31 October 2011

Silver news you won't get anywhere else

Shall we count how many bloggers pick up on this news item Chinese silver imports decline 39% y/y; exports tumble 44% y/y:

Silver imports in China fell by 39% y/y and 16% m/m to 264.7 tonnes, the lowest level since February, while silver exports declined by 44% y/y to 83.5 tonnes, keeping China a net importer of the metal for two consecutive years on a monthly basis.

On a product basis, silver powder, unwrought silver, semi-manufactured silver, and silver jewellery all declined y/y in September with the latter two products suffering the steepest decline and silver powder only falling by 4% y/y. Indeed, silver powder is the only product that has grown for the year-to-date.

And from the "Chinese love paper more than physical" department, see China's gold frenzy gives birth to small bourses:

The emerging exchanges offer a lot size as small as one ounce, which lowers the capital needed to begin trading, even though the margin requirements can be as high as 30 percent. With lot size set at 10 ounces and margins at 20 percent, the initial capital requirement to start trading is about half the amount required by the SGE.

Emerging exchanges claim to trade physical gold, but most investors are not interested in taking physical delivery. Some exchanges make it difficult and expensive to take delivery. ...

"Who would want to take physical gold? People just want to speculate on price moves and make a profit," said a customer service representative at the exchange who gave her last name as Chen.

Analysts compared the gold investment spree to the wave of retail stock market investors in the last decade, who rushed to a bull market with little know-how, only to suffer huge losses during later market turbulence. ...

Although China's central government has vowed to open up the market, and has made progress by allowing more foreign banks access to the two Shanghai exchanges, an open market for retail investors is yet to take shape. ...

But it was unlikely to happen as long as the country's foreign currency exchange remains tightly controlled. Until foreign exchange controls are lifted, Chinese gold bugs would continue to need tables to put down their bets. "The Chinese love gambling," said Hou.

Doesn't sound like China's exchanges are any different from COMEX. If the Chinese Government wanted its people to buy physical gold you'd think all this paper gold would be shut down. I suppose we will have to wait until the much hyped PAGE is up and running [sarcasm].


  1. ”Emerging exchanges claim to trade physical gold, but most investors are not interested in taking physical delivery. Some exchanges make it difficult and expensive to take delivery. ...

    "Who would want to take physical gold? People just want to speculate on price moves and make a profit," said a customer service representative at the exchange“

    Why would want to take physical gold indeed? When paper and physical gold trade at par taking delivery of physical is just plain stupid for a speculator. Perhaps one takes delivery of physical for other reasons?

    ”"The Chinese love gambling," “

    I guess there must be speculators in China too then. Who would’ve thought?

    ”If the Chinese Government wanted its people to buy physical gold you'd think all this paper gold would be shut down.“

    Would this speculative money be spent on physical gold if there were no paper vehicles with which to speculate on the gold price? Or would it be gambled with elsewhere?

    What, generally speaking, does the average buyer of Perth Mint bullion goods and services spend at The Mint; their speculative money or their long-term savings/wealth?

    If the Chinese Government wanted its people to buy physical gold, the people need to actually have long-term savings/wealth with which to buy it. If the Chinese Government were to give its people no choice but to buy physical gold, its people would run the price (presuming they have the means to buy it), which would be problematic if the Chinese Government were wanting to continue further accrual of their own gold reserves as well as other tangible assets with their (currently valuable) dollar reserves, as the exchange rates for both these would move to the detriment of the Government’s goals. It does appear to this observer that the Chinese Government are patiently accruing both. Perhaps it appears different to you?

    At some stage the parity between paper and physical gold may cease (they are two different things after all), and somehow I can’t see paper claims being the more valuable if this happens. Should such a time come, we will see what people really want (and what they can get) when the chips are down. Until then, we all speculate one way or another [sarcasm].

    As an aside, does The Mint have a contingency plan for such an eventuality, when it may be possible for there to be a large quantity of unallocated gold claims on The Mint requesting allocation?
    Would The Mint allocate in such an eventuality, or simply refund the cash citing force majeure?

  2. I don't disagree with your comments, my post was more of an antidote to the idea that China is a totaly physical market and ignoring the possibility that the average investor may just be as easily seduced as Westerners by paper gold.

    For the Depository clients, we certainly see little speculative behviour, with many clients buying and holding and not trading. The fact that we don't offer leveraged products may contribute to this.

    We do expect and plan for significant liquidations on the other side of the peak (although I think it will run down over a few years) and I think we could be left with a few hundred million in depository unallocated when it is all over.

    If we get heaps of client selling or physical delivery requests, then as we need a certain amount of working inventory we would need to replace that. The first thing we would do is to go out and lease metal from bullion banks, in effect swapping the owners of our working inventory from Depository clients to bullion banks. If we weren’t able to get leases (unlikely IMO), then we would be forced to simply start cannibalising our inventory to sell (for those wanting cash) or make into product (for those wanting physical).

    I do not think we will have any problem getting leases, the real problem will be that the lease rates will likely be back to the 1-2% level they were in the 90s on the back of miners try to hedge against the price decline. This will be a big cost that will result in us reducing our working inventory down to the minimum necessary to support lower level of production we are likely to see.

  3. Chinese people appear to have been seduced to some degree by many things western in recent times, so paper gold doesn't seem surprising.

    There is no apparent totally physical gold market, and there never will be as long as we have paper-physical parity. Of course if the specific function of physical is required by more than a margin of the market then parity will be broken, because as I said the price may be the same but the product isn't... if the market never requires the function specific only to physical, then parity will likely continue.

    Your comments about The Mint reinforce my earlier comments about how it would be my first choice should I require a custodian for gold myself. Much better promotion for the likes of me than a big coin.

  4. Bob Moriarty probably got it right on silver more than most: (http://www.321gold.com/editorials/moriarty/moriarty042511.html), certainly better than Ted Butler, Zero Hedge and the rest.

    According to FOFOA gold is different, and CB buying might seem to confirm this. Despite this, I recently sold off almost half my physical silver (at a very nice profit) and 20% of my gold. And I might add that I now feel much more comfortable (and richer) having done so.

    But the point of this post, Bron, is that in most of your recent blogs you have/are becoming more and more cautious about gold maybe being in a bubble (early stage), that you and the PM are aware of and making the appropriate risk adjustments.

    Unlike the mysterious FOFOA and his followers I do not believe that "this time it is different" but that gold is approaching fair value. I think, however, that the danger is that a bigger bubble could form and that its subsequent bursting would be a disaster for all gold 'hoarders' and for producers like the PM.

    Rather than you citing articles with a brief personal comment I, for one, would be grateful for your considered opinion on such a likelihood.


  5. Gordon,

    I assume you are refering to http://goldchat.blogspot.com/2011/08/coming-goldbug-civil-war-and-your-pm.html

    I'm tending to repeat of 1980 but I keep my mind open to how events are playing out. Either way we are only in early stages - as many bloggers have pointed out the amount of money invested in PMs is minimal.

    In either scenario the Mint can expect liquidations. In a 1980 repeat this will be selling for cash profits, in the End scenario it will be for physical collection as trust evaporates.

    Both present different challenges to the Mint, one requiring us to maintain financial liquidity so we can give clients good execution, the other physical liquidity.

    Because I'm talking about it doesn't mean I think it is imminent, more forward thinking. Having said that, being liquid has always been a primary focus for us, which is why we don't lend out unallocated. We know our client's holdings are "at call".