Zero Hedge fail on undocumented gold supply story

Zero Hedge really dropped the ball on the Bloomberg story that commodity trading firm Gunvor Group was giving up trading physical precious metals partly due to "difficulties in finding steady supplies of gold where the origin could be well documented".

 

Firstly, their spinning of the story came out three days after the Bloomberg story. That is an eternity when we have been told by experts that "the London hub is failing" (more on that in a future post) - I mean, the bullion banking system could have blown up in that time!

 

Secondly, ZH were obviously only half committed to their meme as they couldn't be bothered to do their signature LinkedIn profile highlighting. If you look at Cedric Chanu's profile you'll see that he only joined Gunvor in January, after having spent over 5 years with Deutsche Bank! Need I say more? And Francois Beuzelin, who worked at Soc Gen from 1998-2009 as "head of metals swap trading"! Gold swaps! Need I say more? And finally, coincidental that Cedric also worked at Soc Gen from 2004-2007, the same time as Francois?!

 

Seriously, ZH's last two paragraphs are a mess in terms of trying to spin a meme out of this story - it reads like a first draft and I've seen a lot better from them. Gold is one of ZH's mainstay themes and it is surprising to see them give this story such slack treatment; maybe it is a sign of the bottom that ZH's heart is not in to pumping this story for all its worth.

 

ZH starts off trying to link this story to the "rehypothecated commodities scandal in the port of Qingdao" and twist it to being about "gold whose ownership traders are unable to validate - has now flooded into the global trading infrastructure". Two misdirections here. First, "flooded" - where in the Bloomberg article is their any indication that undocumented gold is flooding the market? Zero.

 

Second, the Bloomberg quote talks about the undocumented "origin" of gold, not "ownership". Zero connection between those two concepts (maybe this is what the "zero" in Zero Hedge means - they just make stuff up of nothing). Any knowledgeable commentator on the professional gold markets would be aware of the LBMA's responsible gold framework, which implements "OECD Due Diligence Guidance as well as Swiss and US KYC, Anti-Money Laundering and Combating Terrorist Financing regulations". Not just refiners, but anyone trading in the gold market, needs to comply with this. Therefore Gunvor's reference to "origin" and "documentation" is clearly referring to the need to be able to verify that gold is conflict-free. It is not a reference to the "ownership link", as ZH puts it, of the gold that is the meme spin that ZH tries to put on this story.

 

Finally, ZH tries to play up the unusual nature of Gunvor pulling out of trading gold, since they are "the world's fifth largest trader of commodities". Well what is unusual is that Gunvor was in the gold market in the first place because Bloomberg notes that "neither Glencore Plc (GLEN), the biggest metals trader, nor Trafigura Beheer BV, the second largest, trade physical gold." The gold market is dominated by a handful of bullion banks who have a deep contact list and often contractual supply arrangements in place with miners and refiners. It is not surprising therefore that a "handful of people in Singapore and Geneva" were not able within a year to crack this market and gain enough business to justify a specialist division within a large firm. That is the mundane reality behind this story, not a biblical flood of ownership undocumented gold.

 

While we are talking about people who don't know what they are talking about, this Bloomberg piece on the possibility of Russia's next move being to sell their gold is a classic piece of gold bashing. In support of the thesis they quote two bullion market nobodies:

• A guy "who oversees $150 million at Parsippany, New Jersey-based" financial advisor
• Founder of Optionsellers.com in Tampa, Florida

The only credible source is "Michael Widmer, metals strategist at Bank of America Corp. in London" It is not surprising that he is the only one who notes that Russia could use their gold as collateral, rather than selling it. The others just simplistically argue that Russia will sell their gold outright. Given that Russia has been accumulating gold almost every month since mid-2006, I think it is highly unlikely they would sell it rather than just swap/repo it. I'd ignore this Russia-to-sell-gold meme only except that it may be a narrative influencing some traders.