Parallel universe in Gold: Physical versus Paper gold

Two interesting outlooks from the two day 14% massacre on gold prices

1. Falling gold prices equals bigger demand for physical gold in India

From Outlook India

With gold prices tumbling to a 15-month low today, retailers are witnessing a surge in demand and expect up to 50 per cent spike in sales volume in this marriage season.

They are also expecting prices to fall further to around Rs 25,000 per 10 grams in the immediate short-term.

"Over the weekend, demand has picked up and there is surge in footfalls. As such, demand for jewellery has been up since Holi due to the upcoming wedding season. However, the recent plunge in prices have added to the momentum.

"We are expecting a whopping 50 per cent growth in sales volume during this season over the same period last year," Vice-Chairman of the Mumbai Jewellers Association Kumar Jain told PTI.

Jain, who also owns Umedmal Tilokchand Zaveri retail chain, said jewellers are expecting a good season on the back of expectations that the prices are likely to tumble further to around Rs 25,000 due to global cues.

2. Has the selling of paper gold been far more than the actual inventories?

From Mark Byrne of Goldcore (via Zero Hedge) [bold original]

Gold futures with a value of over 400 tonnes were sold in hours and this is equal to 15% of annual gold mine production. The scale of the selling was massive and again underlines how one or two large banks or hedge funds can completely distort the market by aggressive, concentrated leveraged short positions.

It may again be the case that bullion banks with large concentrated short positions are manipulating the price lower as has long been alleged by the Gold Anti Trust Action Committee (GATA). The motive would be both to profit and also to allow them to close out their significant short positions at more advantageous prices and possibly even go long in anticipation of higher prices in the coming weeks.

Those with concentrated short positions may also have been concerned about the significant decline in COMEX gold inventories.

The plunge in New York Comex’s gold inventories since February is a reflection of increased demand for the physical metal and concerns about counter party risk with some hedge funds and institutions choosing to own gold in less risky allocated accounts.

Comex gold bullion inventories have slumped 17% already in 2013, falling to just 286.6 metric tons of actual metal on April 11, the lowest since September 2009.

This means that futures speculators on Friday sold a significant amount of more paper gold, in an hour or two, then the entire COMEX physical gold bullion inventories.

Sell on banksters and governments! This should give the physical gold market (or the public) more space or opportunities to accumulate.

War on Gold: CME and Shanghai Gold Raises Gold, Silver Margins

Gold’s has been utterly clobbered for the past two days. Yesterday price of gold got crucified down by 8.71%. Silver had also been razed down 12.48%

Part of that steep dive has been exacerbated by the raising of trading margin requirements from the CME and the Shanghai Gold Exchange.

From the Bloomberg:

CME Group Inc. (CME) increased the margin requirements on gold trading after prices plunged.

The minimum cash deposit for gold futures will rise 19 percent to $7,040 per 100-ounce contract at the close of trading tomorrow, Chicago-based CME said in a statement. For silver, the minimum cash deposit was raised to $12,375 from $10,450.

The CME’s Comex unit is making it more expensive for speculators to trade after gold fell the most in 33 years today, dropping to the lowest since February 2011, after prices entered a bear market last week. Silver, also in a bear market, slumped 11 percent today and extended the year’s loss to 23 percent.

From CityIndex.co.uk (bold original)

The plunge in gold and silver was also accelerated by reports that the Shanghai Gold Exchange may hike margins on gold and silver contracts to 12% and 15%. Margin hikes were carried out in 2011 by Comex in order to stabilize speculation, whereas an increase in Shanghai following violent price plunge may reflect the stability of the Exchange’s clearinghouse.

Intervening supposedly to “stabilize” gold-silver markets apparently backfired.

Yet two exchanges doing the same thing, as if they had been coordinated.

Such actions signify as the proverbial “kick a man when he is down” or may have been meant to ensure that gold-silver’s decline continues.

Parallel Universe in Gold: More US States Push for Gold as Money

Even amidst aggressive inflationism from central bankers and from predatory confiscation of people’s savings, prices of gold has staggered.

Priced in major currencies (USD, EUR, GBP) except Japan’s yen, gold has substantially softened since mid 2011 (Gold.org)

Technically speaking, languid gold prices has been mostly due to a selloff in paper gold and through short sales. (chart from Danske Research)

In an interview with the South China Post, George Soros attributes falling gold prices to deleveraging in the Eurozone:

But when the euro was close to collapsing in the last year, actually gold went down, because if people needed to sell something, they could sell gold. Therefore they sold gold. So gold went down together with everything else

This implies that gold has not been deflationary hedge.

Nonetheless Mr. Soros partly acknowledges of the parallel universe that exists in the pricing of gold:

Gold was destroyed as a safe haven, proved to be unsafe. Because of the disappointment, most people are reducing their holdings of gold. But the central banks will continue to buy them, so I don’t expect gold to go down. If you have the prospect of a crisis, you will have occasional flurries or jumps. So gold is very volatile on a day-to-day basis, no trend on a longer-term basis.

Gold really has not lost its safe haven status, the role of currency safe haven may have partly been assumed by bitcoin.

But the bear raid on paper gold could have been orchestrated to influence “inflation expectations”. Gold plays a vital role in the commodity sphere, signifying a key benchmark on commodity ETFs, from the Mineweb last March:

The exodus from gold pulled down the entire commodities ETP complex, global data from BlackRock showed, as the gold segment accounts for some 70 percent of total commodity ETP investments.

Some $5.1 billion left commodities ETPs as inflows to industrial metals and broad basket commodity ETPs failed to offset the gold meltdown.

In other words, by suppressing gold prices, the general commodity sphere will likewise follow.

 

Also my personal view that gold’s has been undergoing a normal reprieve (profit taking-shake out phase) considering TWELVE consecutive years of advances.Markets hardly ever move in a straight line.

Yet aside from record central bank buying buying of physical gold as noted by Mr. Soros, gold coin sales has just been slightly off the record highs, while silver coins remains on record breaking path,

The more significant part of the growing parallel universe in gold dynamics is that about a dozen US states appear to be in the process of legislating gold as money.

From Bloomberg

Distrust of the Federal Reserve and concern that U.S. dollars may become worthless are fueling a push in more than a dozen states to recognize gold and silver coins as legal tender.

Arizona is poised to follow Utah, which authorized bullion for currency in 2011. Similar bills are advancing in Kansas, South Carolina and other states.

The measures backed by the limited-government Tea Party movement are mostly symbolic -- you still can’t pay for groceries with gold in Utah. They reflect lingering dollar concerns, amplified by the Fed’s unconventional moves in recent years to stabilize the economy, said Loren Gatch, who teaches politics at the University of Central Oklahoma.

If gold’s role as money will continue to get political recognition, then eventually this will reflect on prices, in spite of Central bank-Wall Street’s stealth suppression schemes.

BRICs Mull Bank to Bypass World Bank and IMF

Developing economies represented by the BRICs or Brazil Russia India and China, a popular acronym coined by Goldman Sach analyst Jim O’Neill, have been reported as intending to establish their own multilateral bank to bypass or breakout from the clutches of the influences of the US and the World Bank-IMF cabal. 

From Bloomberg:

The biggest emerging markets are uniting to tackle under-development and currency volatility with plans to set up institutions that encroach on the roles of the World Bank and International Monetary Fund.

The leaders of the so-called BRICS nations -- Brazil, Russia, India, China and South Africa -- are set to approve the establishment of a new development bank during an annual summit that starts today in the eastern South African city of Durban, officials from all five nations say. They will also discuss pooling foreign-currency reserves to ward off balance of payments or currency crises.

“The deepest rationale for the BRICS is almost certainly the creation of new Bretton Woods-type institutions that are inclined toward the developing world,” Martyn Davies, chief executive officer of Johannesburg-based Frontier Advisory, which provides research on emerging markets, said in a phone interview. “There’s a shift in power from the traditional to the emerging world. There is a lot of geo-political concern about this shift in the western world.”

The growing role of emerging markets suggests of a commensurate expansion in geopolitical clout. From the same article:

The BRICS nations, which have combined foreign-currency reserves of $4.4 trillion and account for 43 percent of the world’s population, are seeking greater sway in global finance to match their rising economic power. They have called for an overhaul of management of the World Bank and IMF, which were created in Bretton Woods, New Hampshire, in 1944, and oppose the practice of their respective presidents being drawn from the U.S. and Europe…

Trade within the group surged to $282 billion last year from $27 billion in 2002 and may reach $500 billion by 2015, according to data from Brazil’s government. 

But such plans are still on the drawing board…

While BRICS leaders may approve the creation of a development bank in principle at the summit, there’s still disagreement on how it should be funded and operated.

There is more than meets the eye from this development.

 

The BRICs has been expressing apprehension over central bank 'credit easing policies' adapted or imbued by developed economies led by the US Federal Reserve. 

Russia’s Putin calls Bernanke’s QEs as “hooliganism”. Brazil has blamed the Fed for inciting a currency war, and so with China’s censure of QE. 

And partly in response and also in part to promote advancing her geopolitical role, China has been promoting the yuan, via bilateral trade arrangements to the BRICs and the ASEAN.

BRICs along with other emerging markets have been major buyers of gold

Emerging markets led by the BRICs dominated buying in 2012 according to the Bullion Street:

Central bank buying lifted gold last year and is likely to do so this year as more and more emerging market central banks have become first time buyers in recent years.

Observers said central banks across the globe collectively bought more gold than they had previously over 40 years. The buyers were not the usual central bank suspects among the old world European nations, but emerging economies.

And also in 2011 (chart from Reuters)

And recent events in Cyprus only exhibits of the rapidly deteriorating state of the current central bank based fiat money system. 

As Tim Price at the Sovereign Man aptly commented

It matters because the inept handling of its crisis last week threw one facet of modern banking into sharp relief: if a deposit guarantee is seen to be fraudulent or sufficiently fragile to be easily smashed by politicians, then confidence in banks, and in unbacked paper currency itself, will be vulnerable to an unpredictable run.

So the BRICs dissension over the current system has been prompting them to "diversify" (euphemism for acquiring insurance through gold purchases), as well as, to work on creating an alternative system that would circumvent the US dollar standard, possibly with their own bank. 

Perhaps BRICs officials are becoming more aware of the warning given by the French historian and philosopher François-Marie Arouet, popularly known by his nom de plume Voltaire: Paper money eventually returns to its intrinsic value--zero.

Argentines Flee to Gold on Financial Repression, Devaluation

Escalating financial repression implemented by the Argentina government has been prompting its citizenry to seek gold as safehaven. 

From the International Business Times:

Argentines are utilizing gold to hedge their savings as economists forecast the peso will lose more value than any currency in the world, and President Cristina Fernandez de Kirchner forbids dollar purchases.

The nation’s inflation rate of 26% is also eroding Argentina’s peso- denominated bonds to fall 5.5% ytd.

With Argentina printing pesos to finance itself, the growth of pesos in the economy has rose 38% in the past year, leading analysts to predict that the currency will depreciate 12.9% through year-end, the highest of currencies tracked by Bloomberg.

Banco Ciudad is the only bank left that trades in gold after Fernandez  banned the purchase of certified 99.99% pure gold for savings in July. The bank sells it at 99.96% purity, according to Carlos Leiza, who oversees the lender’s gold trading.

There is a 35% gap in the prices to buy and sell physical gold at Banco Ciudad, while there’s no premium to sell the country’s benchmark 2017 dollar bond in the local market, according to the Buenos Aires-based Open Electronic Market, known as MAE.

Gold sold by Banco Ciudad also isn’t recognized internationally, making it more difficult to determine its value, he said.

Watch Bloomberg’s news video on this here

I must say that Argentina’s inflation rate must have been severely understated by the mainstream. Price controls have been distorting real conditions in Argentina. The Argentine government even recently banned advertising as part of price controls.  Official inflation rates are way below private estimates. Argentina’s government has also been censoring private sector economists from making inflation forecasts.

Argentina’s “blue dollar” or the nickname for the US dollar based on the black market rate has fallen to a new low yesterday, at 8.27 from 8.07 last Monday or a decline of about 2.4% in just a few days. The Peso is far from the official rate of about 5.1. The gap between the black market rate and the official rate continues to widen.

The increasingly desperate government has imposed more capital controls through a 15% tax hike on the use of credit cards abroad aside from new 20% levy on airline tickets.

Unlike Venezuela, so far, Argentina’s stock market has yet to manifest symptoms of hyperinflation. The Merval index has been up 22.23% year to date, as of Friday’s close, and nears a milestone breakout.

We should not confuse rising stock markets with prosperity or even bubble cycles, when they serve as evidence of worsening monetary disorder. Nonetheless a breakout of the Merval along with increased panic buying on gold will could mean a tipping point towards hyperinflation and a crisis.

Infographics: War on Gold, A History of Confiscation

Today's "war on gold" which has been more about implicit price manipulation or suppression and administrative regulations higher taxes, higher fees on gold deposits and etc., have not yet gone to the extent of outright confiscation by government as had been in the past. 

The following infographic from visual.ly published by mining.com exhibits the history of gold confiscation. (hat tip Bob Wenzel)

A history of gold confiscation infographic

Is the Euro Crisis Back???

All it seems to expose on the mirage of ECB Draghi’s jawboning communication strategy has been the recently concluded elections in Italy.

From Ambrose Pritchard of the Telegraph, (bold mine)

The Five Star movement of comedian Beppe Grillo, which won 25pc of the vote, has called for a euro referendum and has a return to the lira as one of its manifesto pledges, while ex-premier Silvio Berlusconi has threatened to pull Italy out of the currency bloc unless the EU switches to a reflation strategy.

Even if the centre-left leader, Pier Luigi Bersani, can put together a “grand coalition” with Mr Berlusconi, there is no going back to the hairshirt regime imposed by Mario Monti’s technocrat government at the EU’s behest over the past 15 months…

The great fear is that the European Central Bank (ECB) will find it impossible to prop up the Italian bond market under its Outright Monetary Transactions (OMT) scheme if there is no coalition in Rome willing or able to comply with the tough conditions imposed by the EU at Berlin’s behest. Europe’s rescue strategy could start to unravel.

Meanwhile, French Industry Minister Arnaud Montebourg has called for the ECB to work on the weakening of the euro through debt monetization.

Here is a noteworthy quote from Minister Montebourg from the same article: (bold mine)

“I am expressing personal sentiments here but the debate has started within the euro group on the euro being too strong and the role of the ECB,” he said. “We have to look at what’s going on the world. All central banks that are doing their job are doing it this way.”

The central banking inflation creed has been deeply embedded on the mindset of political agents and has become a populist political selling point.

Following Italy's elections, euro spreads have began to widen…

chart from Bespoke Invest

…as the euro and European stocks (Stox 50-lower and Dow Jones Italy-behind) plummeted. (charts from stockcharts.com)

And given the expressed desire to revert or “return to the lira” or switch to a “reflation strategy” or for a weakening of the euro from Italy’s politicians, as well as, from the French Industry Minister, this means the prospects of more inflationism…

And as I recently pointed out, the recent collapse of gold prices have been tightly linked with the contracting balance sheet of the ECB.

But such dynamics seems to have turned the corner or that the recent bounce of gold may signal or signify anticipations of more inflation from the ECB.

By closing 1.2% higher last night, Gold has reclaimed the $1,600 price levels, particularly at 1,612.

Like US counterpart, ECB’s Mr. Draghi seems to be boxed into a corner: either inflate or the lira will make a comeback.

Will current political developments in the Eurozone compel Mr. Draghi to relax on the strict conditionality he has imposed on crisis stricken nations in order to activate the yet to be tapped Outright Monetary Transactions, or OMTs?

We are living in interesting times.

Are Central Bankers Poker Bluffing the Gold Markets?

Dr. Ed Yardeni at his blog writes

Other than profit-taking, what might be the fundamental reasons behind gold’s weakness? Perhaps the most important reason for the weakness in gold is that after three years of “living dangerously”--with lots of panics about apocalyptic endgame scenarios--the global economic and financial outlook is improving. That means that central banks may start to ease off on easing.

Earlier he wrote of the important role played by the FED in influencing stock market prices, (chart from Dr. Yardeni)

The Fed has contributed greatly to the bull market with its NZIRP and QE ultra-easy monetary policies, as evidenced by the close correlation of the S&P 500 and the securities holdings of the Fed. Bond yields fell to historic lows as the Fed purchased more fixed-income securities, increasing the attractiveness of stocks.

If gold prices indeed has been anticipating a forthcoming squeeze in the monetary environment due to an alleged "improving" fundamentals, which has bolstered the stock market, then we can easily deduce that tightening policies may similarly lead to falling stock markets.

This means that gold prices could be a leading indicator of the stock markets.

One can easily correlate the substantial contraction of the ECB’s balance sheet (left window), with the recent collapse in gold prices (right window).

The ECB’s balance, which has shrank to its lowest level since March of last year, began its accelerated descent since October almost simultaneously with peak gold prices.

Also, China’s government has announced pulling back on her easing policies through “a net 910 billion yuan ($145.89 billion) drain from the interbank market this week” (Reuters) which has coincided with a slump in her stock markets.

Of course, today’s booming US stock markets, as well as property markets, has prompted for the increasing hawkish statements from FED officials.

As Bloomberg’s Caroline Baum rightly points out,

Market participants forget that the Fed is neither omniscient nor a very good forecaster. What it is is the sole proprietor of the printing press. If the hint of cutting back on its hours of operation is enough to frighten the stock market, then the Fed really has to be concerned by what it hath wrought. 

This only means the Fed has been caught in a box. Once the stock markets gets freaked out by the prospect of a money squeeze, two question arises: 

-Will the central bankers stand firm and let the market clear (bubble bust)?  

-Or will they come rushing back to reflate the markets?

At the end of the day, my bet is that all these hawkish talks will pave way for future easing, thus a resurgent gold.

Euro Pacific Peter Schiff, in the following video, expounds on this matter:

What’s Wrong with Gold?

Gold priced in the US dollar have broken below technical levels. And some gold bears have been shouting at the top of their lungs declaring that this may be the end of the gold bull market.

They resort to appealing to authority by citing the reduced holdings of popular investors as George Soros, as example.

The real reason behind the calls for the end of the gold bullmarket is that such gold bears have been desiring to demonstrate, that in the face of massive money printing by global central banks, price inflation hasn’t been a threat. 

And since gold serves as hedge of savings against the loss of purchasing power of paper money, such lack of price inflation thereby justifies the actions of political authorities to engage in more expansionist monetary policies.

Yet citing the actions of George Soros doesn’t mean the end of the gold bullmarket. Mr. Soros has previously flipped flopped on gold. 

Considering that Mr. Soros reportedly made a huge killing ($1 billion) in shorting the Japanese yen, what may have happened was that Mr. Soros may have redeployed part of his gold holdings into the short yen position.

Mr. Soros has reduced his holdings of gold SPDRs during the 4^th quarter by 55% but this also means that he still holds 45%.

The current massive interventions by policymakers suggest that the yield chasing phenomenon has only shifted focus by big players to the currency markets.

Analyst Doug Noland at the Prudent Bear writes,

This highly unsettled backdrop forced the big macro hedge funds – and traders/speculators more generally – to keep trades on short leashes (risk control measures that chipped away at performance).  We now see indications that the big players have been unleashed, at least as far as taking – and winning – huge bets against the yen.

Given the current direction of social policies, people's orientation has been reduced to simply profiting from short term yield chasing arbitrages.

It is true that falling gold prices has not just been a US dollar affair, but through a broad spectrum of currencies such as Euro, British Pound, Canadian Loonie, Australian Dollar, Chinese Yuan and the Euro as shown in the chart below from gold.org

It is also equally true is that the latest fixation on the yen has led to record high gold prices in yen...

So does record yen prices of gold mark the end of gold bullmarket? 

Well, again reference point matters.

The concurrent yen carry trade has been a partial fulfillment of my March 2012 prediction. The next phase is to see capital flight from Japan into ASEAN.

Moreover, real demand for gold has remained vibrant, as I recently pointed out.

Furthermore, despite the seeming underperformance of the price of gold, which I believe has been actively suppressed, this time through the US Federal Reserve communications strategy in portraying the tilting of balance towards the ‘hawks’, the string of record breaking activities as evidenced by record buying of physical gold and silver in the US (first 2 weeks of 2013), record ETF holdings of gold (as of November 2012) and record gold imports of India and China (fourth quarter 2012), aside from milestone third quarter rate of growth in the gold buying of emerging market central banks (third quarter of 2012), suggests of the blatant disconnect between gold prices and real economic activities underpinning the gold markets. Yes some Fed officials have openly been chattering about risks of price inflation!

From US Global Funds

Although there may have been some slight weakness in the demand for gold in India, these may have been due to the Indian government’s relentless “war against gold” via series of hikes in import taxes and other bank regulations.

Statistics alone cannot capture gold’s real dynamics since countries like India and Vietnam have adapted restrictive policies on gold ownership that has brought the gold market underground.

This also imply that activities in the real economy and the financial markets have, like other financial markets, been operating in a parallel universe.

It’s also important to realize that prices of gold haven’t been isolated from the broader dimension of the commodity markets.

Since 1970, while there are may be differences in the degree and in the timing of short term fluctuations, the trend of commodity markets run in a general direction (black arrows).

Commodity markets rose during the stagflationary decade of the 1970 until the early 1980s, whereas globalization coincided with declining prices of commodities through two decades or until the outset of the new millennium 

The US Federal Reserve’s attempt to reflate the US economy in response to the dot.com bubble bust has generally lifted the commodity markets since 2003. Same commodities also went into a tailspin in 2008.

The above chart includes energy, industrials, precious metals, soft agriculture and the CRB Reuters index.

Are we seeing a broad based decline in prices of commodities today?

Hardly.

While Agriculture has recently been down (GKX) following an earlier spike, Energy (GJX) has been on the rise, along with the Industrial metals (GYX).

So there is little evidence to say that gold’s bull market may be at a close.

But there is one thing we can be sure of, there has been a massive build up of gold and silver shorts by US banks.

Albeit, gold shorts has been reduced along with declining prices.  But this runs opposite to silver where declining prices has led to increasing position on silver shorts.

Are the silver shorts sustainable?

Supply-demand imbalance will prove devastating to shorts, that’s according to Goldmoney’s Alasdair Macleod

We can be sure that the massive short position in silver is causing difficulties for the banks concerned, because of the lack of physical supply. Therefore, the bullion banks have an exposure which appears to be out of control. While they frequently conduct bear raids (which are more successful in gold) they face the risk in silver of themselves becoming victims of a bear squeeze. Unusually, they have got themselves into this mess on a low silver price, and it is roughly double the short position than when the silver price was over $40. This being the case, when silver turns up the banks are likely to be very badly squeezed, throwing up enormous losses. Meanwhile, the non-bank commercials have kept a level head and reduced their net short position by 2,268 contracts to 3,616.

I think this is right. But the collaborative heavy manipulation of the various aspects of the markets by global government could also imply that to paraphrase the deity of economic interventionism, JMKeynes, adulterated markets may remain intoxicated and irrational a lot longer than we can remain solvent. Nevertheless, eventually the fundamental laws of economics will prevail.

 

For me, gold’s recent weakness has been simply a revelation of the “reversion to the mean” or of the market truism where "no trend goes in a straight line".

Gold has been in a bullmarket for One, two, three, four, five , six, seven, eight nine, ten, eleven and TWELVE straight years, so a reprieve or profit taking should be natural reaction.

 

As I wrote at the year’s opening,

Although, so far, with the exception of gold, no trend has moved in a straight line, so it would be natural for gold to undergo a year of negative returns.

Nonetheless all these will also depend on the actions of monetary authorities.

Instead of merely chattering, it would be best for the gold bears to profit from their predictions by putting their money where their mouths are via shorting gold.

Russia’s Putin Turns Black Gold into Gold

Prices of gold has been falling but Russia’s Vladmir Putin keeps buying, converting proceeds of Russia’s oil exports to gold.

From the Bloomberg, (hat tip Mises Blog)

When Vladimir Putin says the U.S. is endangering the global economy by abusing its dollar monopoly, he’s not just talking. He’s betting on it.

Not only has Putin made Russia the world’s largest oil producer, he’s also made it the biggest gold buyer. His central bank has added 570 metric tons of the metal in the past decade, a quarter more than runner-up China, according to IMF data compiled by Bloomberg. The added gold is also almost triple the weight of the Statue of Liberty.

“The more gold a country has, the more sovereignty it will have if there’s a cataclysm with the dollar, the euro, the pound or any other reserve currency,” Evgeny Fedorov, a lawmaker for Putin’s United Russia party in the lower house of parliament, said in a telephone interview in Moscow.

Gold, coveted by Russian rulers including Tsar Nicholas II and the Bolshevik leader whose forces assassinated him, Vladimir Lenin, has soared almost 400 percent in the period of Putin’s purchases. Central banks around the world have printed money to escape the global financial crisis, sapping investor appetite for dollars and euros and setting off a scramble for safety.

In 1998, the year Russia defaulted on $40 billion of domestic debt, it took as many as 28 barrels of crude to buy an ounce of gold, data compiled by Bloomberg show. That ratio tumbled to 11.5 by the time Putin first came to power a year later and in 2005, after it touched 6.5 -- less than half what it is now -- the president told the central bank to buy.

Read the rest here

Bundesbank’s Gold Repatriation will Take Seven Years!

This is just a follow up on my earlier post about how Germany’s Bundesbank repatriation of their gold held by the NY FED (and the Banque de France) could trigger a scramble for the premier precious metal.

Apparently, in today’s deepening digital economy and the space age, it would strangely take 7 years for this process, which only accounts for half of Bundesbank’s claims, to get fulfilled.

Here is the Bloomberg:

The Bundesbank will repatriate 674 metric tons of gold from vaults in Paris and New York by 2020 to restore public confidence in the safety of Germany’s reserves.

The phased relocation of the gold, currently worth about 27 billion euros ($36 billion), will begin this year and result in half of Germany’s reserves being stored in Frankfurt by the end of the decade, the Bundesbank said in a statement today. It will bring home all 374 tons of its gold held at the Banque de France and a further 300 tons from the New York Federal Reserve, it said. Holdings at the Bank of England will remain unchanged.

My guess is that these governments will apply manual labor or of physically dragging gold from source central banks to their destination: the Bundesbank. 

Gold from the NY FED may be shipped by ancient maritime ships known as Triremes.

Portrait of modern day replicas of ancient Triremes from the Wikipedia.org

Of course, they might build these ships manually too. 

On the other hand, from the ranks of the unemployed, political appointees will physically carry bullions from the Banque de France to the Bundesbank. But they would to do these via obstacle courses designated by the authorities.

Pun aside, the above developments, seem as dilatory tactics aimed at implicitly squelching the current demand by the German public for a central bank gold audit. Eventually these central banks hope that the public's interest on these will fade.

Yet instead of "restoring confidence", such will likely raise more questions about the gold reserves held by central banks for the Bundesbank and for the FED itself, as well as, postulations of gold manipulation schemes, employed by central banks and by welfare-warfare governments.

A Coming Scramble for Gold? Bundesbank Initiates Repatriation of NY Fed held Gold

Oh this should be interesting. 

If governments have indeed been manipulating gold prices, then Germany’s Bundesbank’s reported commencing of the process of repatriation of their gold bullions held by the NY Fed may have just opened the gauntlet for a potential scramble for physical gold.

Writes the Zero Hedge, (bold, underline and italics original)

In what could be a watershed moment for the price, provenance, and future of physical gold, not to mention the "stability" of the entire monetary regime based on rock solid, undisputed "faith and credit" in paper money, German Handelsblatt reports in an exclusive that the long suffering German gold, all official 3,396 tons of it, is about to be moved. Specifically, it is about to be partially moved out of the New York Fed, where the majority, or 45% of it is currently stored, as well as the entirety of the 11% of German gold held with the Banque de France, and repatriated back home to Buba in Frankfurt, where just 31% of it is held as of this moment. And while it is one thing for a "crazy, lunatic" dictator such as Hugo Chavez to pull his gold out of the Bank of England, it is something entirely different, and far less dismissible, when the bank with the second most official gold reserves in the world proceeds to formally pull some of its gold from the bank with the most. In brief: this is a momentous development, one which may signify that the regime of mutual assured and very much telegraphed - because if the central banks don't have faith in one another, why should anyone else? - trust in central banks by other central banks is ending.

Much more importantly, it is being telegraphed as such, with Buba fully aware of just what the consequences of this (first partial, and then full; and certainly full vis-a-vis the nouveau socialist regime of Francois Hollande which will soon hold zero German gold) repatriation will be in a global monetary arena, which is already scraping by on the last traces of faith in a monetary system that is slowly but surely dying but first diluting itself to oblivion. And in simple game theory terms, the first party to defect from the prisoner's dilemma of all the bulk of global gold being held by the Fed, defects best. Then the second. Then the third. Until, in this particular case, the last central bank to pull its gold from the NY Fed and the other 2 primary depositories of developed world gold, London and Paris, just happens to discover their gold was never there to begin with, and instead served as collateral to paper gold subsequently rehypothecated several hundred times, and whose ultimate ownership deed is long gone.

Two things:

First, if true then this should be reflected on gold prices soon.

Next if the Bundesbank action will impel for a "domino effect" or where other central banks may likely do the same, then this may translate to some volatility in the asset markets, as bullion banks and the banking system, who may be physically short gold, envisage risks of financial strains to cover their positions.

Is the US Federal Reserve Indirectly Putting Down Gold Prices?

Have US Federal Reserve officials been indirectly trying to take down gold prices?

In barely 2 weeks of 2013, gold prices attempted twice to move higher (See ellipses). One peaked during New Year just right after the fiscal cliff deal. The second was during Thursday of this week.

However, both gains had been cut short. This appears coincidentally timed with two occasions where Fed communications (FOMC minutes) had been released and when Fed officials went on air expressing doubts over QE 4.0.

The first came with the announcement of the FOMC minutes which revealed of growing dissension over unlimited asset purchases, a day after the fiscal deal.  I earlier wrote that this signifies another of the Fed’s serial Poker bluff. 

Last night, while switching channel after watching another TV program, I happen to stumble upon Federal Reserve Bank of Philadelphia President Charles Plosser’s Bloomberg interview, where he hinted of his bias against pursuing more balance sheet expansion. If memory serves me right, prices of gold was then trading at $1,669-1,670. Bloomberg seem to have featured this interview in a follow up article

Then I learned today that other Fed officials featured by mainstream outlets also covered the FED hawks.

And in both occasions where hawkish sentiments by FED officials were aired, the earlier gains scored by gold prices had nearly been erased.

Gold has been marginally up this week.

Considering that FED employs communication strategies to influence market behavior called as “signaling channel”, my suspicion is that this has been part of the implicit tactic to mute the public’s inflation expectations, expressed via gold prices.

Nonetheless, I expect such mind manipulation ploys to be ephemeral.

That’s because as I pointed out during my last stock market commentary for 2012

Evidence suggest that gold prices may have departed from real world activities. Sales of physical gold have exploded to record highs. Moreover central bank buying has been gathering steam, which seems on path to hit new highs this year (500 tons), along with record ETF gold holdings at 2,627 tons.

It seems that only after a month, we are getting more proof on this

In the US, sales of physical gold and silver has been exploding: The US mint reports 57,000 gold ounce sales for the first two days of the year and sale of silver coins tripled from December.

In the meantime, India’s gold imports reportedly surged amidst fears that the Indian government may continue to act to suppress demand for gold. According to Mineweb.com, after two earlier hikes of import duties, gold smuggling has also reached new levels. Smuggling is a typical reaction to prohibitions or quasi-prohibitions edicts via tax increases.

In addition, central bank gold buying have also been ramping up. According to International Business Times

In the third quarter, according to the World Gold Council (WGC), the world's central banks bought a total 97.6 metric tons of gold.

In six out of the last seven quarters, central bank demand has been around 100 metric tons, which is a sharp increase from as recently as 2010, the bank said in a statement, adding that through the third quarter of this year, total central bank buying was up 9 percent.

Moreover, China's government via the PBoC reportedly will increase gold acquisition to diversify from her foreign exchange holdings.

The China Daily notes,

China may decide to increase the percentage of gold holdings in its monetary reserves in the next few years, said the report, an analysis of the world monetary system commissioned by the World Gold Council.

Demand for gold is likely to rise amid the uncertainty about the stability of the US dollar and the euro, the main assets held by central banks and sovereign funds, it added.

China almost doubled its gold reserves in the last five years. The country had holdings of 1,054metric tons in July 2012 and is now the sixth-largest holder of monetary gold.

In 2011, gold accounted for 14.4 percent of the world's total monetary reserves.

In a country-by-country comparison, the figure was 1.6 percent in China, while it was 74.5percent in the United States, 71.4 percent in Germany and 71.1 percent in France, according to data from the World Gold Council and the International Monetary Fund.

China holds the world's largest foreign exchange reserves, which were worth more than $3.31trillion by the end of 2012, according to figures from the People's Bank of China, the country's central bank.

China has been approaching gold with “talk the talk” as November gold imports have doubled from October.

According to Zero Hedge, (italics original)

at 90.8 tons, this was the second highest gross import number of 2012, double the 47 tons imported in October (which many saw,incorrectly, as an indication of China's waning interest in the yellow metal), and brings the Year to Date total to a massive 720 tons of gold through November. If last year is any indication, the December total will be roughly the same amount, and will bring the total 2012 import amount to over 800 tons, double the 392.6 tons imported in 2011.

Meanwhile, ETF holdings of gold remain at record levels

 

According to my digital financial chronicle,

Exchange traded funds (ETFs), with gold as the underlying asset, have contributed to its prices. Institutional and retail inflows into global gold ETFs are at record levels. ETF holdings have been a key indicator of price movements in the recent years. Reports suggest that at November end last year ETF holdings were at an all-time high of over $150 billion. Till November, holdings in ETFs had risen by 12 per cent to 2,630 tonnes.

In short, the strings of record highs from various activities such as buying of physical gold, ETF holdings, record imports of China and India (two largest gold consumers) and lastly central bank buying simply doesn’t square with current consolidation phase.

Interventions to suppress gold prices are likely to have short term impact.