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Gold Is Being Supplied By Western Governments

2013-JUN-16
Alasdair Macleod

There has been considerable throughput of gold in western capital markets, with substantial buying from all round the world following the April price crash. The supply can only have come from two sources: the general public, or one or more governments. It really is that simple. Two months later the gold price has only partially recovered, so physical supplies have continued to be made available. Physical demand cannot have been entirely satisfied by ETF liquidations, confirming governments are involved. This article looks at the dynamics of the gold market around this event and the implications.

While the investing public in the western nations has been generally stunned following the April price smash, demand from Asia is running at record levels, illustrated in the chart below, which is of physical gold deliveries on the Shanghai Gold Exchange. (Thanks due to @KoosJansen for pointing me to the data on the SGE’s Chinese website).



The increase in deliveries for April and May was spectacular, totalling 460.5 tonnes, with the week ending 26 April alone seeing phenomenal deliveries of 117 tonnes. In addition, according to the Economic Times, India imported 142.5 tonnes in April and 162 tonnes in May, compared with an average monthly rate of 86 tonnes in Q1 2013. Therefore these two countries imported 765 tonnes of gold in two months, before considering any unofficial imports or their government purchases in foreign markets. The rest of Asia, from Turkey to Indonesia would certainly have stepped up their demand for gold as well, as did the western world itself for physical metal as opposed to paper entitlements.

The table below puts this into context.



A prefatory note about the statistics in this table: there is no single defined source of statistics on gold movements, and there are considerable variations in the same numbers reported by different organisations. The figures in the table above can only illustrate bullion flows. I have sourced the statistics from official sources where possible. The cash-for-gold business has had the easy pickings by now, so an assumption that this is about 600 tonnes per annum is I believe cautiously over-generous. It is based on a speech made by Jeffrey Rhodes of INTL Commodities DMCC to the LBMA in 2010, when he identified scrap supply as 583 tonnes in North America and Europe, whose central banks are in the gold suppression business. At that time, 1,091 tonnes were recycled in the East, including Turkey. Since the Chinese, Russian and other gold-producing governments of Central Asia retain most if not all of their domestically mined gold amounting to over 700 tonnes, there is less than 2,000 tonnes of free mine supply annually available for global markets, based on US Geological Survey figures.

Looking at the bottom line for 2012, there were only 87 tonnes of gold supply for the rest-of-the-world, after Asian and Russian central bank and global ETF purchases. In other words, there must have been a severe deficit overall, which can only have been covered by central bank sales.

About 150 tonnes of ETF gold were liquidated in Q1, providing temporary relief until the Cypriot crisis, when concerns over the security of large deposits in eurozone banks prompted a flight into physical gold, but interestingly, not into ETFs. This was because there were escalating systemic concerns over having physical gold and currency deposits with European banks, while at the same time portfolio investors were worried that the 12-year bull market might have ended.

From the point of view of the western central banks, as well as the bullion banks with short positions on Comex, in March the alarm bells must have been ringing loudly. Chinese demand was accelerating and there was an increasing likelihood that ETF liquidation would cease if the gold price stabilised. If that happened, as the table above clearly shows, an epic bear-squeeze would likely develop, fuelling a rush into gold and potentially bankrupting many of the bullion banks short in the futures markets and/or offering unallocated accounts on a fractional reserve basis.

Therefore, investors had to be dissuaded from buying gold, otherwise the ensuing crisis would not only cause a market failure that could spread to other derivatives (particularly silver), but it would come at the worst possible time, given the coincidental programme of monetary expansion currently being undertaken by all the major central banks.

The reasons for governments to intervene on the side of the bullion banks were therefore compelling. As one would expect, the intervention was well-timed: on Friday 12 April two large sell orders of 100 and 300 tonnes were placed on Comex, clearly designed to do maximum damage to the price, and setting it up for all remaining stops to be taken out the following Monday. Furthermore, central banks were prepared to supply physical gold to keep the price from recovering. We know this because lower prices generated a surge in private demand, not only in China and India, but from everywhere. The only possible supply, other than inadequate ETF liquidation, is from governments.

India and China have absorbed enough gold in the last two months of April and May to leave the rest of the world in a supply deficit, requiring matching sales of western government gold to continue to suppress the price.

The future

We now know for certain that government-controlled gold has been used to defuse a developing crisis in gold markets that had the potential to destabilise bullion banks, other derivative markets and ultimately the whole fiat currency system. We have seen the surge in demand for physical gold, which is the consequence of sharply lower prices. Realistically, the priority has been to ensure such a crisis is avoided, rather than for the price of gold to be continually suppressed.

The difficulty for the casual observer is compounded by the available information being one-sided. We are all painfully aware of both the losses inflicted on investors and their loss of faith in gold at a time when other investment media, such as stocks and bonds, have been doing well. Concealed from us is the real financial condition of the banks and governments themselves, which is the fundamental reason for owning gold. We are acutely aware of the sellers’ pain and only dimly aware of the buyers’ motivation.

Nervous western investors in a market of 160,000 tonnes are in truth a small part of the whole, particularly since gold has been migrating from the west to the east where it has been more valued ever since the 1970s oil crisis. More fundamentally we know that the stock of gold grows at about 1˝% annually in line with global population growth. We also know that central banks everywhere are expanding their balance sheets at an accelerating rate. The disparity between the rate of growth for gold and paper currencies will certainly lead to increased tensions between precious metals and currencies generally, and it is this that will drive future demand for gold, not whether or not western investors think it is in a bull or bear market.

A second point about the market being 160,000 tonnes and not just the sum of mine and scrap supply is that the market is far bigger than western governments’ gold reserves. Gold held by them is officially about 19,000 tonnes, but it may well be only half that, or 5% of the aboveground stock, when unrecorded leasing and selling over the last 25 years are taken into account. The ability of central banks to contain a global surge in gold demand such as that which followed the April price-crash and continuing to this day is therefore limited.

But this is only a part of the story. There are the factors concealed from us, such as the buying opportunity given to gold-friendly governments and sovereign wealth funds, both with surplus dollars, as well as the appetite for gold from the growing ranks of the Russian and Asian mega-rich. There are factors known to the financially savvy, such as the growing instability of the Indian rupee and other emerging market currencies, the increasing systemic risks in eurozone banks with the threat posed to deposits, and the revenue shortfalls that force governments to raise money by printing their currencies at an increasing pace: all will impact the gold market in coming months.

These and other systemic problems are deteriorating. A potentially destabilising crisis in the gold market from runaway prices has been defused by allowing the bullion banks the space to square their books. There can be no other realistic objective in supplying government-owned gold into the market. As to the embarrassment of the gold price rising at a time of accelerating money printing – that will have to be accepted, presumably emphasising the official line, that the gold price is irrelevant to a modern economy.

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Gold Demand Extraordinary In Vietnam – Paying $217 Premium Over Spot

Published in Market Update Precious Metals on 17 June 2013

By Mark O’Byrne


The Vietnamese Central Bank sold another 25,700 taels (37.5 grams, 1.2 troy ounces) at a gold bar auction on Friday in order to try and satiate the massive public demand for gold in Vietnam.

The Central Bank hopes that the sale of gold into the market will reduce the very high premiums paid by gold buyers in Vietnam, the largest buyer of gold in Southeast Asia after Thailand and one of the largest physical buyers of gold per capita in the world.

Vietnamese people hold gold as a store of wealth for protection against war, inflation and currency depreciation. In recent months, the bursting of bubbles in the stock market (see chart) and property market and the continuing devaluation of the dong has led to record demand in Vietnam and a surging premium over the spot price of gold.

Today, the premium was close to 5.5 million dong which is the equivalent of a very high premium of $217 per ounce over spot.

The premium reached an all-time high of more than $210 per ounce or 6 million dong in April, when gold prices were hammered by what appeared to be manipulative selling on the COMEX futures market.

The Vietnamese Central Bank has held sales since the end of March to help banks return deposits by June 30. So far 709,800 taels, or about 27 tons, have been sold in 28 auctions through June 7, according to the bank.

It is hoped that the gap between domestic and global prices for immediate delivery will probably drop to 4 million dong a tael ($158 an ounce) by the end of July, according to Nguyen Thanh Truc, vice chairman of the Vietnam Gold Traders Association.

Vietnam’s central bank has, like the Reserve Bank of India, tightened rules on gold trading. These include making itself the sole importer. This is an attempt to limit gold demand, the impact of gold prices on the exchange rate and in a misguided attempt to prevent a further devaluation of the dong.

As part of the drive, banks must return all gold deposits to investors by June 30, while the State Bank of Vietnam is selling gold to lenders and trading companies to boost domestic supplies.

Vietnam consumed 77 metric tons of gold last year. This compares favourably with massive gold buyers in India and China - 864.2 tons in India, 776.1 tons in China, where the populations are over 1 billion. Vietnam has a population of just 87 million and thus is one of the highest buyers of physical gold per capita in the world.

Purchases of physical gold between 2011-2012 accounted for over 3% of GDP.

Interestingly, property prices are often quoted in taels of gold rather than the local currency due to the Vietnamese experience of monetary inflation and currency debasement.

“The stricter regulatory measures implemented by the State Bank of Vietnam and the fear of a steep decline in gold’s price may affect gold demand temporarily,” Albert Cheng, Far East managing director at the council, said in an e-mail.

“In the long run, for the majority of Vietnamese, particularly those who have lived through the war years and the ensuing economic regression, gold is still considered as the favorite tool for saving and investment.”

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Chief commodities analyst at HSBC sees gold rising to $1,600/oz in the second half of 2013.


James Steel, chief commodities analyst at HSBC in New York continues to be constructive on gold in the medium and long term and sees gold rising to $1,600/oz in the second half of 2013.

In a Bloomberg audio interview, Steel said that this year the gold market has been under pressure and has experienced a rotational shift out of commodities in general driven by the constant chatter of a tapering off in QE and experienced very steep declines in mid April. He likens it to a rugby scrum pulling back and forth near the $1,400oz level, between ETF outflows and strong physical demand for coins and bars, notably from China.

Steel said that in the past few weeks the heavy ETF outflows have died down, and prior to this year they were mostly static. The peak for ETF's was 85M ounces at the end of last year. He says most institutions have already exited that wanted to get out.

Market chatter has been nervous about the unwinding of QE3. Steel points out that unwinding or paring back is very different than an exit. The Fed many need to do tapering for a long time before it ends their program.

Steel mentions that it was the jewellery market that drove the gold market in the past and now it is investment demand and demand from China. He believes gold will average is $1,542/oz and he is predicting a rally in the second half of the year up to $1,600/oz. Longer term, he is on record as saying that gold will rise to over $2,000/oz.

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Images From China: Ten Thousand People Waiting In Line To Buy Gold

Sometimes one must see to believe, in this case believe just how massive the raw demand for the shiny, barbarous relic is in China during times of relative monetary stability (in this case the Dragon Boat Festival). Now assume runaway inflation as we saw in 2011 China, which may be unleashed by something as catalytic as the PBOC once again deciding to inject liquidity in its suffocating banking system and to revive growth in the stalling economy.

June 11, ten thousand people line up in front of a gold shop to buy gold. The buyers lined up during the three day Dragon Boat Festival.

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Is Gold at a Turning Point?

Precious metals investors' heartbreak may soon be over
by Adam Taggart
Wednesday, June 12, 2013, 9:18 PM

A Hard Look in the Mirror

There's no way to sugarcoat the dismal performance of the precious metals in recent months. But a revisitation of the reasons for owning them reveals no cracks in the underlying thesis for doing so.

In fact, there are a number of new compelling developments arguing that the long heartbreak for gold and silver holders will soon be over.

A Hard Look in the Mirror
The past two years have not been kind to holders of the precious metals. The price of gold is down over $500/oz since the record high (nominal) price it hit in August of 2011. That's a decline of 28%. Silver has seen a decline of 56% over the same period.




A healthy amount of that decline came in the past seven months, which have pretty much seen a steady price deflation punctuated by sharp (and historic) downdrafts:




On top of these grim charts, daily headlines touting, often with delight, the demise of gold appear nearly everywhere in the media.

And forget about PM mining stocks. They have been absolute widow-makers for investors:



It's hard to argue that PM mining stocks aren't the most hated sector in today's markets. The chart below shows that last month, the bullish sentiment on gold miners dropped to 0%. Can't go any lower than that:




Wasn't reckless central-bank money printing going to flood the world with paper currency, sending gold prices – and those of its "poor man's" sister, silver – to the moon? Weren't the markets going to crack as the unresolved economic and financial rot in the U.S., EU, and Japanese systems became further exposed, sending capital fleeing into the bullion market and driving prices much, much higher? Weren't escalating mining costs going to march up the price floor for the precious metals?

Why haven't any of these scenarios happened? Were we wrong in our reasons for purchasing gold and silver?

Are we the clueless patsy at the poker table?


The Way of the World

These are very understandable questions to be asking. You wouldn't be human if you didn't.

So, it's wise to return to the #1 lesson of investing: Never fall in love with your positions. Be sure to question your rationale regularly and often. Remove emotion from your decision-making, look to what the data tells you, and continually ask yourself: Ignoring my past decisions, would I purchase this investment today? If the answer is no, lightening up your position is almost always the right decision.

Chris and I follow the precious metals markets on a daily basis, and we frequently challenge the logic behind our support of them. But at this time, we can find nothing – nothing – that has happened over the past two years that invalidates the principal reasons we've laid out for owning precious metals. You can review these reasons in detail on our foundational report, The Screaming Fundamentals for Owning Gold & Silver.

The hard truth for us investors is that secular market trends take time to play out. Nothing moves in a straight line. And they are many false signals along the way. There are no sure bets, no risk-free winning options to pick.

But the good news is that the laws of physics and rationality always prevail in the end. If you can identify the right endgame and position yourself for it patiently, the messy volatility along the way really won't mean much in the big picture.

But Has Anything Really Changed?

Let's look at the key reasons why we originally recommended that investors look to the precious metals as a safeguard:

- Negative real interest rates
- Fiscal deficit spending and unserviceable sovereign debts
- Loose, if not reckless, monetary policies
- The price of newly mined ounces continues to climb higher and higher, due both to reduced ore grades and higher costs for fuel and equipment.

Negative real interest rates have always been supportive of gold prices. While admittedly that's not been the case for the past two years, we now see that historic relationship re-expressing itself.

After all, when the return on cash savings is virtually nothing and the money printers are running, inflation eats away at fiat purchasing power. Gold, as money, offers protection from this.



Perhaps things are different this time, but we're thinking not.

The degree of fiscal and monetary recklessness has taken us by surprise, both for the intensity of the actions already taken, but also for the fact that financial markets have adjusted to the practices and now treat them as normal, if not desirable. While the U.S. deficit has been declining from its record highs, much of that is due to accounting shenanigans, all while our dangerously high debt-to-GDP ratio (as well as those of most other developed countries) continues to worsen.

Mining costs have been on a steady march upwards over the past decade, setting an average "all-in" cost floor now very close to the current price of gold:




Even exploration costs have skyrocketed, which, importantly, is happening in parallel with a marked decrease in discovery volumes:



Gold, it seems, is getting both harder to find and harder to get out of the ground.

And to the above list of original fundamentals, we must sadly add several new drivers:

- MF Global proving that client accounts can be looted and then drawn into a lengthy and unsatisfying bankruptcy/creditor process
- Cyprus proving that the banking system intends to make depositors pay for its mistakes
- Politicians openly calling for various wealth taxes to be levied on anybody who has managed (dared? bothered?) to save up funds

And one last big one: a new secular change in rising interest rates that threatens to create havoc in world economies and financial markets across the world.




After a decade of low and declining interest rates, yields are back on the rise. The low cost of debt that the markets have become used to has created a worldwide bubble in bond prices, about which experts like Bill Gross have been increasingly vocal in issuing dire warnings. A popping of this bubble will increase borrowing rates for governments/business/consumers, depress home prices, make mortgages more expensive, and basically act like kryptonite to any "recovery" in the world economy.

Wall Street has certainly taken notice. And it's worried about the implications:




Lastly, there is the wild-card possibility – improbable, but certainly worth considering because of the gains to be had – of gold being re-monetized as a means of balancing and settling international accounts. Should that transpire, gold will be worth many multiples of today's value.

The Light at the End of the Tunnel

For all the reasons above, the bruised precious metal investors out there should still sleep well at night, secure that the foundational rationale for holding gold and silver remains intact.

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JPM Vault Gold Drops By 28.4% Overnight, Slides To Fresh Record Low As Withdrawals Accelerate

With a massive 6,208 (or 80% of the total in the entire Comex system) Customer Delivery issues outstanding against JPM so far in June alone, many have been wondering - how and when will the firm reconcile what is seemingly more demand for JPM vaulted gold than the firm has in its possession?



While we still don't have the answer, what we do know is that as of an hour ago when the Comex released its daily vault depository statistics, JPM has said goodbye to another 28.4% of all of its vaulted gold - the largest one day withdrawal since April 25, the result of the departure of 61.5% of its Eligible gold, or 218k troy oz, as hundreds of thousands of registered ounces in the past few weeks have seen warrant detachment.

Which means that as of last night, total gold held by JPM has fallen to a new fresh all time low of just 550k ounces, down from 768K the day before, and total eligible gold of only 136,380 troy oz in inventory (just over 4 metric tonnes) - also a record low.



Whoever is "running the JPM vault" shows no sign of relenting. At this pace, the world's biggest gold vault located below 1 CMP, and just next to the Fed's own gold vault, will be empty in about 1.5-2 months.

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U.S. And Canadian Mint Sales: All Of Domestic Silver Supply Used Solely For Bullion

GLD, PHYS, PSLV, and SLV investors may want to start following the North America bullion markets because demand is so strong that it is using up all of domestic mine supply. We will get into that in a little bit, but for now let us look at U.S. bullion sales for the month of May.

Analyzing the US Mint Sales Numbers

When analyzing sales numbers it is important that investors go past the headlines and dig deep into the true nature of the sales. For brevity we are only showing the last few years of sales, but for doing comparisons we have used data from the beginning of the current bull market in 2001. We also use the average monthly London price fix to calculate the dollar value of the month's bullion sales.

To start, let's take a look at the U.S. Mint sales numbers for silver and gold for May and compare them to the same month in previous years. We are doing a year-over-year comparison because coin sales are very seasonal in nature and to get a fair read we have to compare May to May.



(Click to enlarge)

We know that last month's April sales broke all sorts of sales records, so we were expecting a little bit of a slowdown in gold and silver sales. May sales came down from the previous month's totals, but still are at exceptionally high levels. Richard Peterson, the acting director of the U.S. Mint, commented that "Demand right now is unprecedented. We are buying all the coin (blanks) they can make," - that comment was made in June or two months AFTER the record-breaking April.

As investors can see from the table above, May sales continue to be exceptionally high for gold and silver. Silver once again surpassed 3 million ounces sold for the month and gold was fairly strong at 70,000 ounces sold. On a year-to-date basis, gold and silver sales are still breaking records and gold sales are 8,000 ounces higher than any other previous year, while silver sales are almost 2 million higher than the second highest silver sales year.

Canadian Mint Sales

Silver sales were also strong in Canada, as the Royal Canadian Mint (RCM) issued its first quarter report showing that it is also seeing record breaking sales. Unfortunately, the RCM does not issue monthly statistics, but on a quarterly basis (January through March of 2013) it has sold 269,000 gold ounces (96% higher than the 2012 first quarter) and 6.6 million silver ounces (65% higher than the 2012 first quarter). These sales numbers were before the major price drop in April, so we expect that second quarter sales numbers will be significantly higher than even this stellar first quarter.

US and Canadian Silver Mine Supply

Another interesting thing about these sales numbers is when investors compare them to the mining statistics from these two countries. According to the USGS in 2012, the U.S. mined around 34 million ounces of silver, while Canada mined around 17 million ounces of silver.

Let us now extrapolate U.S. and Canadian sales numbers to forecast how many ounces of silver will be sold by the end of the year. Since a linear calculation would be inaccurate (bullion sales are not linear in nature), we will simply compare our year-to-date sales totals with the next highest year and then forecast our number based on the comparison year's ending total.

Year-to-date U.S. sales are 21.7 million ounces of silver sold, which is around 15% higher than the second highest year-to-date sales for this period (in 2011). It would be fair to expect that if we run at the current pace we will end 15% higher than 2011 totals (39.8 million silver ounces sold in 2011) - which would put our 2013 forecast of silver sales at 46 million ounces.

For 2012, the Royal Canadian Mint sold 18.1 million silver maples and if we also extrapolate our first quarter numbers (65% higher than first quarter 2012) out for the rest of 2013 based on this total, they come out to a forecast of around 30 million ounces of silver. Again, this completely ignores the month of April - where we expect sales were record-breaking.

Based on year-to-date numbers, we forecast that the U.S. Mint will sell 46 million ounces of silver, while the RCM will sell 30 million ounces of silver - both significantly higher than their expected silver mine production amounts for 2013. In fact, if sales stay at these elevated levels, these two countries will be around 25 million ounces SHORT of silver - which means silver will have to be imported to satisfy mint demand.

Remember that we are exclusively talking about mint demand for silver to produce U.S. American Silver Eagles and Canadian Silver Maple coins - these demand totals assume absolutely no industrial or alternative investment (bars, rounds, etc) demand whatsoever. What happens if North American industry actually needs to use silver?

Finally, our mine production forecasts were based on 2012 USGS totals and as we know many primary silver miners are struggling to produce silver economically at current prices. In fact based on our exhaustive 2012 true all-in cost data, most silver miners are already below their all-in production costs for silver - which will lead to significant cost-cutting and cuts in exploration and silver supply. This probably will result in much lower silver production for 2013 as production is cut - so our 25 million ounce silver deficit for bullion production may be much higher if mines produce less silver than in 2012.

Conclusion

If investor physical demand stays at current levels, we think that the silver market can provide investors with a spectacular opportunity because the supply and demand picture is so bullish for silver. The fact that all U.S. and Canadian silver mine production will go to solely satisfy domestic demand for government issued coins (and supply will still be 25 million ounces short), should make investors turn their heads.

Industrial demand and alternative bullion suppliers will have no physical silver supply to use, and their silver needs will have to come from imports of silver. Additionally, low silver prices will cause many miners to cut production because their costs are above current silver spot prices, and so we also expect a drop in mine production. Finally, silver scrap supplies, which make up around 25% of silver supply, will definitely be impacted by low silver prices and we expect this source of supply to also drop. Throw in the exceptionally large short position that hedge funds and retail investors have taken in silver, and you have all the ingredients for an explosion in the silver price.

Investors should consider adding to positions in SLV, PSLV, SIVR, and CEF to get exposure to silver because we believe that the physical markets will be the source of a significant turnaround in the silver price. Also, investors should make sure they hedge their paper silver positions with physical silver bullion - this will not only hedge them from calamities in the financial markets, but it will also add to the physical pressure on the silver market and thus benefit their positions.

The supply and demand picture is about to get extremely tight in silver and we believe there will be a significant jump in the price as investors and shorts realize this - we think it is prudent to have an oversized position in both the silver ETFs and physical silver when the market realizes this.

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India Central Bank Prohibits Sales Of Gold Coins

Two weeks ago, with its current account getting crushed by relentless gold imports, India's finance minister Chidambaram literally begged the people to stop buying gold. Judging by the popular response, the ongoing physical shortage, and last night's increase in Indian gold import duties from 6% to 8%, appealing to people's feeling when it comes to the choice of fiat vs physical, has failed miserably. So the FinMin Chidambaram has decided to escalate. Per Reuters: "The Reserve Bank of India has advised banks against selling gold coins to retail customers, Finance Minister P. Chidambaram said on Thursday, a day after he raised gold import duty to try to ease pressure on India's bloated current account deficit." Well, if there ever was one sure way to send demand for any product through the roof (guns, ammo, etc), it is for the government to prohibit its outright sale. What follows next, almost without fail, is a panicked, chaotic buying scramble.

Gold imports by India, the world's biggest buyer of bullion, surged to
162 tonnes in May -- more than twice the monthly average in the record
year of 2011.

"I think the Reserve Bank has advised banks that they should not sell gold coins," said Chidambaram, while speaking at an event in Mumbai.

Chidambaram also urged banks to advise their customers not to invest in gold.
Why? If it is not clear by now, here is the explanation: there is simply not enough gold to satisfy demand at the current artificially downward-manipulated price, no matter what propaganda script is being spun on Verizon TV at any given moment. And with India's idiotic decree, even more gold will be purchased at these prices.

Dear India - here is a simple way to limit demand: price.

Petition the central banks to allow gold to price based on price discovery, or as it is also known supply and demand. Because if gold were to cost $2000,$5000, $10,000/oz then all problems resulting from excess demand would immediately disappear and India's current account would be back to normal.

Of course this will not happen, as the crumbling facade of the imploding fiath based regime would immediately peel away. So back to gold capital controls and other ad hoc made-up measures guaranteed to not only fail but push the price of physical gold much higher.

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