The Death of Gold... Or Not!
Precious metal investors suffered yet another rude shock early this week, with the price of gold plunging below USD $1100oz, with a nearly USD $50oz sell off occurring in a matter of minutes in early Asian trading on Monday the 20th July.
In total, some 5 tonnes of gold was dumped on the Shanghai market in this two minute window, an extraordinary amount when one considers DAILY trading volume is typically in the vicinity of 25 tonnes.
At the same time, according to ANZ Bank, there was also 7,600 August 2015 gold contracts traded on the COMEX, equivalent to another 23 tonnes of metal.
The market has since bounced around, trading back above USD $1100oz at one point, though this morning we see that the metal has eased again, currently sitting at USD $1,091oz, whilst silver has fallen below USD $15oz, with the gold/silver ratio now sitting at 73.82
Australian dollar investors have not been spared this time around, with the AUD price falling back below AUD $1500 per oz. Year to date, this has reduced gains (yes, investors are still UP for the year in local terms, albeit mildly) to just 2%, though the recent sell off has also led to marked increase in trading volumes for bargain hunting physical buyers.
China Gold Announcement
Whilst the majority of the sell off in gold reflects extreme pessimism and aggressive short positioning in the markets (more on this below), perhaps some of the weakness in gold prices this week can be tied back to the Chinese announcement on Friday the 17th regarding their updated physical gold holdings.
To recap, on the 17th Juy 2015 the Chinese government announced that national gold holdings had increased to 1658 tonnes, up some 57% in the past 6 years. Based of these figures, the Chinese state has been buying roughly 100 tonnes of physical gold per year for the past 6 years.
This number disappointed many analysts and gold bulls who thought the number would be somewhere between 3,000 and 5,000 tonnes.
Despite the much lower than expected announcement, the updated figures still put China in fifth spot when it comes to the largest national gold reserves, behind the United States, Germany, Italy and France. Despite this, physical gold holdings still officially represent less than 2% of China’s massive foreign exchange reserves.
So what to make of it?
A few months ago, we wrote a piece for Livewire that specifically discussed Chinese national gold holdings. Titled “There are known knowns, known unknowns, and unknown unknowns”, we stated that whatever the number ended up being, “we think the number will offer plenty for both the bulls and bears to argue about, and we’re almost certain it won’t move markets as some expect”.
Whilst the sell off in the gold market this week might lead some to argue we were wrong regarding the impact of the announcement, we are happy to stand by our comments, for a few reasons.
Firstly, it is worth mentioning that China does not just hold physical gold through the People’s Bank of China (PBOC). They can also hold gold through the State Administration of Foreign Exchange (SAFE), and the China Investment Corporation (CIC).
When it comes to SAFE, one of their major functions is; “to undertake operations and management of foreign exchange reserves, gold reserves, and other foreign exchange assets of the state.”
The CIC on the other hand is a Chinese sovereign wealth fund. Founded in 2007 with roughly USD $200 billion of investment capital, it had grown to well over USD $550 billion by August of 2013. As at the end of December 2014, some 26% of this money was sitting in what the CIC describe as long-term investments, which include resources and commodities specifically.
As a result, we’re relatively certain that Chinese national gold holdings across all the entities it controls are higher than the official number, though it remains a known unknown as to what the true figure is.
It is also worth mentioning that if Chinese national gold holdings really only are in the vicinity of 1,600 tonnes, and that the Chinese state has been doing far less buying than many anticipated, then by default it means the Chinese citizenry have been doing more buying than might have originally been anticipated.
At the end of the day, we know that thousands of tonnes have been shipped into China in the past few years, and we also know that China is now the largest miner of gold.
We’re quite certain that the gold imported and mined hasn’t been thrown away, so if the state wasn’t buying it, someone or a group of someone’s, clearly has been.
Finally, it pays to remember the game that China is playing. At present, getting the yuan included as part of the SDR is a major priority, therefore announcing respectable but not threatening levels of national gold reserves, and not doing anything to potentially cause gold prices to rise makes plenty of sense from a Chinese perspective.
But don’t forget for a minute the long-term plan, which Song Xin of the China Gold Association has alluded to previously, that being the accumulation of at least 8,500 tonnes of gold over time to at least match/exceed the United States sovereign gold reserve.
Bottom line: China will be a net buyer, and a net importer of physical gold for years to come. In and of itself that won’t necessarily cause a sharp rally in gold prices anytime soon, but gold acquisition from the Chinese state and her citizens, as well as emerging market central banks the world over will continue to provide support for the physical gold market.
Those that have sold gold in the past few days (and there have been plenty in the ETF and futures markets) as a result of the “disappointing” number out of China may have just caused the capitulation event that typically marks the bottom of any bear market.
The Death of Gold
And so we come to the “Death of Gold”, a headline we saw earlier in the week accompanying a story about a particular ASX Stock that had soared 400%, alongside a sales pitch for investors imploring them to part with their hard earned cash for more stock tips. This headline capped off a week of unanimously bearish stories on the future prospects for gold, just some of which we’ve included below as images.
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