Submitted by: Adrian Ash | BullionVault

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Plenty of reasons to be cautious were flagged up in today’s “Bubble or Not?” debate… LOTS MORE to share from the second and last day of this year’s LBMA Annual Conference here in Montreal. But the red-eye for London won’t wait, not with Air Canada cabin staff starting a strike at midnight.

So two quick charts, both highlighted by Edel Tully, precious metals strategist at UBS, in her conference summary. First, she said she’s adding this chart – hoisted from this morning’s opening presentation by Albert Cheng of the World Gold Council in the China & India session – to her slide deck:

It shows the yawning supply-demand gap inside China’s domestic gold market. Now the world No.1 for gold mining output four years running, China cannot satisfy its own private household demand.

Bigger picture, the chart makes a neat pairing with this slide, used by Franco-Nevada chairman Pierre Lassonde in Monday’s keynote speech – and already a key fixture in any analyst or strategist’s PowerPoint slides, according to Tully.

Plenty of reasons to be cautious on gold were flagged by this afternoon’s “Bubble or not?” debate. In particular, the risk of a parabolic rise – similar to how silver shot higher this spring – could see “safe haven” buyers scared off by volatility. (Silver investment flows have certainly turned “hesitant” since then, noted GFMS’s Philip Newman.)

Or maybe existing investors will soon begin tiring of year-on-year gains in gold, and start rotating into other asset classes instead of waiting for what they might forecast as a “top”. Or maybe a blow-up in China – sparked by its own domestic credit and real estate markets, if not central-bank action to try and cool them, along with inflation – could see its tug on the world’s gold supplies pushed the other way, as the feel-good affinity for gold is reversed by economic slowdown or even recession.

But for now, as one panellist put it in the Oxford-style debate – and with gold investment accounting for just 1% of the world’s financial assets today – “This looks less like a bubble than an opportunity.”

Related News:

• Gold forecast to beat $2,000 in the next year

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Formerly City correspondent for The Daily Reckoning in London and head of editorial at the UK’s leading financial advisory for private investors, Adrian Ash is head of research at BullionVault – winner of the Queen’s Award for Enterprise Innovation, 2009 and now backed by the World Gold Council market-development and research body – where you can buy gold today vaulted in Zurich on $3 spreads and 0.8% dealing fees.

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This is my response to the article A challenge to debate: How safe is gold? by Sam Chee Kong of Malaysia Chronicle. Since links in the comments section don’t work, here’s the fully linked comment.

“But despite having one less competitor in the safe haven basket, the price of gold did not rocket up as expected. Instead it went down about $50 when the CHF news hit the streets.”

That’s because the price of gold as we know it is manipulated, although its value remains untouched. The “gold price” that the market uses is influenced largely by gold futures and options trading at the CME, which are essentially gold derivatives or “paper gold”. High Frequency Trading (HFT) by bullion banks largely determine the price of paper gold which in turn is adopted as a basis for this debate.

Because of this, gold’s price action does not make sense most of the time, and the case in point is the one you cited above. If you assume that the gold price is a reflection of the value of physical gold in a free market, your observation and conclusion is spot on. If however, you factor in the issue of manipulation, you will come to a totally opposite conclusion.  In the event cited above, gold was taken down five minutes before the announcement and the subsequent plunge of CHF. See this minute-by-minute chart of CHF and gold price actions.

If one argues that the gold price action was because of leaked news, should not the same apply for the CHF/EUR chart? To understand what happened behind the scene, listen to the comments by fund manager Ben Davis of Hinde Capital (4mins into the audio clip) and read the analysis by professional commodities trader Dan Norcini.

For in-depth discussion on manipulation of gold (& silver), visit politicalmetals.com to understand the political nature of gold and silver. Only then can you understand why gold (& silver) prices behave the way they do and why you should view them as the ultimate safe haven and store of value compared to fiat currencies or any financial instruments and paper derivatives.

I could do a point by point rebuttal of the whole article, but it’ll be quite pointless if this fundamental premise upon which the whole debate is based is not sorted out first. In the interim, just ignore the minute-by-minute, hourly, daily or even weekly price of gold. They’re all noise due to massive manipulation. To make sense of the place of gold (& silver) in the larger scheme of things, look at their prices on a monthly and yearly chart. While the powers that be are able to do massive manipulations to paint the tape on short term charts, this effect is less pronounced in long term charts.

Conclusion:

The current price discovery mechanism of gold is akin to the tail wagging the dog (paper gold influencing physical gold). Coupled with central bank manipulations, it will be a futile exercise to engage in a debate over gold’s role in one’s portfolio based on short term price actions. However, things are looking brighter going forward. With the expected opening of the Pan Asia Gold Exchange (PAGE) in China by the end of this year, Comex will no longer have the monopoly to determine the price of paper gold, and by extension, that of physical gold. When we finally see the dog wagging its tail, the proper price discovery mechanism for gold would have been in place. By then, gold’s role will be so evident this debate becomes unnecessary.

By Chris Powell | GATA

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By Alasdair Macleod | GoldMoney

Gold, politics, and Venezuela

Markets were abuzz last week with Chavez’s recall of Venezuela’s gold reserves not currently held in Caracas. Bulls are excited by the thought that withdrawing some 150-200 tonnes from the Bank of England and the bullion banks will force a bear squeeze on the LBMA, where gearing between the physical and paper markets are assumed to be 100 to 1. This stretches the relationship between paper gold and physical gold even further. They are also excited by the possibility that others might follow Venezuela’s example.

These concerns are real and should not be dismissed lightly, and the announcement could not have come at a worse time for LBMA members, who also face being caught up in a European banking crisis. Fear dominates, but the real trigger for this market emotion, and therefore its outcome, is global politics. Chavez is not just recalling his country’s gold to protect its integrity, he is waging an idealist’s war against the capitalist system and the US in particular. This is why he has threatened to move gold and foreign reserves to the countries he says he trusts, principally Russia and China, and why he is proposing to nationalise Venezuela’s gold mines.

He has picked the capitalist system’s weakest point. He has been told by his central bank that the Fed, the BoE and the Bank for International Settlements hold gold for the whole central banking community in the main trading centres, and that much of this gold exists only as a ledger entry and is not backed by physical metal. Whether or not Venezuela’s gold is held in these fractionally-backed sight accounts, or in earmarked accounts where the gold is held separately, we do not actually know; but there is little doubt that this move is designed to encourage other central banks to demand that their gold is also repatriated.

Chavez has a point. It is a fair bet that the International Monetary Fund’s 2009 sales of 212 tonnes of gold to other central banks are held in sight accounts as a condition of sale. India, Mauritius and Sri Lanka, who bought this gold, must be very nervous. Interestingly, India and Sri Lanka are also associated with the Shanghai Cooperation Organisation, which was set up by China and Russia with the eventual goal of establishing an Asian supranational state.

This little-known connection is extremely important. The SCO even has a website. The central banks of its member states, observer states and dialogue partners are nearly all buying gold, overtly or covertly. This is more likely to be a co-ordinated economic attack on the West than just a purely random event.

Until Chavez’s intervention, China and Russia – who run the SCO – were gently turning the screws on the gold market: Russia by announcing regular purchases and China by encouraging its citizens to buy. They appear to have put the word about through the SCO that gold will have an important role in the SCO’s future, and those involved should have some. This is a world Chavez wants to be part of, and by removing his country’s gold from capitalist markets he is declaring his credentials.

Underlying this extreme socialist action is the Marxist belief that capitalism will destroy itself. Chavez believes it is his duty to give it a helping hand.

Related Articles:

• Bullion Bank Run – Pressure from the Top and Bottom
• Precious Metals Price Discovery about to Change

By Ned Naylor-Leylan | Cheviot Asset Management Limited

Pan Asia Gold Exchange (PAGE) building in Kunming City, China

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The Pan Asia Gold Exchange and Hugo Chavez, a curious meeting of minds

The Pan Asia Gold Exchange and Hugo Chavez, a curious meeting of minds? The recent story picked up in the media about Hugo Chavez and the ‘calling’ of Venezuelan Gold held in London generated a good deal of interest and drew attention to the little-discussed issue of Precious Metals custody and ultimately, delivery.

Unlike the Venezuela delivery angle, however, an even bigger and related story is emerging outside of the coverage of the mainstream western press. China has recently launched a new Precious Metals exchange in Kunming City, Yunnan province, called the Pan Asia Gold Exchange (PAGE). I had the great pleasure of being part of a small group of interested parties in London observing and participating in the opening ceremony for the new exchange. We saw the clear support of central and regional government in this venture, evidenced by the participants on the day and their comments. PAGE has been steered at central government level by key economic ministers and mavens and is a formal part of the PRC’s present 5 year plan, one which places Yunnan province as a new gateway to international trade. The photo on the right shows the scale (and colour!) of the new exchange building in Kunming City.

This exchange is offering a new international-facing allocated ‘Spot’ Gold and Silver contract, with an 8am Beijing-time ‘fix’. The fix will only involve Chinese Banks; indeed the owners and members of the exchange are in no way related to the western banks that dominate the existing Spot and Futures Precious Metals markets. PAGE is launching in Q4 2011 a new Spot Precious Metals contract to challenge the emaciated LBMA ‘loco London’ system. International investors will now be able to buy allocated and, crucially, Rmb-denominated ‘Spot’ Gold and Silver contracts. The importance of this cannot be overstated. The Renminbi will be accessible to international investors through this exchange, but in a controlled fashion - using Gold as a synthetic choke on demand for the currency. By buying an Rmb Gold contract on PAGE and selling the equivalent $ denominated contract elsewhere, investors will be left with Rmb exposure. One would imagine that the incentive to own Rmb in the present climate is by inference likely to lead to a whole lot of demand for Gold contracts through this new exchange. Add to that the real demand for allocated Gold that will migrate across from the existing Spot market and you are looking at something that looks sure to have major implications for the Precious Metals market.

Historically the emergence of new Gold and Silver exchanges is met with a collective yawn. The reason for this is that there has never before been any expectation that new exchanges could/would affect the price discovery mechanism. Each new exchange was effectively an extension of the status quo. The mainstream has become dissociated with regard to this issue of price discovery. Many assume that Precious Metals prices are discovered in the healthy way one would normally expect - the body of the market being the ‘real’ Spot market, where the forces of supply and demand meet, with a small tail wagging merrily away in the form of a futures market (see the Jack Russell illustration). In Gold and Silver the size of the Spot market is ten or more times that of the futures market, so the use of a dog as an analogy holds up in scale terms. The current price discovery mechanism, however, as expressed by my Basset Hound illustration, works instead as follows:

The body of the dog (the Spot market) has become the plaything of its ‘tail’. Rather than the dog wagging its tail, the dog is being wagged BY the tail. This is achievable because the actors wagging the dog by its tail are some of the same LBMA (London Bullion Market Association) members that effectively make up the body of the dog. The LBMA system (aka ‘loco London’) has held sway beyond living memory and countless nations rely on the system for both price discovery and storage/custody. This system has not only allowed itself to be corrupted by fractionalisation, it is clear that the body of the dog actually welcomes being wagged, for fear of the repercussions of being caught short were it not! The ‘spot’ dog has been reduced to shell of its former self, so much so that even apologists for the status quo admit that the ‘spot’ market has around 100 paper claims outstanding to each physical bar. At any cost the existing mechanism will resist delivery, which is what makes the recent demand by Hugo Chavez to repatriate Venezuelan Gold reserves so interesting. This move towards delivery by the Venezuela leader plays into the same important dynamic as the Pan Asia Gold Exchange.

My contention is that this new exchange represents a far bigger challenge to the hegemony of the existing bullion banking system and it price discovery mechanism than most realise. Given the choice between being the unallocated and unsecured creditor of a fractionalized LBMA market or holding title to deliverable and allocated bars within the PAGE system I anticipate much of the ‘loco London’ business will migrate east, lured by the twin benefits of certainty of outright ownership and long-awaited international market access to Renminbi.

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Richard Poulden, Director of Power Capital Financial Trading (PCFT) discusses the new Pan Asia Gold Exchange (PAGE) with James Turk of GoldMoney.

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China Business News

Central banks’ purchases in the second quarter more than quadrupled compared to the levels in the corresponding period of 2010, according to the council’s report. Central banks are likely to remain net purchasers of gold. “Purchases of 69.4 tonnes during the second quarter of 2011 demonstrated that central banks are continuing to turn to gold to diversify their reserves,” WGC said in the report.

It added that gold supply was 1,058.7 tonnes in the second quarter, a four per cent decline from 1,108.3 tonnes in the same period last year, as a result of an increase in net purchases by central banks.

Ten years ago when the gold price touched $1,000 an ounce, it seemed improbable, and now the industry forecast is pegged at approximately $2,000 by 2015.

Asked if the high price of gold would be reached even earlier than that, Unni told Gulf News: “Considering the current fundamentals, further gains in gold are quite possible, but it will be difficult to envisage a high in the near term.”

He added that gold remains “vulnerable” if investors have to sell positions to cover any sharp fall in equity markets.

As per WGC’s estimates, gold demand in the second half of 2011 is expected to remain “strong”.

“The strength of demand in India and China, coupled with an overall drop in recycling activity this quarter, demonstrates that consumers have adjusted to the current price environment and expect the upward price trend to continue,” Marcus Grubb, managing director, investment, at the WGC, said in the report.

Dubai The rising price of gold is unlikely to impact the trading patterns in the UAE, according to commodity analyst Pradeep Unni. “The UAE, especially Dubai, is largely a trade centre and also a favourite tourist destination. Thus, jewellery trade in the region is unlikely to get effected by the price spikes or drops,” he said, adding that gold trading in Dubai constitutes to about “16 per cent” of the global gold trade.

Retailer Damas, too, does not expect much of an impact on sales in value terms.

“Our belief is that consumers have become slightly accustomed to high gold prices. There is even a strong consumer sentiment that the price might increase further,” said Raj Sahai, director, retail, at Damas.

The UAE emerged as the most resilient market in the Middle East according to WGC report, with second quarter tonnage demand just one per cent below year-earlier levels at 16.1 tonnes.