http://www.afr.com/news/world/asia/zhou-says-china-has-room-for-monetary-easing-may-not-use-it-20150418-1mo4ek Zhou Says China Has Room for Monetary Easing; May Not Use It April 18, 2015 0 Share 0 Pin 0 Share 0 Share Source: Bloomberg Markets China’s central bank Governor Zhou Xiaochuan said the world’s second-largest economy has scope compared with other nations to ease its monetary policies though won’t necessarily take advantage of it. “We have room in the reserve ratio and our interest rates are not zero yet,” Zhou, 67, said in a brief interview Saturday in Washington, where he was attending the International Monetary Fund’s spring meetings. “There is definitely room. But we need to adjust carefully. It doesn’t mean we will have to utilize it or fully utilize the room.” Banks including Macquarie Group Ltd. and HSBC Holdings Plc flagged the need for further stimulus after China’s economy expanded last quarter at the slowest pace since 2009 and industrial-production gains in March were the slowest since November 2008. An economy-wide inflation indicator turned negative last quarter for the first time since 2009, suggesting room for easing. Premier Li Keqiang last month said policy makers will step in to support the economy if jobs and wages are hurt by the slowdown, while Zhou previously said the nation needs to be vigilant about deflation risks and policy makers have “room to act.” The People’s Bank of China made its first interest-rate cut in two years in November and followed with another reduction announced in February, with the one-year lending rate now at 5.35 percent and one-year deposit rate at 2.5 percent. It also lowered banks’ reserve-ratio requirements in February. China is battling a property slump, excess industrial capacity, local-government debt and capital outflows, with the economy last year expanding at the slowest pace since 1990. The nation is among at least 30 countries that have loosened monetary policy this year as lower commodity prices give room to stimulate. Gross domestic product rose 7 percent in the three months through March from a year earlier, while industrial production last month increased by 5.6 percent, after a 6.8 percent rise in the first two months of the year. In a statement at the meetings in Washington taking place from Friday to Sunday, Zhou said that while China’s economic expansion is slowing, it’s still within a “reasonable range” and employment growth remains stable. He reiterated that China will pursue “prudent” monetary policy and said it will adjust “adaptively” according to the economy and inflation, according to the statement posted on the PBOC’s website. One hurdle that may curb the extent of any monetary stimulus is China’s surging stock market, which took off after the central bank cut interest rates in November. Another may be reticence to reignite debt risks and a repeat of the 2009 stimulus binge. Zhou and the Chinese government have been pressing the IMF to include the yuan in its Special Drawing Rights basket of currencies regarded as global reserve currencies. IMF Managing Director Christine Lagarde has said that “we welcome and share this objective.” Zhou, in Saturday’s interview, declined to speculate on when the yuan, also called the renminbi, would be added to the basket. The IMF this week indicated it may be abandoning its long-held view that the Chinese exchange rate is undervalued . “The market should be the judge of the renminbi’s value rather than us,” Zhou said. Source: Bloomberg Markets
Beware, The Brent Vigilantes Are Coming Back Submitted by Tyler Durden on 05/08/2013 10:21 -0400 Bond China Crude Crude Oil Vigilantes Back in February we introduced the world to their last best hope in controlling the largesse of the world's central bankers . The 'Brent Vigilantes' were shown to have taken over the mantle of the now totally-repressed and benign bond vigilantes (since deficits don't matter apparently). Each time retail gas prices have breached $3.80 in the past six years, the SP 500 has crested (specifically the crossing of that threshold has seen P/E multiple expansion brought to a halt). With current gas prices around $3.53, we hear you cry, "what are you worried about?" Well, simply put, the answer lies in what is coming. Prices at the pump follow crude oil prices extremely closely with around a 30-day lag; the current WTI crude prices imply a price of gas at the pump around $3.80. So, if there is anything that can stop us from hitting 2,000 on the SP 500 (or Dow 30,000), we suspect it is the 'tax' that gas prices represent and we now know what the trajectory of those prices is likely to be in the next few weeks. Each time retail gas prices have topped $3.80, valuations (Fwd P/E) have also topped - not good news for a market driven solely by hope-driven multiple expansion... Especially as it would appear clear that gas prices at the pump are set to surge up to that $3.80 level once again... The Brent Vigilantes are on their way back... maybe that is what China is banking on? Charts: Bloomberg Goodbye Bond Vigilantes, Hello Brent Vigilantes Brent WTI Back To $20 - Some Thoughts On What's Next From Goldman Guest Post: Analysis of the Global Insurrection Against Neo-Liberal Economic Domination and the Coming American Rebellion Market Sentiment: Mixed SocGen Lays It Out: "EU Iran Embargo: Brent $125-150. Straits Of Hormuz Shut: $150-200"
Food Inflation To Surge, Goldman Warns Submitted by Tyler Durden on 10/10/2012 22:02 -0400 Brazil Central Banks China CPI Czech fixed Goldman Sachs goldman sachs Gross Domestic Product India Kazakhstan Mexico Ukraine Volatility We have been very active in our discussions of the impact of the pending rise in food prices around the world (from central bank largesse to weather-related chaos ). As Goldman notes, food inflation has been one of the most significant sources of headline inflation variation in emerging markets (EM) over the past few years . Since June, international prices for agricultural commodities have risen almost 30%, increasing the risk of fresh, food-related increases to EM headline inflation. We, like Goldman, expect EM headline inflation to start to reflect the relevant pressures more broadly in the October prints at the latest. While the effects, for now, are expected to be less extreme than the 2010-2011 episode, the timing as the US enters its fiscal-cliff-prone malaise, could mean a further round of easing will reignite this critical inflationary concern . Via Goldman Sachs, Food prices: A key driver of EM inflation Swings in food prices have important implications for overall inflation in emerging markets. Since 2007, we have observed substantial shifts in food inflation, which in turn have triggered significant contemporaneous volatility in EM headline inflation (see Exhibit 1). Food inflation has a strong impact on overall EM inflation for two reasons: In lower per-capita GDP economies, households necessarily dedicate a larger portion of their disposable income to inelastic goods such as food . As such, food makes up a larger share of the consumer basket. The average inflation share for food items in EMs is generally larger than that for the G10 countries (25% vs 15% respectively, on average). In order to capture the joint effect of the weight, the relative variation of food vs non-food inflation and the potential correlation between food and non-food items, we run univariate regressions of food on headline inflation. The R-squareds are typically higher on average for EMs (42%) than for G10 economies (33% respectively, Exhibit 2). Food prices have been highly volatile since 2007 globally . We have observed very large spikes in international prices for agricultural commodities (proxied by the SP GSCI Agricultural Index) in 2008, 2011 and more recently in June 2012. Such global price shifts typically also tend to be reflected in local food inflation. Exhibit 3 shows the co-movement between international food prices and an equally weighted average of food inflation rates across emerging markets. International food prices have tended to lead local food inflation by a few months (approximately four months on average). Following a significant increase in 2010, aggregate EM food inflation peaked in 2011 and has contributed to an overall moderation in EM headline inflation since. But EM food inflation has recently shown tentative signs of a trough and, at the country level, there is variation in the recent path of food inflation. China, Korea and Indonesia have seen the largest falls in food inflation from their 2011 peak. However, in countries such as Taiwan, Mexico and the Czech Republic, yoy food inflation has picked up and is currently hovering at higher levels than in 2011. This bottoming-out of EM food inflation has coincided with a significant spike in international agricultural commodity prices. In June and July this year, the SP GSCI Agricultural Index rose almost 40%, to levels last seen in August 2011, and roughly speaking has remained there since. Should this spike persist, we would expect to see food inflation pick up across EM once again. Here we argue that food price pressures will boost EM headline inflation by October at the latest . However, we do not expect EM CPI to exceed 2011 levels (in yoy terms). This is because we expect the increase in food prices to be smaller and less broad-based, and because non-food inflation is running at a slower pace currently. Moreover, we find evidence that the pass-through from international to local food prices has declined, something that first became visible in 2010. Food price outlook – new highs expected Agricultural commodity prices have exhibited substantial swings in the past few years. On the demand side, rapid income growth in EM economies has supported overall demand for agricultural products . Along with the broader increase in agricultural commodity demand, increased consumption of meat products has led to higher meat production and, in turn, higher demand for livestock feed. Lastly, high energy prices also boost food demand via the substitution process between conventional fuel and biofuel . Given this backdrop of elevated demand for agricultural commodities, the response in food supply conditions becomes the key to analysing price movements. Volatility in weather patterns and crops has helped trigger substantial inventory shortages and price spikes such as those experienced in 2008, 2011 and more recently in June 2012. The current spike has come in response to the summer drought in the US Midwest, which was one of the worst in the past century. In addition, a wide set of agricultural commodity producing countries have experienced adverse weather conditions (such as Brazil and Argentina in the past winter, and Russia, Ukraine, Kazakhstan and India). Damien Courvalin from our Commodities Strategy Team points out that these disruptions have caused substantial losses in global food supply (see Agriculture Update: ‘Severe US Drought to Push Corn and Soybean Prices to New Highs’, July 23, 2012). The supply loss is concentrated in wheat, corn and soybeans, which jointly account for 70% of world agricultural production . In contrast, rice remains largely unaffected. Despite the resulting 40% spike in the SP GSCI Agricultural Index between mid-June and mid-July, demand for agricultural commodities has remained robust. The net result has been a decline in inventories, with the USDA’s September 1 stocks of corn and wheat well below expectations, as Damien highlights in Agriculture Update: ‘Crop prices to recover on tight supplies with corn outperforming’, September 30, 2012. Our Commodities Strategy team expect demand to remain resilient and supply to remain binding , leading soybean and corn prices to new highs in the coming months. Higher prices will eventually be followed by a supply response, and if weather returns to normal, we should expect a large crop in South America (harvested next spring) and in the US (harvested next autumn). In the interim, prices are likely to remain high. However, there is a clear weather dependency to this assessment ; further weather adversity is likely to pose further upside risks to food prices. To address the binary nature of the food price outlook, our Commodities Strategy team provided us with two scenarios: The ‘favourable’ weather scenario , in which larger harvests in South America and the US serve to moderate agricultural prices following the initial increase. In this scenario, a basket of corn, wheat and soybeans sees year-on-year price changes of 46%, 16% and -21% in 3, 6 and 12 months respectively. The ‘moderately adverse’ weather scenario , in which supply tightness intensifies due to less favourable weather in South America, pushing prices to a higher peak over the coming months. In this scenario, the basket of corn, wheat and soybeans increases 65%, 41% and 1% in 3, 6 and 12 months respectively. Exhibit 4 shows the equivalent paths corresponding to each of the two scenarios of price developments in the corn, wheat and soy basket. In both scenarios, the SP GSCI Agricultural Index reaches new highs in the months ahead and declines one year out. The peak is, of course, higher in the adverse scenario, as is the trough 12 months out . The decline following the initial spike is also more gradual in the adverse scenario, while the final levels remain very close to the previous (2011) highs. It is worth pointing out that this scenario analysis is only meant as an illustration of the broader argument, rather than a precise forecasting exercise. Evidence of a moderation in the pass-through to EM inflation To translate our scenarios for international food prices into local food price trends for emerging markets, we need an estimate of the relationship between the two variables. As mentioned earlier, large shifts in global food prices have tended to show up systematically in local food inflation . Moreover, local food prices are typically stickier and slower to respond to shocks in global agricultural prices, which creates a lag between the two. To map international food prices onto local food prices, we follow the framework we introduced in Global Economics Weekly 11/13, June 6, 2011. We regress changes in the SP GSCI Agricultural Index on changes in an equally weighted average of food CPI components from key EMs. To avoid issues of seasonality and excessive near-term volatility, we look at year-over-year percentage changes in the two variables. Lastly, we examine different lags in international food prices to find the type of structure that offers the highest explanatory power. As in our previous analysis, we find a strong correlation between international and local food prices (an R-squared of 40%), with international food prices feeding through to local food prices with the highest explanatory power at a four-month lag (with a five-month lag a very close second). We estimate the historical sensitivity of local to international food prices at around 0.058, which implies that a 10ppt increase in international food prices would tend to raise our proxy of EM local food inflation by 58bp. Interestingly, this is 20% lower than our estimate from one year ago, of 0.073. This is further evidence for our suggestion from last year that EM CPIs appear to be displaying a lower sensitivity to global food price shocks. This could be due to a number of reasons, such as the temporary nature of the shocks, the softening in global demand dynamics leading to less broad-based price pressures, or the larger capacity of EM authorities to respond to food price volatility and smooth such shocks. It will be interesting to observe whether the pass-through declines further this time too. In our previous analysis, we also examined two alternative scenarios for food prices : one that assumed that normal weather conditions persist and one that assumed that adverse weather conditions push food items significantly higher. Based on those scenarios (combined with our pass-through estimates), we projected ranges of outcomes for the forward path of our EM food inflation aggregate. Finally, we translated those paths into EM headline inflation projections by keeping the rate of inflation for non-food CPI in EM economies constant. To check whether this approach is robust using out-of-sample data, we contrast the actual path of EM inflation with the scenarios developed in April 2011. We see that over the last year EM headline inflation has hovered between our moderate and our adverse scenario (see Exhibit 5). This confirms our ex ante assumption that food inflation would remain the most important determinant of EM headline inflation, and also provides a level of comfort that our estimation approach and results are fairly sensible. It broadly confirmed our estimates for a lag of about four months in international food prices feeding through to EM inflation rates on aggregate. EM inflation set to increase more moderately than in 2010-11 With our two scenarios for international food prices, and our updated pass-through coefficient, we can now calculate two potential paths for EM food inflation. Using these, we then turn to estimating the impact of EM food inflation to EM headline inflation. To do this, we use the relevant food weights to split EM headline inflation into a food and an ex-food component. We then assume that EM inflation ex-food continues to grow at the current pace and we add the weighted path of food inflation to project the headline rate. We find: Relative to the latest available inflation data (August), there may be further downside to aggregate EM headline inflation due to food contributions . The impact of base effects and the relevant lags between international and local food prices imply that we may need to wait until the full set of October inflation prints are out to fully confirm the beginning of the systematic pick-up in EM food inflation. From October onwards inflation starts to rise and peaks, on a year-over-year basis, in March 2013 , i.e., 40-60bp above current levels and 80bp-100bp above the projected trough. After March 2013, inflation starts to decline. The pace of the decline will depend on future weather conditions. A moderate weather environment would lead to a quicker and deeper normalisation in EM inflation. Our projections suggest the peak in headline inflation will be lower than the 2011 food price spike episode , at between 4.6% and 4.8%yoy depending on weather conditions, compared with 5.1% in mid 2011. This is mostly because the food price increase itself is projected to be somewhat smaller for international food prices on aggregate and in annual terms, and to be less broad-based (focused on wheat, corn and soy). In addition, non-food inflation rates in the first half of 2011, when EM headline inflation peaked, were slightly higher (about 20bp on average) relative to the current annual pace of non-food inflation. There are three key risks around these conclusions. Timing appears to be more uncertain this time around . As mentioned earlier, there are signs across a number of EMs that food inflation is already picking up. This may mean that the lag estimate of four months in the pass-through from international to local food prices may be too lengthy this time around. In turn, this means that EM food inflation is likely to pick up sooner than October. Relative to the last food price spike in 2011, this analysis may be less applicable to Asian economies. This is chiefly because of the much more stable price developments in rice . To some extent our analysis takes this into account; as mentioned earlier, we map the corresponding shifts in the corn, wheat and soy basket on broader shifts in the SP GSCI Agricultural Index. And this is, in part, the reason why the size of the shock in aggregate international prices is smaller. However, we are conscious that we run our exercise on a high level of aggregation, which does not allow for more precise adjustments along those lines. The uncertainty in non-food inflation may be high in the months ahead . Oil prices are expected to recover from current lows but a lot will depend on the pace of global demand and developments in geopolitical risks. Moreover, there is a degree of co-movement between food inflation and core inflation across several EMs, which may pose upside risks to our stable current non-food inflation assumption. Finally, core inflation may exhibit a high degree of variation across emerging markets. We are coming out of a period of softening growth in EM economies which could dampen headline inflation prospects. That said, many EM economies continue to run at high rates of capacity utilisation and experience persistent inflation inertia. Note that these assessments do not constitute an inflation forecasting exercise but rather an illustration of likely paths for food-driven EM inflation on aggregate. There are, of course, local particularities that may create deviations from such assessments on a regional or country level. Our Asia and CEEMEA Economics research team have also done quantitative work projecting the likely impact of higher food prices on local CPIs. Reassuringly, their findings are broadly consistent with ours; in CEEMEA, our economists expect a 50bp-100bp upside contribution to headline inflation , mostly due to higher food prices but also accounting for the impact of energy prices. In Asia, our economists expect food inflation to add 100bp to local inflation. EM currencies to benefit Given the significance of food inflation for overall headline inflation levels and the linkages between food and non-food inflation recorded in the past, EM central banks are unlikely to fully dismiss food price volatility as a temporary and mean reverting phenomenon. Instead, they are likely to respond by tightening monetary conditions either via guidance (a more hawkish stance) or via currency strength (to curtail price pressures on imported food items), or even via higher policy rates. As international food prices are available in high frequency, markets are likely to anticipate these shifts to some extent. Given, however, that ex ante market assessments are conditioned on a number of underlying macro developments, shifts are likely to be priced only partially. Therefore, it is reasonable to expect market shifts to occur as EM food inflation pushes headline inflation up and EM policy makers react proportionally. Overall, higher headline inflation in EMs is broadly consistent with higher front-end rates (or rate expectations), flatter EM curves and currency strength. To confirm this intuition, we run a simple cross-asset event study of the last three food inflation spikes: 2004, 2007-08 and 2010-11 (Exhibit 7). We examine the average impact of food-driven headline inflation on EM curves and currencies, and also look at equity market behaviour. More specifically, to proxy for shifts in near-term interest rate expectations, we look at the change in 1-year rates 1-year forward relative to the US (to account for global shifts in fixed income markets). We also look at shifts in the spread between 5-year and 2-year EM rates relative to the US to proxy for shifts in the broader shape of the curve. Lastly, we examine average EM FX returns vs the USD and average EM equity performance vs the SPX. Arguably, it is hard to rely on such small sample assessments and cross-EM averages, but it is interesting that our results generally confirm our macro intuition: Typically, 1-year 1-year forwards tend to increase on average , albeit by a small amount, while EM curves flatten significantly in only two of the three episodes. EM currencies appreciated strongly vis à vis the USD during the last two food inflation spike episodes and were flat in the first episode under study. Interestingly, EM equities outperformed the SPX in all three episodes . It is hard to argue that such a negative supply shock can be linked to benign equity market trends. Indeed, in absolute terms, equities fell in two of the three spikes. The relative outperformance may be due to stronger EM growth vs G10 in our sample. Hard as it may be to draw firm conclusions from a limited sample, EM FX vs USD strength appears to be the clearer tradable result of EM food inflation pressures . Forward rate expectations have also tended to pick up, albeit to a small extent, while curve flattening is less obvious. Lastly, it is not clear if we will observe a repeat of the relative EM equity strength we saw in the past given the current mixed cyclical backdrop across different EMs. Source: Goldman Sachs Average: 5 Your rating: None Average: 5 ( 5 votes) Tweet Login or register to post comments 7584 reads Printer-friendly version Send to friend Similar Articles You Might Enjoy: Goldman Enters The "Corn Trade" Putting The Corn Harvest In Drought And Flood Context What Every Farmer And Commodity Trader Will Be Glued To Tomorrow at 830ET Food Price Spike Dead Ahead: US Cuts Corn Crop Forecast By 12% As 56% Of America Is Under Drought Conditions Deja Food: Will Social Unrest Surge As Corn Prices Soar?
Eric Sprott: Do Western Central Banks Have Any Gold Left? Submitted by Tyler Durden on 10/02/2012 18:49 -0400 From Eric Sprott and David Baker of Sprott Asset Management Do Western Central Banks Have Any Gold Left??? Somewhere deep in the bowels of the world’s Western central banks lie vaults holding gargantuan piles of physical gold bars… or at least that’s what they all claim. The gold bars are part of their respective foreign currency reserves, which include all the usual fiat currencies like the dollar, the pound, the yen and the euro. Collectively, the governments/central banks of the United States, United Kingdom, Japan, Switzerland, Eurozone and the International Monetary Fund (IMF) are believed to hold an impressive 23,349 tonnes of gold in their respective reserves, representing more than $1.3 trillion at today’s gold price. Beyond the suggested tonnage, however, very little is actually known about the gold that makes up this massive stockpile. Western central banks disclose next to nothing about where it’s stored, in what form, or how much of the gold reserves are utilized for other purposes. We are assured that it’s all there, of course, but little effort has ever been made by the central banks to provide any details beyond the arbitrary references in their various financial reserve reports. Twelve years ago, few would have cared what central banks did with their gold. Gold had suffered a twenty year bear cycle and didn’t engender much excitement at $255 per ounce. It made perfect sense for Western governments to lend out (or in the case of Canada – outright sell) their gold reserves in order to generate some interest income from their holdings. And that’s exactly what many central banks did from the late 1980’s through to the late 2000’s. The times have changed however, and today it absolutely does matter what they’re doing with their reserves, and where the reserves are actually held. Why? Because the countries in question are now all grossly over-indebted and printing their respective currencies with reckless abandon. It would be reassuring to know that they still have some of the ‘barbarous relic’ kicking around, collecting dust, just in case their experiment with collusive monetary accommodation doesn’t work out as planned. You may be interested to know that central bank gold sales were actually the crux of the original investment thesis that first got us interested in the gold space back in 2000. We were introduced to it through the work of Frank Veneroso, who published an outstanding report on the gold market in 1998 aptly titled, “The 1998 Gold Book Annual”. In it, Mr. Veneroso inferred that central bank gold sales had artificially suppressed the full extent of gold demand to the tune of approximately 1,600 tonnes per year (in an approximately 4,000 tonne market of annual supply). Of the 35,000 tonnes that the central banks were officially stated to own at the time, Mr. Veneroso estimated that they were already down to 18,000 tonnes of actual physical. Once the central banks ran out of gold to sell, he surmised, the gold market would be poised for a powerful bull market… and he turned out to be completely right – although central banks did continue to be net sellers of gold for many years to come. As the gold bull market developed throughout the 2000’s, central banks didn’t become net buyers of physical gold until 2009, which coincided with gold’s final break-out above US$1,000 per ounce. The entirety of this buying was performed by central banks in the non-Western world, however, by countries like Russia, Turkey, Kazakhstan, Ukraine and the Philippines… and they have continued buying gold ever since. According to Thomson Reuters GFMS, a precious metals research agency, non-Western central banks purchased 457 tonnes of gold in 2011, and are expected to purchase another 493 tonnes of gold this year as they expand their reserves. 1 Our estimates suggest they will likely purchase even more than that. 2 The Western central banks, meanwhile, have essentially remained silent on the topic of gold, and have not publicly disclosed any sales or purchases of gold at all over the past three years. Although there is a “Central Bank Gold Agreement” currently in place that covers the gold sales of the Eurosystem central banks, Sweden and Switzerland, there has been no mention of gold sales by the very entities that are purported to own the largest stockpiles of the precious metal. 3 The silence is telling. Over the past several years, we’ve collected data on physical demand for gold as it has developed over time. The consistent annual growth in demand for physical gold bullion has increasingly puzzled us with regard to supply. Global annual gold mine supply ex Russia and China (who do not export domestic production) is actually lower than it was in year 2000, and ever since the IMF announced the completion of its sale of 403 tonnes of gold in December 2010, there hasn’t been any large, publicly-disclosed seller of physical gold in the market for almost two years. 4 Given the significant increase in physical demand that we’ve seen over the past decade, particularly from buyers in Asia, it suffices to say that we cannot identify where all the gold is coming from to supply it… but it has to be coming from somewhere. To give you a sense of how much the demand for physical gold has increased over the past decade, we’ve listed a select number of physical gold buyers and calculated their net change in annual demand in tonnes from 2000 to 2012 (see Chart A). CHART A Numbers quoted in metric tonnes. † Source: CBGA1, CBGA2, CBGA3, International Monetary Fund Statistics, Sprott Estimates. †† Source: Royal Canadian Mint and United States Mint. ††† Includes closed-end funds such as Sprott Physical Gold Trust and Central Fund of Canada. ^ Source: World Gold Council, Sprott Estimates. ^^ Source: World Gold Council, Sprott Estimates. ^^^ Refers to annualized increase over the past eight years. As can be seen, the mere combination of only five separate sources of demand results in a 2,268 tonne net change in physical demand for gold over the past twelve years – meaning that there is roughly 2,268 tonnes of new annual demand today that didn’t exist 12 years ago. According to the CPM Group, one of the main purveyors of gold statistics, the total annual gold supply is estimated to be roughly 3,700 tonnes of gold this year. Of that, the World Gold Council estimates thatonly 2,687 tonnes are expected to come from actual mine production, while the rest is attributed to recycled scrap gold, mainly from old jewelry. 5 (See footnote 5). The reporting agencies have a tendency to insist that total physical demand perfectly matches physical supply every year, and use the “Net Private Investment” as a plug to shore up the difference between the demand they attribute to industry, jewelry and ‘official transactions’ by central banks versus their annual supply estimate (which is relatively verifiable). Their “Net Private Investment” figures are implied , however, and do not measure the actual investment demand purchases that take place every year. If more accurate data was ever incorporated into their market summary for demand, it would reveal a huge discrepancy, with the demand side vastly exceeding their estimation of annual supply. In fact, we know it would exceed it based purely on China’s Hong Kong gold imports, which are now up to 458 tonnes year-to-date as of July, representing a 367% increase over its purchases during the same period last year. If the imports continue at their current rate, China will reach 785 tonnes of gold imports by year-end. That’s 785 tonnes in a market that’s only expected to produce roughly 2,700 tonnes of mine supply, and that’s just one buyer . Then there are all the private buyers whose purchases go unreported and unacknowledged, like that of Greenlight Capital, the hedge fund managed by David Einhorn, that is reported to have purchased $500 million worth of physical gold starting in 2009. Or the $1 billion of physical gold purchased by the University of Texas Investment Management Co. in April 2011… or the myriad of other private investors (like Saudi Sheiks, Russian billionaires, this writer, probably many of our readers, etc.) who have purchased physical gold for their accounts over the past decade. None of these private purchases are ever considered in the research agencies’ summaries for investment demand, and yet these are real purchases of physical gold, not ETF’s or gold ‘certificates’. They require real, physical gold bars to be delivered to the buyer. So once we acknowledge how big the discrepancy is between the actual true level of physical gold demand versus the annual “supply”, the obvious questions present themselves: who are the sellers delivering the gold to match the enormous increase in physical demand? What entities are releasing physical gold onto the market without reporting it? Where is all the gold coming from? There is only one possible candidate: the Western central banks. It may very well be that a large portion of physical gold currently flowing to new buyers is actually coming from the Western central banks themselves. They are the only holders of physical gold who are capable of supplying gold in a quantity and manner that cannot be readily tracked. They are also the very entities whose actions have driven investors back into gold in the first place. Gold is, after all, a hedge against their collective irresponsibility – and they have showcased their capacity in that regard quite enthusiastically over the past decade, especially since 2008. If the Western central banks are indeed leasing out their physical reserves, they would not actually have to disclose the specific amounts of gold that leave their respective vaults. According to a document on the European Central Bank’s (ECB) website regarding the statistical treatment of the Eurosystem’s International Reserves, current reporting guidelines do not require central banks to differentiate between gold owned outright versus gold lent out or swapped with another party. The document states that, “ reversible transactions in gold do not have any effect on the level of monetary gold regardless of the type of transaction (i.e. gold swaps, repos, deposits or loans), in line with the recommendations contained in the IMF guidelines.” 6 (Emphasis theirs). Under current reporting guidelines, therefore, central banks are permitted to continue carrying the entry of physical gold on their balance sheet even if they’ve swapped it or lent it out entirely. You can see this in the way Western central banks refer to their gold reserves. The UK Government, for example, refers to its gold allocation as, “Gold (incl. gold swapped or on loan)”. That’s the verbatim phrase they use in their official statement. Same goes for the US Treasury and the ECB, which report their gold holdings as “Gold (including gold deposits and, if appropriate, gold swapped)” and “Gold (including gold deposits and gold swapped)”, respectively (see Chart B). Unfortunately, that’s as far as their description goes, as each institution does not break down what percentage of their stated gold reserves are held in physical, versus what percentage has been loaned out or swapped for something else. The fact that they do not differentiate between the two is astounding, (Ed. As is the “including gold deposits” verbiage that they use – what else is “gold” supposed to refer to?) but at the same time not at all surprising. It would not lend much credence to central bank credibility if they admitted they were leasing their gold reserves to ‘bullion bank’ intermediaries who were then turning around and selling their gold to China, for example. But the numbers strongly suggest that that is exactly what has happened. The central banks’ gold is likely gone, and the bullion banks that sold it have no realistic chance of getting it back. CHART B Sources: 1) http://www.bankofengland.co.uk/statistics/Documents/reserves/2012/Aug/tempoutput.pdf 2) http://www.treasury.gov/resource-center/data-chart-center/IR-Position/Pages/08312012.aspx 3) http://www.ecb.int/stats/external/reserves/html/assets_8.812.E.en.html 4) http://www.boj.or.jp/en/about/account/zai1205a.pdf 5) http://www.imf.org/external/np/exr/facts/gold.htm 6) http://www.snb.ch/en/mmr/reference/annrep_2011_komplett/source Notes: ECB Data as of July 2012. Bank of Japan data as of March 31, 2012. * European Central Bank reserves is composed of reserves held by the ECB, Belgium, Germany, Estonia, Ireland, Greece, Spain, France, Italy, Cyprus, Luxembourg, Malta, The Netherlands, Austria, Portugal, Slovenia, Slovakia and Finland. ** Bank of Japan only lists its gold reserves in Yen at book value. Our analysis of the physical gold market shows that central banks have most likely been a massive unreported supplier of physical gold, and strongly implies that their gold reserves are negligible today. If Frank Veneroso’s conclusions were even close to accurate back in 1998 (and we believe they were), when coupled with the 2,300 tonne net change in annual demand we can easily identify above, it can only lead to the conclusion that a large portion of the Western central banks’ stated 23,000 tonnes of gold reserves are merely a paper entry on their balance sheets – completely un-backed by anything tangible other than an IOU from whatever counterparty leased it from them in years past. At this stage of the game, we don’t believe these central banks will be able to get their gold back without extreme difficulty, especially if it turns out the gold has left their countries entirely. We can also only wonder how much gold within the central bank system has been ‘rehypothecated’ in the process, since the central banks in question seem so reluctant to divulge any meaningful details on their reserves in a way that would shed light on the various “swaps” and “loans” they imply to be participating in. We might also suggest that if a proper audit of Western central bank gold reserves was ever launched, as per Ron Paul’s recent proposal to audit the US Federal Reserve, the proverbial cat would be let out of the bag – with explosive implications for the gold price. Notwithstanding the recent conversions of PIMCO’s Bill Gross , Bridegwater’s Ray Dalio and Ned Davis Research to gold, we realize that many mainstream institutional investors still continue to struggle with the topic. We also realize that some readers may scoff at any analysis of the gold market that hints at “conspiracy”. We’re not talking about conspiracy here however, we’re talking about stupidity. After all, Western central banks are probably under the impression that the gold they’ve swapped and/or lent out is still legally theirs, which technically it may be. But if what we are proposing turns out to be true, and those reserves are not physically theirs; not physically in their possession… then all bets are off regarding the future of our monetary system. As a general rule of common sense, when one embarks on an unlimited quantitative easing program targeted at the employment rate (see QE3), one had better make sure to have something in the vault as backup in case the ‘unlimited’ part actually ends up really meaning unlimited. We hope that it does not, for the sake of our monetary system, but given our analysis of the physical gold market, we’ll stick with our gold bars and take comfort as they collect more dust in our vaults, untouched. 1 http://www.bloomberg.com/news/2012-09-04/central-bank-gold-buying-seen-reaching-493-tons-in-2012-by-gfms.html 2 See notes in Chart A. 3 http://www.gold.org/government_affairs/reserve_asset_management/central_bank_gold_agreements/ 4 http://www.imf.org/external/np/exr/faq/goldfaqs.htm 5 Mine supply estimate supplied by World Gold Council; YTD gold mine production data suggests that total 2012 gold mine supply will come in lower around 2,300 tonnes, ex Russia and China production.In addition, Frank Veneroso has recently published a new report that warns that the supply of recycled scrap gold could drop significantly going forward due to the depletion ofthe inventories of industrial scrap and long held jewelry over the past decade. 6 http://www.ecb.int/pub/pdf/other/statintreservesen.pdf Average: 4.875 Your rating: None Average: 4.9 ( 40 votes) Tweet Login or register to post comments 18111 reads Printer-friendly version Send to friend Similar Articles You Might Enjoy: “Gold Ponzi Schemes” Revealed - Physical Gold Favored Over Derivatives Sprott's John Embry:“The Current Financial System Will Be Totally Destroyed“ Barclays Opens Massive Brand New Precious Metals Vault In London Guest Post: Does Central-Bank Gold-Buying Signal The Top Is Near? 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