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Dec 2013 - Gold and Money

Gold and the Business of Making Money

Most Chinese gold company presenters were bearish at the China Mining 2013 Conference held in Tianjin in early November 2013, believing that gold would probably trade between $1200 and $1400 (or $1500/oz) for the next 2 years. CRU were more bearish, perceiving gold to trade at ~$1200/oz in 2017 (becoming effectively $1130/oz in real money terms).

  • The scale of the fall in April 2013 and later June 2013 had taken many by surprise. Most presenters thought that the cause was due to reduced ETF holdings.
  • CRU thought that the demand from Chinese housewives/aunties would not be enough to increase the gold price and that it needed investors to return, as a recovering US, followed by a recovering Europe would cause money to follow the equity markets and avoid being invested in gold.
  • CRU stated that they thought the big surprise for investors was that printing money had not led to inflation (yet alone hyperinflation), in fact inflation had gone sideways to down, and with recovering economies, interest rates could rise, which should result in rising real interest rates and an even stronger US$ - both negative for gold.
  • CRU's rationale for inflation being avoided was that ~70% of the QE from the Fed to the banks actually goes back to the Fed. Because the banks receive it, but lend it back to the Fed to receive a higher interest rate of 25bps on such money (it is a special provision for QE money that the Fed gives to the banks). In normal circumstances it would be called money laundering, but it's the Fed. So a reduction in QE or tapering, just means the Fed lends less money to itself.
  • As China remarked in the plenary session of the Conference, the Fed is the first super central bank - able to defy normal economic theory - the Fed is "more equal" than other central banks. Or as a presenter at Kerry's Symposium in Sydney in late November commented "no one bets against the Fed".
  • As for the rest of the 30% of QE, it has gone into the market or been bought by other foreign countries, as China commented "we have bought/taken over the US debt".
  • A number of presenters at the Tianjin Conference remarked that we are now in a new economic "era" where the old economic theories no longer apply (as in print money and result in a stronger currency and stronger economy). Japan's weakness in the Yen after doubling its money supply is only because it elected  to reduce the Yen for import/export competitive purposes.
  • Even China had increased its money supply by 12trn yuan (A$2.5trn), and even Australia had printed another $200bn (for little effect to mid-November). Both countries had not reduced their exchange rates, instead for China the yuan has steadily appreciated.
  • Under the new economic theory (of printing money for no impact on inflation or currency), China thought that since gold no longer has a clear relationship to currency, it could become re-classified as another asset class, and may then increase as the US$ and equity markets increase.  Although China did state that they still thought that holding material gold reserves (~8,000t like the US) results in having a strong currency, however, China was not going to follow the US printing money "new" economy, it (China) intended to have a "real" economy.
  • A completely different view of the cause of gold's weakness was given in the Gold Symposium Conference at Sydney's Luna Park in October 2013, when it was stated in the panel discussion at the end of the first day by bullion traders/banks that the gold price is not being manipulated, there is no manipulation or collusion,  it's simply the business of making money.
  • Traders are just doing their job, which is to make money for their employers or hedge funds, and depending on how successful they are, results in what size of bonus they receive.
  • It is apparently well known (for some) that a group of Manhattan hedge funds that control >$1trn meet on a regular basis (lunch/dinner) and decide what they are going to collectively "hit" next. "Earlier this year (2013) it was the A$, and then it was the rupee, currently it's gold and other precious metals". What they are doing is not wrong, they are in the business of making money, and if they operate as a group, they have a greater chance of success, and lower likelihood of prosecution (following the Libor manipulation ruling earlier in 2013).
  • It seems that's why Goldmans have such an incredible track record of accurately forecasting when the gold price should fall, because they have possibly either attended or are aware of a meeting at which it has been discussed that gold (and the other precious metals) are going to be "hit".
  • Goldmans again "called" gold lower on 19 November (forecasting $1040/oz by the end of 2014, along with iron ore at $108/t, Brent crude at $105/bbl and copper $6,200/t - though I suspect the iron ore price may be harder to control). And gold was "hit" again on 20 November (in the manner described in the Goode News column of Paydirt November 2013), the market "froze" for 20 seconds when the whole buy side was taken out, enabling the sellers (and buyers) to restart at a lower level.
  • It occurred at just after 6.26am in New York time on 20 November (11.26am London time), and gold fell exactly $10/oz in one "hit" from $1268/oz to $1258/oz, (being HFT trading it appears to be one hit, but HFT trading is almost in nanoseconds). The point is that it caused trading to go into a "freeze" yet again. The major players have found a "way" to control the market. Gold was "hit" again at precisely 2pm NY time from ~$1262/oz to ~$1252/oz (post London market - so the computerised "sell-stop" selling kicked in and took gold down to $1242/oz).
  • Platinum fell $20/oz to ~US$1390/oz (as gold fell ~$25/oz from ~US$1270/oz to ~US$1245/oz) on 20 November 2013, despite statements of reduction in power by Eskom which was expected to reduce South African platinum production.
  • As a delegate at the October Symposium commented, "none of 'you' (gold bugs) complained when the gold price rose / overshot to ~$1900/oz. The complainants were the equity markets, because in gold you get the classic offset hedge of the Dow. Trading gold has always been like this, and periodically 'for a bit of fun'  as a trader, you would punt the other way to see what could happen".
  • One of the presenters in the October Symposium showed that the gold price has been controlled by the US since 1935. However, the reality is that if a Govt is able to keep its currency (and economy) strong through manipulating a commodity at little impact to itself, then it is going to do so. Most Americans and most of the world appear to have benefited from having weak gold prices, so (if true), what the US Govt is apparently doing can be viewed as right and justifiable - it's just unfortunate if you are a gold producer, or believe in gold.
  • GATA gave an extremely detailed presentation referring to a number of instances of control/manipulation and even took the Fed to court to force it to release its gold records. The Fed managed not to release them, but had to pay GATA's court costs.
  • GATA was similarly unsuccessful in getting the swap records of central banks (CBs) to be reported. Finland recently stated that it has swapped/lent its gold, and reputedly ~90% of the gold that CBs are supposed to hold may have been lent or swapped and could now be held in Asia, especially China.
  • After all, the Shanghai Gold Exchange has transacted ~19,835t of gold in the past 3 years to 2012, of which 6,350t of gold were transacted in 2012 for ~2.15trn yuan (and shorting in China is apparently not allowed - do so and you can be fined and lose your job forever / be banned from trading).
  • There have been a number of comments about aunties/housewives buying gold in China, but if they do, they probably don't do it at Beijing's airport anymore. The China Gold shop in Beijing airport in previous years used to sell gold at close to the prevailing gold price, but this time (Nov 2013), it was being sold at ~CNY323/g for gold chains (ie US$1640/oz with the US$/CNY at 6.13, when it was trading at ~CNY253/g or ~US$1283/oz in Shanghai, which was the same in London), hence being sold ~28% or ~$360/oz higher than spot gold.
  • In Hong Kong, the gold being sold in the jewellery shops appeared to be close to the prevailing gold price. As a fund there commented to me, the aunties/housewives come to Hong Kong to buy gold and goods; gold because it is much cheaper (or closer to its actual price) and goods because whatever you buy in China, you don't know what else has been added to it, to result in (or dilute) the underlying product.
  • It has been estimated that China's official gold consumption could reach 1000t of gold this year. What was very clear, is that China's population is gradually becoming wealthier. Apart from the numerous designer brand shops in many cities, China now has 157 US$ billionaires, (out of the total world's 2,170 that control $6.5trn), whose average age is 53 (~9yrs less than global) with an average holding of $2.4bn (the top 7 have over $7bn) and have their wealth spread ~45% in private holdings, 39% in stocks and 4% in real estate.
  • Sales of Swiss watches rose to $1.8bn in 2012, the highest in the world, ahead of Hong Kong and the US. General entrance to the Terracotta warriors in Xian was 150CNY (A$30). At a wine bar in Beijing, a 2006 bottle of French Champagne cost CNY12,800 (A$2,560), while a 2011 bottle of Penfolds' Grange was A$880, the cheapest wine was ~$100 per bottle or ~$20 (~CNY100) per glass. However, metro fares are still CNY2 (A$0.40) anywhere on the Beijing network.
  • China's largest billionaire (at $12.5bn of the Wanda group - one of China's largest real estate developers) bought the 1950 painting of Picasso's two children (Claude & Paloma) for CNY172m (US$28.2m) on 4 November 2013. It was stated at the time that the price was a "bargain" purchase at the bottom of the market, as most of the other items at the Christie's sale failed to attract a bid. In a few years' time, the Picasso could be worth closer to $80m to $100m.
  • Such wealth is expected to continue being generated with China's GDP now expected to be closer to ~8%pa for the next 7 years to 2020, as the expected ~300 detailed reform measures of the 3rd Plenum are gradually applied.
  • However, this time round, there were not that many aunties that I could see buying gold in Hong Kong. It may have been an odd time of the day or week, but the seats at the jewellery shop counters in Hong Kong were mostly empty as shown in Figure 1.
  • While there have been penalties for manipulation, the big US trading firms are able to "carry on, business as usual".  In the unregulated >$250bn per day gold market, traders can meet and collude to bring the gold price (and other precious metals) down resulting in more money for their employers / clients and themselves (through bonuses). Most people and markets appear to be better off at lower gold prices, so what's wrong with that ?
  • As a fund manager commented to me in Hong Kong in mid November 2013, "if what you say is true, that there is manipulation in the gold price, what's to stop them from manipulating it lower ?" (and it seems, that is exactly what happened about 1 week later on 20 November 2013).

Disclosure and Disclaimer : This article has been written by Keith Goode, the Managing Director of Eagle Research Advisory Pty Ltd, (an independent research company) who is a Financial Services Representative with Taylor Collison Ltd.

Figure 1. Gold Jewellery shops in Hong Kong on 14 November 2013 (Gold at ~US$1280/oz)

  • Written by: Keith Goode
  • Sunday, 01 December 2013