"The relocation of Germany's gold reserves is currently in full swing. In 2014, the Bundesbank transferred 120 tonnes of gold to Frankfurt am Main from storage locations abroad: 35 tonnes from Paris and 85 tonnes from New York. A new film explains how Germany's gold reserves came into being and the reasons behind the relocation."
This "full swing" relocation is taking almost forever. China buys more gold in a couple of months, than Germany managed to rescue from New York in a whole year!
"Koos Jansen reports about the continued very strong demand for Gold in China. Monday will be very interesting day for Gold and you can pick up the front seats on Sunday evening in Europe. Huge miss on Jobs Report and Record Short position on Gold can produce very exciting fireworks. Fundamental picture in Gold supply and Demand is confirmed by record accumulation in China and now we have the technical opportunity for Gold to move decisively higher. Read more."
Koos Jansen reports about the continued very strong demand for Gold in China. Monday will be very interesting day for Gold and you can pick up the front seats on Sunday evening in Europe. Huge miss on Jobs Report and Record Short position on Gold can produce very exciting fireworks. Fundamental picture in Gold supply and Demand is confirmed by record accumulation in China and now we have the technical opportunity for Gold to move decisively higher.
After today's huge miss on The Jobs Report the parabolic move in US Dollar is officially over. With crashing dollar commodities should finally find the bottom. Gold is already printing very strong Double Bottom Reversal, confirming what we had discussed before. Move above $1,310 will bring all the fun back now. Good Friday to everybody who is not short Gold or Euro … Monday will be interesting with Record Short position in Gold.
"This is what is called the parabolic move in US Dollar. It has "coincided" with the collapse in Oil and other commodities. You can appreciate the magnitude of this move and the total devastation is has caused in the commodity markets. Is it over now? Everybody is still bullish on dollar, but FED has already scaled back expectations on the rate hike. Immediately we had the dollar flash crash, which is better seen on the daily chart below. Strong dollar is not very good for the recovering US economy, actually FED is in the corner of 18 Trillion debt, All-Time-High markets and the brave idea to hike the rates. Half of the traders maybe have never even seen rising rates in their lives before. What will happen with the market on fire once the oxygen will be going out? I would say that this "removal of patient does not mean that we are impatient" will lead to the very gradual couple of hikes the most. Once the market realise it, this parabolic move will end in the crash. The higher it goes the harder it will go down. When will it happen? I guess that nobody knows, but at least we have the hesitation now, which could be enough for the margin calls on this the most crowded trade after another 5% move down. Read more."
"Nova Gold has published its new presentation for PDAC 2015. Now you can find more information about Alaska as mining jurisdiction and Donlin Gold type of Gold deposit. TNR Gold owns 100% of Shotgun Gold project in Alaska, which has very similar geology to Donlin Gold, according to Greg Johnson - one of the founders of Nova Gold. Read more."
Withdrawals from the Shanghai Gold exchange (SGE), which equal Chinese wholesale gold demand, in week 12 (March 23 – 27) accounted for 46 tonnes, down 14.5 % w/w. Year to date total withdrawals have reached 610 tonnes, up 9 % from 2014, up 33 % from 2013.
Blue (本周交割量) is weekly gold withdrawn from the vaults in Kg, green (累计交割量) is the total YTD.
Ever wondered why Chinese demand doesn’t move the price of gold substantially higher? A much perceived analysis in the gold space is that (central) banks suppress the price of gold. While it certainly is in their interest to control the price of gold and there are many clues they do intervene, in this post I would like to approach this subject from scratch, from what I believe is basic economics, hopefully sparking debate.
Thoughts On The Price Of Gold
In any market where goods are traded there is supply and demand. For this post we’ll look at the gold market to examine the relationship between both; there can be people offering gold for sale (supply), meeting people who are willing to buy gold (demand). If a transaction is agreed at a certain price the amount of gold sold (supply) is always equal to the amount of gold bought (demand), it’s impossible supply and demand are not equal by any measure – or one would use different metrics to measure either one.
When demand increases relative to supply (economic agents are willing to buy more gold at prevailing prices), the strength of demand will transcend the strength of supply. As a result the price of gold will rise until a new market equilibrium is found. The volume of gold bought in itself does not indicate the price will rise, for if an immense flood of supply would be unleashed that is being met by equally strong demand the price of gold will not change. No matter how much gold is sold, it won’t tell us anything about the strength of demand relative to supply, only the price can tell. The price unveils the forces of supply relative to demand.
In the graph below we can see how an increment in demand relative to supply can move the price.
P – price
Q – quantity of good
S – supply
D – demand
In this example demand increases from Q1 to Q2, while supply remains constant; the price moves up from P1 to P2 for a new market equilibrium.
Technically, if India buys (or imports) 4,000 tonnes a year this doesn’t necessarily mean demand is strong, nor does it mean the price will go up or would have gone up in the process. If supply to India was stronger than demand from India, the price can go down while thousands of tonnes cross the globe (given India has no domestic mine production).
The gold market is quite unique and cannot be compared to other markets, like the potato market. The primary difference lays in the fact that gold can’t be consumed, as it doesn’t corrode all gold is immortal and can be recycled indefinitely. We humans can lose gold, but it can’t vanish. Therefor, all gold mined is added to the total above ground stock. In contrast, potatoes have a limited life span of itself and when eaten are digested. Yearly supply and demand of potatoes is determined by what is produced versus human trends that set our need for consumption.
Gold supply, on the other hand, is less determined by mining output, as this is effectively only a small percentage of the total above ground stock. It’s estimated yearly mining output is 1.6 % of the total above ground stock. I doubt whether this number is accurate, though, for this post the accuracy of this percentage is not important. In theory the total above ground stock is potential supply at the right price. The willingness of owners of gold to sell largely depends on the “category of existence of the gold”. Yearly mining output is likely to be sold no matter what the price is; bullion can be sensitive to price movements to be sold; gold from redundant cellphones is stripped and sold before the chips become actual waste, ancient gold artifacts are likely never to be sold; etc. Furthermore, no one is ever forced to sell – though exceptions by government confiscation have occurred in history. In short, the volume of yearly supply is hard to predict, but for sure it’s more than mining output.
Additionally, many other aspects determine the volume of supply and demand (the price). To name a few: technical analysis, monetary circumstances, inflation, the strength of alternate currencies, industrial applications and supply and demand data (for example, if China buys 2,000 tonnes of gold per annum, but analysts worldwide state – for whatever reason – the Chinese buy 1,000 tonnes, this leads to distortion of sentiment as the market will react on false assumptions).
Two other major components that influence the price are gold derivatives – futures, options, forwards and unallocated gold – and the London Gold Fix. Derivatives are leveraged a multitude of physical supply and demand volumes and therefor have an equally greater impact on the price and sentiment, especially in the near term. In derivative markets the price of gold can be easily moved up or down to the likes of big traders.
Terry Smeeton of the Bank Of England stated at the Australian Gold Conference in March of 1994 (from Frank Veneroso’s Gold Book 1998):
…at least 20 central banks are engaged in swaps, options and futures. This is double the number of banks who were regular players a few years ago.
CME Group, the world’s biggest derivatives marketplace located in the US, launched a program in July 2013 to incentivize central banks outside the US to trade in a number of products, a few of which are Metals Futures Contracts traded on CME Globex, by offering them a special discount (click here to read the details from CME Group). I would be surprised if central banks don’t trade gold futures at this moment.
The London Gold Fix is set twice a day in the London gold market through an electronic, auction-based platform, at which currently seven bullion banks participate. The auction has been under scrutiny as its opaque nature is vulnerable for manipulation.
It should be noted that the volume of gold traded in the London OTC gold market is unknown, but estimated to be a few times the size of the futures market in New York (the COMEX).
Derivatives can be used by bullion banks and central banks to influence the price, subsequently influencing technical analysis and sentiment on which the rest of the market reacts. People can be scared to sell, however, when the price in the paper markets (derivatives) moves up or down, no physical owner of gold is forced to sell at the paper prices. If the paper price goes down and physical demand increases this has to be met by equal physical supply, that is, if the price for physical gold follows the paper price. If the physical price disconnects from the paper price, premiums will appear at one location.
Reality Check
In 2013 the price of gold made a spectacular nosedive, which was followed by an even more impressive exodus of physical gold from Western vaults to China. The UK net exported 1,424 tonnes of bullion, China net imported 1,507 tonnes.
According to my textbooks the drop in price and the physical moving east was a stronger force of supply than demand. We could quantify Chinese demand as “strong”, but supply was stronger. From the World Gold Council, Gold Demand Trends Q2 2014:
The rapid 25% drop in the gold price during the April-June period of 2013 sparked a leap in gold demand that we have heard described as a ‘once in a generation’ event.
My point being, if central banks suppress the price of gold, this can only be done if physical gold is supplied to the market. So the question is, who is currently selling gold to China? (Or in the free market since the London Gold Pool collapsed in 1968.)
China is the largest miner of gold at 450 tonnes a year, though to satisfy domestic demand additional gold is imported; in 2013 Chinese net import exploded to 1,507 tonnes, my estimate for 2014 is at least 1,250 tonnes and year to date China has imported well over 400 tonnes. Is this sold by institutional investors in London (the LBMA system) or by central banks? Eventually time will tell. In the meantime I will continue to research how much gold is flowing to Asia and if there is any gold left in Fort Knox (read this and this post for my Fort Knox research).
We are making the baby steps towards normal market in gold. China's involvement and physical market demand vs paper gold can bring us more transparent pricing discovery. Koos Jansen reports his latest findings.
"So far Gold was cooperating with the sliding dollar and has shown the strong reversal with 3 days up forming potentially the second Low, which we have discussed above. This maniacally depressive state of the gold market can turn on a dime like we have seen in January. Move above $1,200 will bring the attention back, but solid breakout of the formation above $1,320 is needed to put this bull back on track now. News from China will be driving this market further. Read more."
On March 24, 2015, Euronews broadcasted Business Middle East, in which Nour Al Hammoury from ADS securities, stated that if Chinese banks would join the new gold fix it would be less sensitive for manipulation. Having Chinese banks participate in the fix, would indeed be very welcome.
Global gold price setting arrives in the 21st century
…Better late than never, the gold market has entered the digital era, joining other precious metals in the 21st century. Criticism of an archaic global price fixing system intensified with some claiming it lacked credibility. Following numerous fines on international banks due to scandals of price manipulation, gold traders may now have more peace of mind with a new electronic system to manage price setting.
…Since 1919, the gold price setting process was limited to four international banks “Barclays, HSBC, Société Générale and Scotiabank”. In the original process, inter-bank representatives would set up a secure conference call each day in order to determine the price. UBS Swiss and Goldman Sachs have now joined this list of bank representatives. The new digital system follows the same process:
Each round is 45 seconds long. Bids and offers are displayed and updated in real-time. The difference is automatically calculated and if it stays within 20,000 troy ounces, the price is fixed. In this new system, orders are separated between clients and the banks’ trading desks.
Daleen Hassan
“Is the new electronic system able to make the daily price benchmark less vulnerable to manipulation?”
Nour Al Hammoury
“We hope. Major global banks have faced many scandals related to commodities and not only gold. The banks who were predicting the price of gold to reach above 2,000 USD/oz are the same banks who are predicting now that the price will fall below 1,000 USD/oz. Despite that, the major banks remain the biggest gold buyers, according to the latest report from the world gold council. In the meantime, the new pricing might give the market some confidence, especially if its transparent and this is what we will be watching out for the coming period.”
Daleen Hassan
“According to projections, China could play a key role in the new pricing system. How so?”
Nour Al Hammoury
“From the start of the financial crisis until today, China has been buying a huge amount of gold, making it one of the biggest consumer and buyers of gold in the past few months. Indeed, if China joins the new pricing plan, there’ll be less manipulation; the more they increase the participants the less chance of manipulation as we’ve seen before, when price setting was done by a few banks.”
Bloomberg reports about the record rising demand for Gold from Asia. This doubling in gold demand will be met with reduced supply after the expected Peak Gold production in 2015.
"Gold production is expected to peak in 2015. As the next chart suggests, the discovery cycle peaked some 20 years ago, and that will only reflect as of this year in the production volumes. Combine this with the falling gold prices (currently right below the average cost of production), and the result is a series of liquidations of miners and mining projects which would lead to an even more drastic short-term decrease of gold output."
Bloomberg reports about the record rising demand for Gold from Asia. This doubling in gold demand will be met with reduced supply after the expected Peak Gold production in 2015.
"Gold production is expected to peak in 2015. As the next chart suggests, the discovery cycle peaked some 20 years ago, and that will only reflect as of this year in the production volumes. Combine this with the falling gold prices (currently right below the average cost of production), and the result is a series of liquidations of miners and mining projects which would lead to an even more drastic short-term decrease of gold output."
"Bloomberg) -- Gold demand in Asia is set to double by 2030 and boost prices to a record as investment and jewelry purchases climb, according to Australia & New Zealand Banking Group Ltd.
Demand from retail and institutional investors will jump to almost 5,000 metric tons a year by 2030 from 2,500 tons, analysts including Warren Hogan and Victor Thianpiriya said in a report. Prices may rise to more than $2,000 an ounce by 2025 and to $2,400 by 2030, they said. The bank says it supplied more than 20 percent of China’s gold imports last year. Read more on Bloomberg."
"Gold production is expected to peak in 2015. As the next chart suggests, the discovery cycle peaked some 20 years ago, and that will only reflect as of this year in the production volumes. Combine this with the falling gold prices (currently right below the average cost of production), and the result is a series of liquidations of miners and mining projects which would lead to an even more drastic short-term decrease of gold output."
Blue (本周交割量) is weekly gold withdrawn from the vaults in Kg, green (累计交割量) is the total YTD.
Since the inception of the Shanghai International Gold Exchange (SGEI) there was a possibility the significance of SGE withdrawals, as published in the Chinese weekly reports, became distorted by activity on the SGEI – in the Free Trade Zone. That’s why I corrected SGE withdrawals by trading volume from the SGEI, just to be on the safe side of measuring Chinese wholesale demand.
However, we just learned that what was traded and withdrawn on the SGEI in 2014 was primarily imported into the Chinese domestic gold market. So, for the time being we can assume SGE withdrawals are still an accurate proxy for Chinese wholesale demand – a metric described in this post.
I like to note SGEI trading volume has jumped recently, reaching a record in week 9 at 34 tonnes (counted unilaterally). Perhaps this is exchange is slowly coming to life.
Only the 1kg physical contract iAu99.99 is traded on the International Board (SGEI), there seems to be nil interest in the 100 gram physical contract iAu100 and in the 12.5kg (London Good Delivery bars) contract iAu995.
Overall SGE volume is somewhat dropping as the spot deferred contracts Au(T+N1) and Au(T+N2) are falling back after a resurrection that started late November 2014.
On the Shanghai Futures Exchange (SHFE) we can see the same trend; slightly dropping volumes. Nothing “worth mentioning”.
"Even if he doesn’t know when exactly it will happen, Gold Stock Analysts editor John Doody says gold is headed higher. Doody says 25% of mine production comes from Russia and China, and that portion doesn’t enter the market. “It’s like a big pimple that is coming to a head and I don’t know exactly when that’s going to happen but it’s going to explode,” he says. “I think the pimple is going to burst this year and where the prices go, who knows? But it’s going to go higher.” Doody says the much anticipated Federal Reserve rate hikes will just be a chance for the central bank to make noise in the market. “They will take out their gun (and) shoot a bullet into the ground so everyone hears the sound of an interest rate increase, might be a quarter of a percent, if it was any more than that I would take the gun and shoot myself,” he says. “I think they will do a token increase and that’s it.” Looking at currencies, Doody says the weaker peripheral currencies compared to the U.S. dollar are helping miners in foreign jurisdictions. “When they translate their cash costs of production back into U.S. dollars, they’re falling. So the miners are going to earn more money this year than last year,” he says."
We have another positive release from NOVAGOLD for Gold mining in Alaska. Now the Gold price above $1,300 should bring interest back to this safe mining jurisdiction and TNR Gold Shotgun Gold project.
"I am following the brilliant work from GATA and they have compiled whole set of documents confirming the control and manipulation over the Gold market by Central Banks - the rhetorical question is why the mass media has never really dug into those documents. Web has made more and more information available to us this days. LIBOR, FOREX, Energy, Mortgages - all these rigging the market scandals were considered conspiracy theories one day. The ugly manipulation in Gold and Silver markets by Central Banks is making its way into the light of the day. Now Koos Jansen with his work provides us with the updates for the real demand for physical Gold in China and more and more information is available from Russia, Turkey and other countries - this is the very important indicator of the real risks in the financial system. What China knows about Gold the others don't? Read more."
"We have a nice short squeeze today in the gold market and Gold is marching back towards $1,300 threshold after being smashed this week. U.S. GDP for Q4 came below expectations at 2.6% and there are more and more talks about the strong dollar killing export and corporate earnings. The upbeat on economy FED can face a very different reality after the Oil crash will make its way throughout the system with massive layoffs, cuts on CAPEX and even ... stop of shares buybacks.
Meanwhile Koos Jansen reports that in China people are buying Gold in record amounts, every dip in price is being bought literally and first 3 weeks in 2015 have seen 202 t of Gold withdrawn from SGE.
Miners start to move up again and NOVAGOLD is quite on fire after its positive news from Alaska, hopefully our Shotgun Project will get the proper attention with gold breaking above $1,300. Read more."
"Kitco News speaks with US Global’s Frank Holmes to see how he sees gold set up following Sunday’s Super Bowl XLIX. Holmes says when looking at gold as a currency, it has performed “exceptionally well” however, he does think gold stocks are in need of a reversal. “Statistically speaking, gold stocks are so depressed,” he says. “Falling energy prices and weak country currencies…where gold is being produced is a huge windfall for many of these gold mining companies,” he adds. Holmes says that several factors are supporting gold prices right now including its safe haven appeal, but also negative real interest rates and Europe. “[N]egative real interest rates economically create uncertainty and the geopolitics of Europe creates another uncertainty, so gold definitely becomes the reasonable place to put capital.” Tune in now to hear his touchdown Super Bowl pass of the week. Kitco News, February 2, 2014."
"We have a nice short squeeze today in the gold market and Gold is marching back towards $1,300 threshold after being smashed this week. U.S. GDP for Q4 came below expectations at 2.6% and there are more and more talks about the strong dollar killing export and corporate earnings. The upbeat on economy FED can face a very different reality after the Oil crash will make its way throughout the system with massive layoffs, cuts on CAPEX and even ... stop of shares buybacks.
Meanwhile Koos Jansen reports that in China people are buying Gold in record amounts, every dip in price is being bought literally and first 3 weeks in 2015 have seen 202 t of Gold withdrawn from SGE.
Miners start to move up again and NOVAGOLD is quite on fire after its positive news from Alaska, hopefully our Shotgun Project will get the proper attention with gold breaking above $1,300."
We have another positive release from NOVAGOLD for Gold mining in Alaska. Now the Gold price above $1,300 should bring interest back to this safe mining jurisdiction and TNR Gold Shotgun Gold project.
