06 November 2013

Confusion in Beijing's gold shops on price manipulation

I received an email from someone who is Chinese with investments in Australia giving a view from the average person in China:

"Gold community in China is much different from western world. The customers are mostly old people (not discribed Chinese Dama [Bron - means middle aged married women]). Their only purpose is to preserve their savings (to against inflation) which earned by hard working of their whole life. When we go to Beijing's biggest gold shop and see some old couples sitting there, looking at gold price chart monitor with hopeless eyes (someone even have heart attack), we are filled with anger. Those good natured and hard working people, they don't chase equities or any kind of riskier investment, they buy gold for safety only. But now, the community is mostly hurted.

As for me, I only have a little gold less than 1% of my assets, but my very old father have a lot. He exchanged 25% of his savings to gold. When every week he met and ask me about gold's "cliff drop" and "volatility" and depressed several months, I can't explain to him exactly what happened. Chinese mainstream media are full of copies of wall streets comments and suggestions, I can't explain to my father clearly what is bullion bank's manipulation and I don't know how to make him happier. Such cases are numerous in China.

Bullion banks are not only making people suffer loss, but also destroying good faith and human logic. CMEgroup says Bullion banks' participation in gold/silver market is to "provide liquidity", but most of end buyers don't need such "liquidity" in the market. Bullion bank's trading is only for their own profit. Those "value-add" profit should belong to customer, miners and even you and your mint.

The problem come from huge naked short in thin time with no news in mid night electronic trading session or London fix, but sadly mid-night electronic session is afternoon in China, that triggers heard attack and depression of old people.

SGE already delivered 1782.997 metric ton in 2013 till October 25, about 15-20 times than Comex, we can't imagine why world price is controlled by a few of US banks."


Unfortnately it seems the average Chinese is no better informed than the average Westerner that we operate in a FIRE economy these days. That is why SGE's larger physical deliveries don't matter, as the ZIRP free money drives leveraged speculation in all markets, gold included. Simply the weight of this money in the gold market overwhelms the non-leverage money from the "good natured and hard working" just looking for safety.

So even if you got rid of fractional reserve banking, futures markets and manipulative trading tatics (which would help), you would still have this volatility as large investors could still borrow money at little cost and leverage up the little bit of their own money to buy a lot more gold. The consequence of that leverage is that it only takes a small change in price to threaten to wipe their capital out, resulting in quick and rushed liquidations back out.

And don't think that "China" is somehow not part of the problem. The same FIRE dynamic is in play in China as well, see this article or this on arbitrages using gold.

There was a great article out a few months ago called On the Phenomenon of Bullshit Jobs where he asks why predictions of a 15-hour work week never eventuated even though productivity increases could allow for it. He proposes that "rather than allowing a massive reduction of working hours to free the world’s population to pursue their own projects, pleasures, visions, and ideas, we have seen the ballooning" of bullshit jobs "as if someone were out there making up pointless jobs just for the sake of keeping us all working".

I propose a related phenonenom - that we are in a bullshit economy.

I am not confident that this is sustainable, which is why I have some gold insurance in my retirement savings account. All I can say to investors is to realise the bullshit FIRE dynamic that drives markets these days, be aware that this will result in large price swings, don't get all excited if we have a quick price rise as it could just be hot money that will flow out again, and remember gold is insurance to protect your wealth, not grow it.

27 comments:

  1. this email is so sad... did you get an email complaining when the price of gold was soaring? of course not...

    Bron, your point here was so subtle that I fear many will miss it: hot money works both ways...

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  2. This is a lot less subtle http://kiddynamitesworld.com/anyone-calling-cftc-morning-blatant-gold-manipulation/

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  3. I thought Chris Powell was being a bit harsh with this comment "But Suchecki suggests that the Chinese should just get over it" at http://gata.org/node/13209

    To clarify, when I said “that we are in a bullshit economy. I am not confident that this is sustainable” I thought it was clear I don’t agree with it, the message of the post is don’t be na├»ve about the way the market operates.

    Buy for insurance and hold firm, as while markets can be manipulated I don't believe they can be supressed in the long run.

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  4. "I propose a related phenonenom - that we are in a bullshit economy."

    So you're saying it's all a Ponzi scheme Bron?

    Or are you going to qualify this as well?

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  5. @Kid

    Sure, we see the price of gold sometimes go up on extreme volumes as well, which just illustrates how easy the price is influenced.

    After everything we have learned about price rigging in ALL financial markets in recent years, do you believe the gold market is clean?

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  6. Justin,

    For debt just used to speculate or spent on consumption, then that is Ponzi.

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  7. Koos - prices can be impacted/manipulated in the SHORT TERM.

    for specific points in time.

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  8. Thanks for sharing the email.

    Seems to me the Chinese could put an end to the paper market by using say .5% of their $3.6 trillion fx reserve to buy comex gold contracts (several hundred tons).

    Seems obvious and maybe that's been going on to some extent as gold stock has been leaving comex vault in mass in 2013. In 2012 comex gold deliveries were about the same as 2013 but most of delivered gold remained in comex vault

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  9. @Norm Lasky

    A low price of gold for a substantial period is the best thing that could happen to China to diversify away from the USD. De don't want it to rise, ..yet.

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  10. Koos Jansen:

    I agree. Through October, I think 100 plus tons of gold have left comex vaults and I suspect most of it has been delivered to China. As long as China can buy sizable amounts of gold at $1300, they'll play the game. Otherwise, I think they'll end it.

    Registered comex gold is down to about 19 tons, down around 80% since 1/1/13. So we could be getting near the end. But the 10/1/13 bank participation report put out by the cftc shows usa banks net long 58,000 comex gold contracts. Will they take deliver and replenish their stock or replace gld gold which they have redeemed and sold to China? 58,000 contracts is about 180 tons of gold and the availability of gold is still very limited.

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  11. Great closing points in your post. Good example and clear explanation. Thanks, perhaps your best ever post.

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  12. Thanks, nice to get some positive feedback for once.

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  13. This is off the subject but I would appreciate any comments on the following:

    October ytd 2013, gold etfs have liquidated about 850 tons with the gld accounting for roughly half of the total.

    As noted by Koos Jansen website It appears a major amount of this has been shipped from the uk to switzerland and then once refined switzerland to hong kong.

    The world gold council through the first half of 2013 has reported the etf liquidation as a reduction in investment demand. Seems to me they double counting the etf liquidation because I think it's included in recycled gold - 400 oz bars being refined into kilos or whatever specified by the Chinese. The only place the wrold gold council could be reported leased gold or gold sold by central banks is in recycled gold so why is etf liquidation handled differently than disposiion by central banks?


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  14. I doubt GMFS would make such a simple double counting mistake. Scrap/recycled gold does not include bars rerefined into other bars as far as I'm away, it only includes jewellery and other objects.

    Same goes for gold sold by CBs, that is included in a separate figure of CB buying/selling - it is not included in recycled gold category. Leased gold is not included because it is not buy/sell, it is borrow/lend transaction.

    If the leased gold is sold (and not all leases are for shorting), then that would be picked up, to include leasing would be double counting.

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  15. Hi Bron,

    What's your opinion on Chinese scrap supply?

    GFMS reports it was 125 tons in 2011, while the China Gold Market Report (by the CGA, SGE, SHFE and PBOC) "states" it was 407 tons.

    How come this difference?

    Koos

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  16. Koos:

    The WGC shows recycled gold was about 1600 tons in 2011.

    What does GFMS show recycled gold in 2011/2012 globally and what countries are the big drivers?

    The WGC shows that Indian scrap is roughly 100 tons per year. GFMS shows China scrap at 125 tons per year. So does that mean that the bulk of the 1600 tons scrap per year is coming from USA and Europe? If so, scrap coming from USA and Europe would be many times greater than new jewelery consumption??




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  17. Bron:

    Thanks for your comments.

    I'm trying to understand the sources of recycled gold scrap and where it comes from.

    Given the high markups on jewelery, seems to me that old gold jewelery which is sold would only be remelted if it were broken or viewed as junk which I believe is a small % of the used gold jewelery market.

    The annual recycled gold amounts reported by the WGC over the last few years have been running around 3/4 of new jewelery consumption. That's a lot of junk gold.

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  18. Koos - don't know why the difference, maybe China includes bars resold/melted whereas GMFS includes that in net bar demand figures.

    Norm - high mark ups on jewellery are just a western thing, a lot of "jewellery" sold in India/Asia is high carat low mark up.

    I don't see anything unusual about the scrap volumes - remember all the cash for gold stores in the west. Also consider that of the 174,000t of gold stock, 85,000t is said to be in jewellery form, so 1,500t of recycled gold is not much in that context.

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  19. Bron:

    You may have read this article by Eric Sprott:

    http://www.sprott.com/markets-at-a-glance/do-western-central-banks-have-any-gold-left-part-ii/

    His data shows USA recycled gold in 2012 at 46 tons or about 3% of wgc 2012 recycled gold total. Nice if wgc reported recycled gold data by country.

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  20. Koos

    GFMS report shows gold scrap by region. Where did you get the 125 tons for China?

    GFMS shows gold scrap in 2012 for east asia at 355 tons. I would think most of it is China.

    http://share.thomsonreuters.com/PR/Misc/GFMS/GoldSurvey2013Update1.pdf

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  21. There is a table in GFMS' Gold Survey 2013 (not the update) with country specific scrap supply from 2003-2012.

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  22. Bron:

    Thanks for the info on ggr site. I'm interested in any opinions or experience you have on scrap gold.

    US Geological says 51% of usa scrap gold comes from leftovers from fabricated products including coin and medallion cuttings. Gold recovered from
    usa junk jewellery and obsolete industrial products accounts for 49% of scrap. The data US Geological provides over the period 2003 through 2011 consistently averages around 40% of the totals included in GFMS 2013 report.

    Can you tell us something about new vs old scrap at the Perth Mint or any opinions that you have on this subject?

    My belief is that the old scrap reported by GFMS is a hodgepodge of old, new and bars. The total old scrap reported in 2012 globally is 1616 tons which is almost as large as global production ex china and russia.


    Thanks.

    Norm

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  23. Norm,

    In the industry "scrap" is usually a generic term referring to gold that is being refined which has not come from a mine. So bars being melted and refined into new bars would be classed as scrap, along with what people would think scrap means, such as industry leftovers, jewellery etc.

    If a bar is being sold but then kept and resold, it would not be classified as scrap.

    Different services would use different classifications.

    Generally why GFMS includes bars being melted down in "scrap" is because when they ask refiners for their statistics, the refiners don't keep separate figures on bars vs jewellery melted down. Often this is because when large quantities of scrap are received by refineries from those who buyback and/or accumulate, it is a mix of bars and jewellery and there is not point in separating it out just so GFMS can have some accuracy in figures - it is all just thrown in the crucible.

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  24. As to the Perth Mint, we mostly refine newly mined gold, but with our scrap we don't keep track of the ounces of each type of scrap we receive, so I don't have any stats for you on that.

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  25. Thanks Bron.

    I believe feftovers from gold fabricated products or "new scrap" as described by US Geological Survey should not be included in old scrap given that it is not included in demand data. Do you agree with this?

    In 2012, the GFMS report shows fabricated demand was 2613 tons. US Geological estimates that the leftovers for fabricated jewellery in USA is 17% and the cuttings from coins and medallions are 14%. Call it 15% on the average. Applying a 15% leftover rate to 2012 global fabricated product demand of 2613 tons results in new scrap of 460 tons. This is a major chunk of old scrap reported by GFMS - 1616 tons in 2012.

    I believe GFMS and WGC should make an adjustment to their old scrap data for this factor. I questioned WGC. They said their data was accurate and no adjustment is required. I disagree with their assessment and believe their old scrap data is significantly overstated.

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  26. "leftovers from gold fabricated products ... should not be included in old scrap given that it is not included in demand data"

    Not sure I agree as the original acquisition of the gold by the fabricator is counted as demand.

    I am more willing to accept GFMS' data as that is based on direct contact with industry worldwide. Where does USGS get its estimates from and is that just for the US or worldwide, as the US % will not be the same in all countries.

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  27. Don't know if they base the demand on tonnage shipped by fabricators or retail stats, but both of them do not include "leftovers" in their demand tonnage because its not part of final product. I'm fairly certain of this.

    Currently we're seeing a lot of remelting of bars to china specifications. WGC shows the etf liquidations as a reduction to demand - separate item shown in their demand stats. As you say, if the refiners throw all the scrap into a crucible including the bars, then it seems to me the remelting of bars is being double counted. However, the data seems to show that they have made an adjustment to the data. The WGC shows that sept ytd etf liquidations are about 700 tons as a negative line item to demand so it's very unlikely that it's also included in the recycled supply stats.

    I thought perhaps they also made an adjustment to the old scrap data but the response from the World Gold Council to my contact at New Gold investor relations states that they do not. I've asked investor relations to bring this up to New Gold CEO, Mr. Oliphant for review.


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