GOLD ANALYSIS
Where’s the gold – or the silver?
The ever continuing movement of vast amounts of gold and silver to the East in particular begs the question of how physical demand is being satisfied elsewhere.
Author: Lawrence Williams
Posted: Wednesday , 13 Mar 2013
LONDON (Mineweb) - Some years ago the Wendy’s hamburger chain ran what was probably its most successful advertising campaign ever where the punchline – ‘Where’s the beef’ - was uttered by a little old lady. How much more so might this be relevant to the gold and silver markets today where the volumes traded on the key markets exceed the amount of physical metal available many, many times over. As numerous observers have pointed out this opens them up to accusations of severe market manipulation and seems to be something the various financial authorities seem unable, or unwilling to take a serious interest in curtailing.
But if this is the case, what is happening to the newly mined physical gold and silver? Where’s the gold? India and China on their own account would nowadays seem to take the bulk of global production based purely on Indian government statistics and Chinese official data for imports through Hong Kong, coupled with China’s own gold production which doesn’t leave the country. Add to that smuggled gold (into India in particular) and gold possibly entering China through other channels plus announced Central Bank purchases and one wonders indeed how physical demand elsewhere in the world is being satisfied – and there is indeed demand for physical bullion other than in those two nations and from the Central Banks. Gold and silver bullion coins are selling at record levels and this may even be dwarfed by sales in small bar form. The real statistics just don’t seem to add up.
Some of the demand may have been satisfied in recent weeks by offloads from the SPDR Gold ETF in particular, although there are some, like Eric Sprott, who cast doubt on the ETFs holding what they say they do in terms of physical metal. If this is the case it would suggest a fraud on a massive scale and this writer tends to discount this suggestion, at least as far as the biggest players in this sector are concerned. Sprott also feels that perhaps Western Central Banks are supplying the markets with physical gold without reporting it – indeed many have suggested that the central banks do not hold what they say they do, having leased it out to the bullion banks who have, in turn, sold it on. The Central Bank accounts show leased gold as still being on their books, but with a potential shortage of physical metal on the markets, so the theory goes, it would be difficult to claw the metal back into the Central Bank vaults in a short period of time – if ever! This accounts for the theories which have sprung up over the German Bundesbank having to wait seven years to repatriate some of its gold from the NY Fed – a process which should be able to be achieved in a matter of days, although admittedly banks do not tend to move quickly at the best of times – but perhaps not that slowly either.
If this does, indeed, represent a globally orchestrated attempt to supress the price of gold, as commentators like the Gold Anti Trust Action Committee (GATA) have alluded to for many years, it is not one aimed at preventing the gold investor making money – that is collateral damage – but rather it would be an attempt to maintain some kind of global financial stability, given gold’s centuries-long role as a bellwether of financial responsibility. The profligate printing of money under the Quantitative Easing programmes makes this very relevant today and is perhaps why the assumed market manipulation seems to be so open and intense.
To an extent whether or not this manipulation is present, is of lesser importance than the shift in economic power from West to East – or at least from the developed world to the developing nations currently underway. It is the BRICS, and other developing nations, which are building up their official gold reserves to give them a stronger foothold as the global world order is seen to be changing. Indeed it is China among these which many assume is increasing its gold reserves fastest, but without officially announcing this lest such news causes the gold price to soar, thus making it more costly to continue its surreptitious gold purchase programme . But China is also probably unwilling to see the gold price fall back much either as part of its policy has also been to encourage precious metals investment by its people – and maintaining, and increasing, its peoples’ wealth is an important factor in retaining control over its massive population.
To come back to the beginning of this article and its title – Wheres’ the gold – or the silver? – much of the newly mined gold does indeed seem to be being moving into China in particular. It is worth demonstrating this graphically with a chart recently published by Agora Financial which shows the huge, and growing, rise in gold’s holdings in China taking into account its reported imports and its growing domestic production.
One might well ask why China is building its gold holdings to such an extent. The Chinese, with their more tightly controlled society, think long term to a far greater extent than the Western Capitalist system would seem to allow where short termism is the principal way markets play out. The Chinese are looking for the yuan to replace the dollar as the world’s global reserve currency with all the economic advantages that brings. As the dollar replaced the pound sterling in this role during the last century so, the way things appear to be going, the yuan will replace the dollar in the current one.
With China’s economy – even at its current relatively depressed level – growing hugely faster than that of the U.S. it will only be a few years before it overtakes the U.S. economy in size and will come to dominate global trade in the way the U.S. has for most of the last century. The world order is changing, and gold is a significant factor in the equation – at least that seems to be the way the Chinese see it.
So what next for gold and silver? The gold bulls predict a serious supply squeeze developing for physical metal in the months and years ahead which, as they comment, will eventually overwhelm the assumed Western efforts to keep the price under control. This may well not happen as quickly as many predict, or would like and, if it does come to pass, would undoubtedly lead to a period of huge gold price volatility – Jim Sinclair’s scenario (see $1,000 daily price swings and $3500 gold – Sinclair’s dire predictions). If the Chinese do indeed gain the upper hand though don’t necessarily expect gold and silver to become a totally free market again. China is capable of micro-managing the gold market to its own advantage to the same extent the West is believed by many to be doing at the moment. Its primary intent will be to keep the bulk of its people happy and under control – and a hugely wealthy middle class of gold holders may not be the best way of doing this – it would rather spread the wealth downwards. It should have learnt better than any nation, barring Russia perhaps, what burgeoning wealth inequality can mean in terms of potential dissent and, ultimately, revolution.
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