is becoming more of a topical issue. A good case in point are the comments from Singapore based Kay Van-Petersen, global macro-economic strategist for Saxo, who was interviewed by ABC's Ticky Fullerton on The Business and later covered by outlets such as the AFR.
Mr. Van-Petersen sees the near term investment outlook as very confusing and risky and cites the "unprecedented" nature of central bank intervention with particular reference to the BoJ. Indeed our unexpected inflation drop yesterday is a good example of such risk and confusion and Mr. Van-Pertersen doesn't see this environment accurately reflected by the VIX or broader markets. Consequently, he is recommending adoption of some downside protection stating that "no one knows how this ends, but one thing is for sure now: it's now more a game of capital preservation".
The motivation behind this recommendation is based upon big picture issues whereby "we still have a lot of debt from the GFC, emerging markets are still not fixed and commodities are still not fixed", further emphasising the importance of capital preservation as a focus rather than the relentless pursuit of growth in an environment that isn't supportive of it.
When it comes to capital preservation, Mr. Van-Petersen stated simply that "it has to be gold and silver". In elaborating remarks, Mr. Van-Petersen said that precious metals look very attractive from a macro perspective and predicted gold to hit $US1,500 in six to 18 months. In support of this positive prediction, we leave you with an interesting chart overlaying the 1970 and 2000 gold bull market behaviours. It would be hard to argue with the correlation to date and bullion holders have prosperous times ahead if this trend continues.
^^^Only if it fails to replicate. 7 - 8 years of time will tell.
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