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I would note that since my September 18th post there has been many more tonnes of kilobars withdrawn out of Comex warehouses (don't have the figures or charts to hand here in Singapore, but will update when I get back into the office).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).

17 July 2014

How Eastern Gold Demand Is Transforming The Gold Market

GoldSilverWorlds has a good post up summarising my tweets and Al Korelin interview about the LBMA Forum in Singapore. Below are some additional notes I took which I didn't tweet or talk about.

Zhang Bing Nan of China Gold Association (view his slides here) when asked about the West to East flow gave what I think is a classic Chinese answer: the globe is round so what is East and what is West, which got a laugh. Other comments:
  • no matter who you lend your dollars to it is not safe; not the same with gold
  • fortunate we have different perspectives on gold (ie you Westerners want to sell while we want to buy)
  • gold in people’s hand makes them feel safe
  • Asians unlike westerners as don’t have same financial products hence they buy gold
From the Zhang slides I thought the comment that "improving the gold market and pushing forward the gold consumption and the “gold held by people” will play a important role in promoting the gold-content of RMB" shows that for China it isn't necessarily important how much gold they have in official reserves, it is about just increasing the total gold held in the country. Whether that indicates they have a contingency plan to confiscate privately held gold if the world moves back to a gold backed monetary system of some sort, or just that they see the country as more wealthy the more gold its people hold I think is an open question.

Note also that China's development of its gold market is not just about physical: "China is speeding up the legislative process of the gold market, actively developing the gold derivatives quoted in RMB". Zhang also made a point about the China Gold Association being a 5A class national social organization which "ranks the highest level assessed by China's Ministry of Civil Affairs and ranks the fifth in the 177 participating national social organizations", which shows how importantly the Government views the gold market.

While we are on China, I would recommend reading this post by Ben Hunt:

"A number of readers asked if China’s accumulation of physical gold played a significant role in China’s current and forthcoming challenges to the Western monetary policy status quo. Absolutely! It has exactly the same meaning as the recently announced dollar-free natural gas trade agreement with Russia. It’s a fang. It’s a claw. It’s a tool in the construction of an alternative monetary policy regime structure."

Hector Freitas of UBS said that their wealth management division saw clients selling gold for a couple of months post the April gold price crash but that these were opportunistic investors who were now in equities, rather than being longer term diversification holders. He said UBS was seeing demand to shift physical gold to the East for storage and noted that there was more wealth in the West than the East, so if the West begin to distrust currency or war or other events occurred than the West will dominate gold demand. In that situation I can't see the East selling it so not sure where the West will get it from.

Tony Reynard of Singapore Freeport was interesting, saying that they never intended to build the Freeport for gold storage and that it was planned for art but they were asked by the market if they could store gold. Of the 25,000m2 of vault space only 10% is for gold. He said that gold is not a good return for them as they lease space by the square foot and gold doesn’t take up much space (note that Freeport is just a landlord, they don’t operate the vaults themselves, so the money is made by the storage firms who have a fixed lease cost but change a % of value). Of most interest was the statement that they have been asked to build similar facilities around the world including Luxembourg, China, South Korea, Macau, Japan and that all of these were requiring precious metal vault capability, which he took as a sign that the operators see a market for precious metal storage. Related comment from Guy Bullen of Brinks was that they found it physically challenging to handle the 2013 volume of gold going into China.

Regarding the talk about new Asian price benchmarks in competition with the London Fix, I missed who made this comment but they said that whether a benchmark can compete or become established depends not just on its volume but also whether there a big enough premium/discount due to fundamental difference between the location and existing benchmark locations from a physical point of view. For example, if the cost of moving gold from an existing benchmark location like London and the new one is say only $0.20 per ounce, then the market will just continue to use London as a benchmark due to its liquidity and the new benchmark won't get volume. Liquidity will only move if there is a big enough difference.

On India, Rashesh Shah of Edelweiss said that Indians save approximately $500bn each year of which 10% goes into gold resulting in a $40-50bn flow of money into gold each year. One ongoing debate with pro market analysts is whether gold demand will hold up as China and India develop, the theory being that people are mostly buying gold due to a lack of trusted financial and insurance products and as those products become more widespread gold demand will reduce. Rashesh felt that as India's financial sector become more sophisticated Indians will still buy gold but there will be more willingness to buy gold in financial vehicles, so he thought it would be the same consumption of physical gold and the change would just be in how it was bought. He said that currently India’s interest in gold was due to a view that it was the best bet against inflation, was easy to invest in and was a cheap way of "exporting" capital (getting around capital controls) by getting exposure out of the Rupee.

Finally, Harriet Hunnable of CME Group made the following comment on a panel session which she shared with LME and Tocom (it turned into a bit of a competitive pitch between CME and LME for the silver fix):

"We are not keen on financially settled gold contracts, market wants integrity of a physically settled contract."

Only comment I will make is that there is a big difference in "integrityness" between a market with the option of physical settlement and where only a few percent of contracts physically settle (eg Comex) and one where you have to physically settle and there is a 10% penalty if you don't (eg the new SGX kilobar contract).

16 July 2014

Indian monsoon & 12.5% interest gold loans

I have a short post up on the corporate blog on the current state of the Indian monsoon, which matters because poor agrarian Indian farmers are purported to buy over 60% of Indian gold. If monsoon rains are good they buy gold, if not they sell some to buy next year’s crop.

While writing this article came up which is mildly negative for Indian gold demand (as it is only talking 80 tonnes) as it seems the jewellery industry is going to be further crimped by a new rule limiting their gold deposit schemes (ie people lend gold to jewellers to fund their business) to 25% of their assets. The really interesting thing is that the new law also prevents the jewellers from paying more than 12.5 per cent annual returns on those gold loans! Talk about using gold as money. I suppose they have to pay those rates due to the risk of them running off with the gold or going bankrupt.

Just wait to Wall Street finds out about these yields - beats current junk bond rates. With investors desperate for yields in ZIRP environment will we see Wall Street selling Indian Jeweller bonds at 10% (yep 10%, where do you think those bankers bonus come from)?

15 July 2014

GLD amendment refers to "unforeseen reasons" for unallocated failure

GLD has some amendments to its terms up for vote, one of which is "that creations may only be made after the required gold deposit has been allocated to the Trust Allocated Account from the Trust Unallocated Account" (hat tip I Shrugged; see here for an explanation of the existing creation process). What is interesting is the explanation of why they are making this amendment:

"This amendment provides additional security for Shareholders by eliminating potential risks related to issuing baskets of Shares against unallocated gold if the Custodian was to become insolvent or if the unallocated gold was otherwise not allocated for some other unforeseen reason."

My emphasis on the bold bid. The risk they are referring to here is because the Authorised Participants only deliver unallocated to the Custodian and it is up to the Custodian to find the physical to allocate. This puts all the pressure on the Custodian. The amendment does raise the following questions:
  • Why the need to clarify this now, is there something the World Gold Council (who sponsors GLD) knows about the state of the market that didn't exist before?
  • Why would unallocated gold now have a risk of not being allocated?
  • Is there an increased risk of intra-day failures for large unallocated allocations?
  • What are these unforeseen reasons?
  • And why are none of the more excitable gold commentators hyping this up as more proof of the end of the London bullion banking system? :)(Probably because they didn't get the letter as they are smart enough not to hold GLD, which has numerous other issues which only make it suitable for short term trading IMO).
I don't think this is a case of the WGC responding to public criticism, as I haven't seen any commentary on this detail/technical matter of ETF operation. Maybe they just thought they would close up this risk point while they were making changes to the management fee revenue. However, that would beg the question of when did they become aware of the "potential risks" in the creation process and why didn't they fix it earlier?

At this point I would just note it as a data point, rather than a sign of "an imminent LBMA default", which was first predicted by one commentator in April 2013, which, even by the lax standards of internet accountability, is a fail (don't shoot the messenger, but clearly the fractional reserve bullion banking system is more robust than many give it credit for).

For the Perth Mint at the moment wholesale and retail demand are weak at best. Kilobar demand was so low we were considering shipping gold TO London but there has been a little pick up in kilobar interest this week. The recent GLD additions are positive but other ETFs have had liquidations so this indicator is unclear. All considered I don't see this as a situation where London is under pressure.

The other amendment to GLD is a rejig of who pays its costs and gets its management fee. Currently the Trustee pays (by selling gold behind the ETF):
  • Sponsor (ie WGC): 0.15%
  • Marketing Agent: 0.15% 
  • Custodian: approximately 0.066%
  • Administration Fees: approximately 0.03% to 0.04%
  • Trustee: $2 million
The proposal is that the WGC will take on all costs and only charge the Trust 0.40%. It just formalises the existing "Fee Reduction Agreement" by which the WGC was absorbing any costs above 0.40% so that GLD holders only paid 0.40%.

I can't see any material change here. Possibly the WGC feels they may be able to control or reduce costs better now that GLD is established and hence it sees an opportunity to make a bit more profit out of GLD beyond the current arrangement, as noted in the amendment letter "the net amount earned by the Sponsor could be greater or smaller than the fee of 0.15% of the daily ANAV of the Trust it currently earns, depending on the actual expenses of the Trust."

Coincidental this happens when two large South African miners (Gold Fields and AngloGold Ashanti) dropped out of the WGC and thus the WGC lost a big revenue source? While that announcement happened after the amendment letter, the WGC would have know about this move by the miners for some time. Just another move towards the WGC becoming more self funded.