Chinese Checkers with Gold Prices

By: John Browne | Thu, Apr 10, 2014
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For decades many of us in the hard money world have speculated that cloak and dagger activity by large financial interests has played a large role in determining performance in the gold market. The focus of this alleged manipulation is believed to be in the London market, and has been widely referred to as "The London Fix." However those who have blown the whistle have been dismissed as alarmists, gold bugs, conspiracy theorists or worse. But recent revelations should bring us closer to the truth.

On March 11, 2014, the Wall Street Journal reported that AIS Capital Management had filed a class action suit, against a number of large banks including, Barclay's PLC, Deutsche Bank, HSBC, and many others, alleging that the banks conspired to manipulate the price of gold for their own gain. This suit comes on the heels of official investigations in the UK and in Germany.

Like the London Inter Bank Offered [interest] Rate (LIBOR), the London Gold price forms a benchmark for the spot price for major gold metal transactions throughout the world. The LIBOR scandal rocked the financial world. But Germany's senior financial regulator declared possible gold manipulation as "worse than LIBOR". These words appeared to give new meaning to the word 'fix'. To get at the truth, it helps to try to follow the international flows of gold, to see who is buying, who is selling, and where the gaps may appear.

Major gold trading has long been shrouded in mystery. Despite returns required by the IMF, trading in the Far East is difficult to trace accurately. In 2009, China's central bank disclosed that its gold holdings had increased by 75 percent from 600 to 1,054 tonnes, or metric tons. According to Wikipedia, this made China the world's sixth largest holder.

Gold Field Mineral Services (GFMS) estimates the world's total gold production for 2013 was 2,982 tonnes. With an annual production of some 428 tonnes, according to Forbes Asia, China is the world's largest producer. But, like Russia, China exports no gold. If China's last three years annual assumed production is aggregated, China's 2009 declared holdings of 1054 tonnes should have increased since by some 1,284 tonnes, for a total of some 2,338 tonnes. This would make China one of the world's largest holders. But the story does not end there. China imports massive amounts mainly via Hong Kong and Shanghai.

According to Forbes Asia, the China Gold Association showed that China's gold consumption increased by 41 percent over 2012 to 1,176 tonnes in 2013. (China does not publish official numbers so discrepancies range in the hundreds of tonnes) Adding these imports to China's domestic production of 428 tonnes indicates that China accumulated at least 1,604 tonnes last year. India's imports, as reported by Bloomberg, were 978 tonnes last year. Therefore, China and India together accumulated 2,582 tonnes or over 86 percent of total worldwide production of 2,982 tonnes.

Furthermore, combining China's aggregate domestic production and apparent imports indicates that she has now over 3,514 tonnes. Assuming the U.S. still owns all the gold held by the Fed, this would make China the world's second largest national owner.

In addition to China and India, Indonesia, Saudi Arabia and Thailand increased their gold holdings in 2013. As gold is a widely recognized representation of wealth, this represents a massive transfer of 'real' wealth from West to East.

Clearly, the massive Eastern demand for physical gold has made it much more difficult for Western central banks' mission to lower the market price of gold. That is unless Western central banks have been leasing out gold secretly to market buyers, who have been 'encouraged' politically, like Germany, not to take physical delivery?

When, at the beginning of 2013, Germany asked for the repatriation of just 300 tonnes of its holdings of 3,396 tonnes, the Fed asked for a five-year delayed delivery. By year's end, the Fed had sent Germany only 5 tonnes.

Although privately owned, partly by bankers, the Fed is audited only partially. Could it be that a large portion of the Fed's published gold holdings of 8,133.5 tonnes is now actually the property of other nations, like Germany?

Is China already the world's largest 'owner' as opposed to 'holder' of gold? If so, China, with a mature financial center in Hong Kong, already is further along the path than most have predicted towards challenging the vital reserve currency status and international credibility of the U.S. dollar.

Clearly the recent price rise in gold owes something to inflation fears, repressed interest rates and to the Ukrainian situation. In the meantime, a growing awareness of a possible serious and increasing shortage of physical gold and a decline in the power of western central banks to suppress the price, point to a resumption of the fundamental bull market in gold, despite a possible increase in fears of recession.

 


John Browne is a Senior Economic Consultant to Euro Pacific Capital. Opinions expressed are those of the writer, and may or may not reflect those held by Euro Pacific Capital, or its CEO, Peter Schiff.

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John Browne

Author: John Browne

John Browne, Senior Market Strategist
Euro Pacific Capital, Inc.

John Browne

John Browne is the Senior Economic Consultant for Euro Pacific Capital, Inc. Mr. Brown is a distinguished former member of Britain's Parliament who served on the Treasury Select Committee, as Chairman of the Conservative Small Business Committee, and as a close associate of then-Prime Minister Margaret Thatcher. Among his many notable assignments, John served as a principal advisor to Mrs. Thatcher's government on issues related to the Soviet Union, and was the first to convince Thatcher of the growing stature of then Agriculture Minister Mikhail Gorbachev. As a partial result of Brown's advocacy, Thatcher famously pronounced that Gorbachev was a man the West "could do business with." A graduate of the Royal Military Academy Sandhurst, Britain's version of West Point and retired British army major, John served as a pilot, parachutist, and communications specialist in the elite Grenadiers of the Royal Guard.

In addition to careers in British politics and the military, John has a significant background, spanning some 37 years, in finance and business. After graduating from the Harvard Business School, John joined the New York firm of Morgan Stanley & Co as an investment banker. He has also worked with such firms as Barclays Bank and Citigroup. During his career he has served on the boards of numerous banks and international corporations, with a special interest in venture capital. He is a frequent guest on CNBC's Kudlow & Co. and the former editor of NewsMax Media's Financial Intelligence Report and Moneynews.com. He holds FINRA series 7 & 63 licenses.

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