16 November 2014

135 years of US Fed Earmarked Gold

Inspired by this post by Koos Jansen, which included a chart back to 1999 of earmarked (custodial) gold held by the US Federal Reserve Bank for other central banks, Nick Laird at Sharelynx went sleuthing for more data and was able to pull together from multiple sources data going back to just before 1880.

The resulting 135+ year chart of the US Fed's custodial gold, as well as the US' gold reserves, provides a fascinating insight into gold's monetary role. I have an article in the latest journal of the Gold Standard Institute featuring the chart and providing some commentary.

One of the more interesting periods is 1950 to 1965, during the Bretton Woods. While the total amount of gold held by the Fed over these 15 years was relatively stable at 25,000 tonnes, in 1950 only 15% of the gold stored in the Fed was owned by foreign central banks but by the end of 1965, 48% of the gold was owned by foreigners. Any guesses why?

Also of interest is the spate of recent withdrawals, which Koos Jansen has speculated are repatriations by Germany. Since June 2013, 75 tonnes has been withdrawn and if all are related to Germany, then they are on track with their plans to transfer 150 tonnes from New York to Frankfurt by 2015 and another 150 tonnes by 2020.

You can find my article the Gold Standard Institute's November journal here.

13 November 2014

New blog by an ex-RBA gold sale/leasing analyst

Steve Ellis, a fund manager for Baker Steel Capital Managers, just let me know he has started a new blog Gold Market Macro which will focus on "gold lease rates, physical gold premiums and the phenomenon of backwardation in gold".

Normally another blogger on gold would be a ho hum event, but given Steve "worked for the Reserve Bank of Australia (RBA) as a senior Bank Analyst and studied the sale and leasing of RBA’s gold reserves" from 1996 to 1998, I think this blog is a must add to your watch list. While I doubt Steve will be able to give any direct comment on the RBA's sale of two thirds of Australia's gold reserves, which happened during his time there (given central bank employment confidentiality agreements are probably signed in blood or something) it will no doubt give him a unique perspective on the gold market and you never know, he might inadvertently let something slip.

11 November 2014

If gold in a forest is withdrawn by a wholesaler and no one is around to buy it, does it make the price move?

One project I’m currently working on at the Perth Mint is the replacement of our website. This involves topics like SEO, “authority”, page rank etc and how to achieve such. It’s hard not to get cynical about it, particularly when you come across tips for “Ultimate Headlines” like:
  • Maximum character count is 65 before being cut off in search results
  • Numbers + Adjective + Target Keyword + Rationale + Promise; Ex. 10 Simple Steps You Can Take Today That Will Make You Happier
  • [Adjective] & [Adjective] [SEO Keyword Phrase] That Will [Highly Desirable Promise of Results]; Ex. New and Useful Content Marketing Trends That Will Drive You More Traffic
I probably should have chosen “The Shocking Truth About Gold Demand That Will Explain Gold’s Price Action” for the title of this blog post, but I decided to go with something cryptic (based off If A Tree Falls) that ignores the rules as part of my ongoing policy on this blog of writing stuff that most people don’t want to read.
 
As has happened every time gold has experienced a large fall in the past, most of the gold blogosphere was out with their reassuring talk because that is what sells – confirmation you made the right decision. Central to a lot of that was the idea that “real” demand was shockingly high. Before I address that, some off-topic ramblings to get out of the way:
 
Ramble #1: To answer my own question, no, Comex kilobar withdrawals don’t “works as an indicator of a bottom” in the medium term :P Whilst I did note a lack of “any positive narrative developing around gold that would drive big fund money” and that “the strong dollar story is the biggest risk to gold breaking $1180” the fact is I didn’t call the drop, primarily because Perth Mint was still seeing good kilobar demand and premiums and I thought that the Chinese would be enough to support the market (kilobar premiums have increased on this drop BTW, so recent Chinese demand stories are not just permabull BS). It seems my advice on the 18th of September that “you might want to trade against” my call, was the right trade. Anyway, I’ll continue on with my “predictions” not because I’m trying to be a guru, but to provide an alternative view using data points (eg kilobar premiums, market narratives) that others don’t which you can factor into your own decision making process.
 
Ramble #2: If you’re not seeking reassurance, which probably means you bought gold for insurance and it is only has a modest weighting in your portfolio, these posts are worth reading for an alternative to the current permabull memes:
Ramble #3: Steven Saville of The Speculative Investor has started a blog which includes debunking like this and this. Added to my RSS feed list and recommend including in you reading list.
 
Ramble Ends
 
One of the most enduring permabull memes is the physical-paper disconnect. I’d suggest what the permabulls are now experiencing with their declining sales/subscriptions and need to turn off comments on their blogs/forums is a permabull-price disconnect. The gold price has disconnected from their constant stories that “demand” for gold is strong. The readers are asking questions and thinking heretical thoughts.
 
The problem stems from a simplistic idea of what demand is, as well as selective focus on positive demand reports and ignoring negative reports. The game of internet marketing requires dumbing issues down into 65 character headline stories easily understood by lay readers. Taking a nuanced approach by delving into the detail is counterproductive because it introduces ambiguity and requires the reader to think, hard, when what they want is comforting reassurance. It just leads down a path with lots of unanswerable questions and denies the writer the ability to craft dramatic self-assured headlines.
 
As an example, consider the difference between wholesale market withdrawals versus end consumer demand. The point of the headline to this post is that withdrawals by a wholesale participant (eg jeweller) may or may not be reflective of demand that will actually affect the price. If the purchase by the wholesale user is offsetting sales to consumers, then the wholesale movements are reflective of price-affecting demand. However, if the wholesale user is stocking (or destocking), then they would hedge that acquisition and the impact on the price would be zero. How much of the Comex or SGE movements are price responsive or price neutral? We don’t know for sure.
 
For an example of this issue, consider the World Gold Council’s quarterly Gold Demand Trends report. This has two jewellery demand figures – fabrication and consumption (which “is equal to fabrication plus/minus jewellery imports/exports plus/minus stocking/de-stocking”). It is worth also looking at page 16 of the 2014 Q2 report where they discuss the difficulties of estimating supply and demand figures, highlighting the difference in Chinese jewellery fabrication demand between CPM Group, Metals Focus and GFMS.
 
Then you have the issue of manipulation, where someone could move stock between visible exchanges/warehouses and OTC opaque vaults to give the impression of strong demand or excess supply. Then add in the use of gold in speculative cross-border arbitrage or commodity financing deals and we have some uncertainty as to what "real" demand is.
 
The above is the reason I don’t look at total Comex movements and instead focus on kilobar movements only, as it is a highly specific product in demand in a specific region. Even so, it is not an entirely reliable metric, although I suppose I should follow the fashion of the day and instead of blaming myself, blame the bullion banks who found out I had shone a light on their otherwise secretive activities and when their dis-info agents failed to convince people that my kilobar theory was wrong and the suspiciously rounded figures were just fraudulent, they purposefully moved kilobars out of Comex into their unseen OTC vaults to discredit me and stop people from paying attention to the numbers.
 
Finally, even if we could get accurate figures, as Robert Blumen explains in this excellent article, quantities demanded (and therefore supplied) have “no causal connection with the gold price”. The problem with Robert’s analysis for our permabull writers is that his true drivers of the gold price - supply and demand schedules – “are not scalar quantities and cannot be measured; they can only be observed indirectly through the gold price itself”. Ouch, that won’t do, the price fell and they need analysis that proves the falling gold price was “wrong”.
 
I would take issue with Robert’s statement that investor schedules can’t be measured – on exchange traded products the depth of bids and offers, and how they change over time, give some limited insight into these preferences. Unfortunately such data in the gold market is limited, but highly important. Consider if you heard that a quantity of one home was bought in your street for $100,000 during the last month. That is useful, but it would be more useful to know that only one home was up for auction during that period and there were five people bidding for it. However, your view of that one $100,000 sale would change if you were told instead that three homes were auctioned and there were only one or two bidders per home.
 
Robert’s article also addresses the flow/stock issue, which I covered in this post noting that “what drives the gold price I would therefore argue, is not so much demand, but to what extent existing holders of the 170,000t will withhold it from the market”. Even so, the price as set by the marginal buyer and marginal seller affect, in sort of feedback loop, the behaviour of the existing holders. For example, everyone in the street sees that one $100,000 sale and thinks their home is worth around $100,000, but should a fair proportion of them attempt to sell their homes, the chance of them all getting $100,000 will be slim and the price would fall. That might not happen if they had information that the number of homes auctioned was three and the number of bidders was poor.
 
I also think that while Robert is logically correct that quantities have no causal connection, he is underplaying the fact that people believe they do, or probably more accurately, people believe everyone else believes they do. Robert also notes that “trading continues because people are always changing their minds about what they want to own” but his article doesn’t consider what influences people to change their minds.
 
The conclusion is that the relationship between price and demand is complex and ambiguous, subject to feedback loops and human interpretation. That is why I’ve taken to Ben Hunt’s game/narrative theory approach.
 
So where are we now? While we have seen reports of retail demand surges, mostly silver, and the Perth Mint’s kilobars premiums have moved up from previous strong levels, the fact is that Western professional market selling has overwhelmed China and other sources of demand. Perth Mint has seen a little selling from Depository clients, but nothing of note but not any surge in buying. We are not getting the same retail reaction we did on the April 2013 drop. From a technical point of view I get much confidence in drawing lines from chart levels over 5 years old – investor circumstances/perceptions have changed. Until we see Western money move back into gold we won’t get any sustained and meaningful price move. On that front the pro market narrative is all negative:
 
Bloomberg: “There’s just not one typical investment idea that’s supportive to gold right now,” George Zivic, a New York-based portfolio manager at Oppenheimer Funds Inc., which oversees $245 billion, said by phone Nov. 5. “With the potential of rates increasing, dollar appreciation, it becomes synthetically expensive to hold gold as some sort of a portfolio hedge. And then you have the reality of no real concerns of inflation.”
 
Mineweb: Half of the 27 respondents surveyed on Wednesday and Thursday predicted gold prices will breach a critical support at $1,100 per ounce by the end of this year. ... "U.S. dollar strength should impact gold on a short-term basis," said John Meyer, analyst at brokerage SP Angel. ... "The drivers of a sustained rally in gold are ephemeral at best," said Tai Wong, director, metals trading at BMO Capital Markets in New York. ... "The mood of investors could not be more bearish for precious metals," said Thorsten Proettel, commodity analyst at LBBW.
 
I quote these guys not because I think they know what they are talking about, but because this is what similar pro investors are reading and what they think everyone else thinks about gold. On that basis the outlook is poor and in uncharted territory. Sorry. We’ll just have to sit and watch how this plays out over the next few months.

22 October 2014

Comex warehouse kilobar movements

As promised in my Monday post, below is an updated chart of kilobar movements out of Comex warehouses.


You can see the clustering of withdrawals in advance of gold bottoming, a total so far of 24 tonnes. Will be interesting to see if this works as an indicator of a bottom the next time we see a bunch of withdrawals.

20 October 2014

Gold market update

At the launch of our Perth Mint Certificate Program Approved Dealer GoldSilver Central today the journalists were interested in the views of Raphael Scherer of Degussa and myself on the gold market.

I made a bottom/buy call on 18 September and the price subsequently held above $1180 and has strengthened since then. It is worth noting that not long ago the narrative around gold was quite negative, even in respect of China demand (see here for an example). In that article a dealer was quoted as saying that Chinese buyers "could come back to the market if prices fall below $1,200 an ounce." This has proven to be the case, as the Perth Mint saw kilobar premiums rise once the price breached $1200 on the downside (see here) as interest returned and volumes were up.

I would note that since my September 18th post there has been many more tonnes of kilobars withdrawn out of Comex warehouses (don't have the figures or charts to hand here in Singapore, but will update when I get back into the office). However, while the $1200 level has proved to draw out interest and gives me confidence that the $1180 level is a firm support point, I would have to agree with this comment that "Asian physical demand doesn’t look strong enough to act as a major catalyst to drive the gold prices higher" at least at this time, as the Perth Mint did see premiums reduce a bit as the price moved up above $1220.

Indian demand is still being throttled, as we saw with calls to retighten import rules in response to the surge in gold imports in September. Smuggling is making up some of the shortfall, but increased policing is making an impact, with courier fees increasing from $245 to $470 a kilo (approx 1.2% "risk premium") as this Reuters article explains. FYI, I have heard reports that some importers are getting around the 80:20 rule by making cheap value added product and then after exporting it, just melting it down as this gives them the right to then import 80% (part of which is the melted gold). This "arbitrage" is unlikely to last, given the Indian government's anti-gold stance and I'm sure we will see a crackdown on this in the future. So I don't think we can rely on India to save to day, so to speak.

On the positive side, I have seen more articles discussing the fact that current prices are around mine cost. This from Saxobank's CIO "there is growing belief that the “narrative of the central banks” is failing" - it seems Ben Hunt's work is getting more exposure - is positive as I think mainstream investors are not buying gold because they believe the government can fix the economy's problems. If that narrative is challenged, then we will see a renewed interest in gold. While Ben Hunt feels that we are "on the precipice of that breakdown in confidence. A cold wind of change is starting to blow" I think such a change in the belief in the power of central bankers will take some time to unwind, as Ben himself says, noting that the "collective solipsism of modern markets is a much bigger game still, and will require a much larger shock and external social structure to unwind the Common Knowledge structure at the heart of all this".

In summary I think we have a formed a firm bottom but gold needs another catalyst to drive it higher and is mostly relying on US dollar/economic weakness at this time. Maybe it is just a case of gold needing to consolidate at these levels: the longer it holds above $1180 the more the bearish calls for $1050 or whatever begin to lose their credibility and then we have the "space" for a more positive narrative about higher gold prices to form.

17 October 2014

Singapore Perth Mint Certificate Launch

I will be in Singapore this Monday 20th for the launch by the newly appointed Perth Mint Certificate Program Approved Dealer GoldSilver Central of Perth Mint Certificates in Singapore. The launch is being held at Chevron House, see here for details, and the official stuff should be over by 2pm after which I'll hang around for a chat. So if you are in Singapore and I look forward to catching up with you.

26 September 2014

Gold bottom update

Following up on my Sep 18 post gold has bounced a couple of times off sub $1210 level which is encouraging. I note there was another 5 tonnes of kilobars withdrawn out of Comex on the 23rd and by my calculation there is still another 10 tonne of kilobars in Comex still to come out.

SGE premiums have been moving up and currently at 1.05 yuan/gram and this matches the premiums Perth Mint has been getting on kilobars, which have increased since my last post. Part of that demand has been related to the SGE International Board launch but our dealers' feedback is the $1200 level is also drawing out renewed Asian interest.

What I didn't see on the 18th was any positive narrative around gold, but that has changed. First up we have this Reuters article which runs with the mine cost/closure narrative:

"$1,200 is a critical level. The industry has geared itself around $1,200," said Joseph Foster, portfolio manager at institutional investor Van Eck Global. "If it falls below that level, then there are a lot of mines around the world that are really going to struggle."

This is an important narrative for gold, and I've mentioned it before here. Then we had these two headlines:
Bloomberg: Gold Premiums in India Seen Doubling on Festival Demand
Gulf News: Weak gold prices has Dubai consumers clamouring for more

On the negative side re narrative Goldman are still downbeat on gold and stocking to their $1050 call and the strong dollar story is the biggest risk to gold breaking $1180.

18 September 2014

Gold bottoming?

This morning I recorded an interview with Al Korelin for his weekend show which should be up Saturday US time. Al talked about how bad the sentiment was in the gold market right now, the worst he has ever seen, and I'd have to agree.

Having said that, I talked about the recent return of demand for gold kilobars from Asia. Premiums have come up off the floor and are moving up nicely. This caused me to have a look at the kilobar movements in COMEX warehouses (see here for background on this indicator), which are shown in the chart below


What it shows is that deposits seem to line up with future price weakness, as bullion banks stockpile them when Asian demand is weak. The withdrawals of kilobars, certainly in January this year, foretold price strength but it is not as strong an indicator considering the late 2012/early 2013 ones. You can see that on the 2nd of September 5 tonnes came out of JP Morgan's warehouse and that doesn't surprise me considering the renewed interest we are seeing. Worth keeping an eye on the COMEX movements to see if more of the 26 tonnes that was deposited in August is pulled out.

On the chart you'll notice a buy and sell point marked. These were my previous calls, which I discussed here. In the Korelin interview I did call a bottom, so you might want to trade against that :P

The uptick in kilobar premiums and COMEX movements gives me a bit of confidence, but on the negative side I don't see any positive narrative developing around gold that would drive big fund money (as Dan Norcini notes, "the big leveraged macro trade buying indiscriminately across the entirety of the commodity sector is not in the cards for now"). Goldman is still out there pushing their $1050 call and they don't want to be proven wrong. All that chatter does impact on the professional market.

However I'm confident that gold won't go below $1180 as I think Asians see this bottom of the range we've been in since April 2013 as a good buying point and that will provide support.

08 August 2014

JPM's 18 tonne Comex fat finger

In Ed Steer's August 7th Gold & Silver Daily, he commented that:

"Ted pointed out something that I'd missed in Tuesday's column on Comex gold inventories---and that was the fact that the 595,102 troy ounces that the report showed withdrawn from JPMorgan on Friday was, with the exception of a few ounces, totally reversed in Monday's report from the Comex."

This big adjustment was also noted by "Pirocco" on the SilverStacker forum here. When questioned by Pirocco, Comex’s response was that "the adjustment column allows the depository or warehouse to make changes to their inventory in either of the categories for various circumstances as needed", which as Pirocco notes, just avoids answering the question because "various circumstances" says nothing.

Well I’ve worked out what one of those "various circumstances" is. If you subtract the 594,506.898 Monday adjustment from the Friday figure of 595,102.000 you get 595.102. That is not a coincidence. In other words, the Friday figure was a fat finger keying error, where someone at JPM keyed in "595 comma 102" instead of "595 point 102"! Hence JPM had to do an adjustment of 594,506.898 to turn 595,102.000 into the correct figure of 595.102.

I do wonder if the fat finger extended to the paperwork sent to the receiver of the erroneous 595,102 ounce withdrawal - perhaps a temporary bit of excitement that they were getting an unexpected 18+ tonnes?

What is surprising is that this sort of data transfer between warehouses and the CFTC isn't automated. Worryingly, this is not an isolated incident:
  • CFTC charging JP Morgan $650k for repeatedly submitting "large trader reports that contained hundreds of errors"
  • Screwtapefile's Warren finding discrepancies between the numbers in the GLD trade settlement spreadsheet and the GLD bar list
  • Rand Refinery losing 87,000 ounces ($113 million) of gold
  • Canadian Mint's 2009 $15 million gold inventory "discrepancy"
It makes you wonder if the whole gold industry is held together with spreadsheets. Be afraid, be very afraid.

28 July 2014

205,000 or 205 tonnes of gold, why commas matter

Karen Hudes latest refers to "The UBS is holding 205,000 MT under the Global Debt Facility for the benefit of humankind" and she provides a link to a letter from UBS and associated gold certificates as proof of the figure.

The letter says that "... volume of 205,000 Metric Tons issued last June 15, 1977 is unrestricted for collateral ..."

Unfortunately, given that the letter and certificates are issued by UBS, a Swiss firm, and that Switzerland is one of the countries that uses commas as a decimal mark (thanks Wikipedia), then the "205,000" figure is actually referring to 205.000 tonnes.

205 tonnes is approximately $8,567,975,000.00 (or $8.5 billion, just in case anyone misinterprets the commas) and while that is a nice sum, I doubt it will be as helpful to "humankind" (a word I note excludes aliens/reptilian life forms) as $8,567,975,000,000 (or $8.5 trillion).