Considering Chinese Demand

541
Thu, Jun 13, 2013 - 1:36pm

It's one of those things. You hear about it every day but never stop to really think about it.

This began as an email discussion with my friend, Ned, yesterday. All of us in Turdville are aware that the Shanghai Gold Exchange has physically delivered something like 1200 metric tonnes of gold, year to date. That's a staggering number and it far exceeds the amount delivered through London and dwarfs the level delivered through the Comex. Prior to yesterday, I looked at that number and thought, "Wow. That's a lot.", but I never stopped to ask the follow-up questions:

  1. To whom is this being delivered? AND
  2. Once it's delivered, where does it go next?

Let's start by looking at this handy chart. Note that, at this current pace of delivery, Shanghai is currently delivering each month the entire global mine supply. No wonder they were temporarily "out of stock" back in May! How long can this continue?

OK, now for some additional background. Recall that, since about 2006, the Chinese government has been aggressively promoting gold buying by its citizens. This campaign really began to pick up steam in 2009 following The Great Western Financial Crisis. A quick Google search returns all sorts of articles which describe this policy. Here are just a few examples: https://www.mineweb.co.za/mineweb/content/en/mineweb- gold-analysis?oid=88452&sn=Detail & https://www.bullionbullscanada.com/index.php?option=com_content&view=article&id=2545:china-urges-citizens-to-buy-gold-silver&catid=48:gold-commentary&Itemid=131 & https://news.goldseek.com/GoldSeek/1267715760.php & https://www.forbes.com/sites/gordonchang/2012/01/29/why-are-the-chinese-buying-record-quantities-of-gold/

We also know that officially reported Chinese imports are soaring. In just the first four months of this year, China has imported through Hong Kong nearly 500 metric tonnes of gold. This adds to the 834 metric tonnes that they imported in calendar year 2012. https://www.bloomberg.com/news/2013-02-05/china-gold-imports-from-hong-kong-gain-to-all-time-high-in-12.html

(Charts courtesy of ZH)

So where is all this gold going? I first wrote about it nearly a year ago. Much of it is being recast into kilo bars that, I believe, will ultimately be used to provide a hard asset backing to a future Yuan. https://www.tfmetalsreport.com/blog/3924/gonefor-good

But that still doesn't explain the almost-daily, 15-25 metric tonnes of physical delivery in Shanghai. This is why Ned and I were so perplexed.

So, next, I did what any sensible person would do, I rang up Andrew Maguire. His decades of experience in working the international wholesale market makes him the best source I have for answers to these questions. The conversation went something like this:

Me: "Andy, where the heck is all this gold going?"

Andy: "It's not going anywhere."

Me: "What do you mean?"

Andy: "I mean exactly that. Shanghai settles all that bullion each day to domestic wholesalers. That metal is then shipped off to Chinese dealers and refiners for domestic consumption."

Me: "So wait a minute. You're telling me that public demand in China is currently soaking up 250 metric tonnes per month or nearly ALL of the publicly-reported global mine supply?"

Andy: "Exactly."

And then I started thinking...Well how hard would that be to do? 250 metric tonnes is about 8,000,000 troy ounces. The current population of China is 1.344 billion. If only 25% of the population is taking their government up on the idea of gold ownership, that's 336,000,000 people or, roughly, an amount equivalent to the entire population of the United States!

So now let's say that these 336,000,000 people buy, on average, 1/40th of an ounce every month. That works out to be about 3/4 of a gram or about $35 worth at $1400/ounce. Working the math backward we get: 336,000,000 people buying .75 grams = 252,000,000 grams and 252,000,000 grams = 252 metric tonnes.

Hmmm. Well how about that? Makes you look at stories like this in a different light, doesn't it? https://usa.chinadaily.com.cn/china/2013-06/12/content_16611576.htm

A crowd of customers waits in front of a gold store to shop during a promotion, in Jinan city, East China’s Shandong province on June 11, 2013.

People crowding around a gold products counter jockey for position to pick up something in a gold store which sold its products at a price of 299 yuan per gram in a promotion – about 50 to 70 yuan lower than the normal level, in Jinan city, East China's Shandong province on June 11, 2013. The promotion attracted nearly 10,000 people who rushed to the store despite restricting each customer's shopping time to 15 minutes. While gold markets in the US and Europe saw panic selling, China has just seen a surge in gold sales in the past few months. Chinese households came under the spotlight with their generous purchase of the gold products amid a global fall of the gold price.

OK, then. So, do you still think that the Spec Shorts are on the right side of the trade, that price is going lower and that the "bull market" in gold is over???

Hmmmm. Chew in that over the weekend and then come back for more on Monday. It's going to be another interesting week.

TF

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  541 Comments

Jun 14, 2013 - 4:28pm

CoT changes this week

Pretty good stuff. Not earth-shattering but a definite continuation of the trend.

GOLD

The Large Specs added 3000 longs but also added a fresh 5200 shorts. The Small Specs dumped 137 and added 998 new shorts and now are once again net short by almost 700 contracts.

The Gold Cartel dumped 1000 longs but also covered 4300 shorts, thereby reducing their net short position by 3,330 contracts. This leaves them net short just 58,300 contracts with a net short ratio of 1.40:1.

SILVER

The Large Specs dropped their net longs by another 1650 contracts and they are now net long just a total of 3,700 with a preposterously low net long ratio of just 1.12:1. The Small Specs dumped 350 longs and added 1367 new shorts. This leaves them net long only 1300 contracts.

The everybody-but-JPM silver commercials added another 1,581 longs this week. This brings their gross long position back to the 2nd highest on record at 68,438. WOW! JPM and their pals were able to further reduce their gross short position, too. They used the weakness brought upon by the Spec selling to cover 1798 contracts. This leaves them with a gross short position of just 73,458. All totaled...The entire commercial category on silver is now net short just 5,020 contracts and the are sitting on a new record low net short ratio of just 1.07:1.

Once again, from a historical perspective this is truly astonishing...almost breathtaking. From time immemorial, even getting the Commercial net short ratio down under 1.5:1 was considered extremely bullish. Now it's 1.07:1!. If you want to see some historical comparisons, I once again refer you here: https://www.tfmetalsreport.com/blog/4492/strange-days-indeed.

I would strongly encourage you to go back to that post and review those numbers. Not just the historical ones but even the data from the CoT of 2/5/13. The changes in the four months since are amazing.

If I have time, I'll add some more thoughts later. In the end, though, this is another very encouraging CoT.

Btw, if I'd told you last Friday that we'd close today at $22+, would you have believed me?

Spartacus Rex
Jun 14, 2013 - 4:28pm

“On the Importance of Sound Money by Arthur Laffer June 14 2013

When I first went to work for the Nixon administration, I told my mom, “Mom, you can’t believe it. I just wrote a speech for Nixon and he used every single word. Well, he did make two little changes. Everywhere I had ‘is’ he put ‘is not,’ and everywhere I had ‘is not’ he put ‘is,’ but other than that, Mom, it’s exactly my speech.”

Nixon did all sorts of things wrong: the import surcharge, the wage and price controls, the huge increase in social spending, the doubling of the capital gains tax rate. But to my way of thinking, Nixon’s biggest problem was going off gold.

I am a strong advocate of sound money. I believe that it’s basically the Fed’s responsibility to guarantee the value of the dollar, to make sure we don’t have inflation. Nixon wanted us to go off the gold, which led to the high interest rates and hyperinflation of the ’70s and very early ’80s. In fact, it really was a global phenomenon.

There was one person whose side I was on. Paul Volcker and I worked on going off gold — that was our task — but both of us shared a view that we needed to keep on the gold standard to provide discipline to the monetary authorities. And unfortunately, we lost the battle. They went off gold and you can see the consequences: the devaluation of the dollar back in the early 1970s. But when Volcker came back in later as Fed chairman, it was just spectacular what he did. He and Ronald Reagan were the two instruments of the prosperity of the ’80s.

In the 1970s, we had all sorts of economic problems. Inflation was rising. We had a weakening of the dollar through Johnson and Nixon. Even before Johnson, we had a weakening with Kennedy. There were all sorts of restrictions on trade. You may remember that Kennedy had a problem with France on the dollar, and then, when Johnson came in, he too had them. We had the Buy America program, the interest equalization tax and the voluntary foreign credit restraint program, all of these things aimed at improving the trade balance, the capital balance of the U.S. And throughout this whole period, we had reduced our reserves of gold and we really had not used gold as the discipline that it should have been. That’s with the Bretton Woods agreement.

When we came into the 1970s with Richard Nixon, I was very involved — as you may know, I was the first chief economist at the Office of Management and Budget when it was formed. In fact, I joined the government in October 1970. I was George Schultz’s right-hand person back then, his economist. My first job was a trip to China. I was in charge of mainland China for the White House, which, for a kid my age (I was 29, maybe 30), was pretty cool.

At that time, we wanted to devalue the dollar and the French did not. John Connolly was our union representative, and he was discussing this with Giscard d’Estaing, and Giscard d’Estaing was trying to explain to Connolly why they really could not allow the U.S. to devalue the dollar. This was just before the Smithsonian Agreement. He said, “Mr. Connolly, I don’t know if you understand the program from the standpoint of France, but you see, sir, we hold the dollars in reserves and, therefore, if we allow you to devalue the dollar against the French franc, we will suffer the capital loss on the reserves in France. That is what will happen.”

And with that, Connolly took his unlit cigar, swirled it in his mouth, put his foot up on the table with his boots on, pointed that cigar at Giscard and said, “Well, hell, Giscard, we have more dollars than you do.” And of course, everyone burst out laughing.

But going off gold and devaluing the dollar was a very big mistake. It caused a decade of hyperinflation, high interest rates and the collapse of the world economy. We raised tax rates dramatically under Nixon and we devalued the dollar. We caused this hyperinflation. It was a double whammy, and it led to one of the worst 15- or 16-year time periods in the U.S.

After the Kennedy go-go 1960s, the Dow Jones industrial average peaked in February 1966 at just about 1,000. Sixteen and a half years later, in August 1982, the Dow was about 800. Ouch.

In 16½ years, the nominal value of America’s stock market fell by 20%, and that doesn’t count the trebling of the price level during that period. The average annual real rate of return from February 1966 to August ’82 on the Dow was negative 8% per annum compounded annually. That bear market was caused by Nixon’s devaluation of the dollar and by high taxes and restrictions on trade.

In the ’80s, we reversed those policies. Paul Volcker brought us back to sound money. Ronald Reagan gave us tax rate reductions, and we had a prosperity that had not been seen on planet Earth for a long, long time. We cut tax rates, we had sound money, we had free trade and we had minimal regulations. All the four grand kingdoms of macroeconomics were put in the right place.

The Dow in August 1982 was at 800. Today, it’s at 13,500. That is a bull market. In the ’80s, we would have given our right arms to have an unemployment rate as low as 6%. We’ve had the long bond yield fall to 4.5%. When the long bond is at 4.5%, the gods truly love you.

We’ve had a tremendous prosperity. I’m going to say it here, and I say it seriously: If they reverse those policies, if these tax increasers try to raise taxes on the rich and have unbridled monetary expansion, or if they try to restrict imports or stop illegal immigration or try to reregulate the economy, believe me that the film will play backward. You’re going to get a mini-1960s/’70s period again. It’s a catastrophe that they’re proposing.

Regards,

Arthur Laffer
for The Daily Reckoning https://dailyreckoning.com/on-the-importance-of-sound-money/

Dagney Taggart
Jun 14, 2013 - 4:30pm

Just Back from Vancouver

Done!

130,000 ounces of 999+ that will never see corrupt hands again. Goal reached.

A good disinformation campaign requires telling the truth 90-95% of the time to establish credibility and then blatant lies once the public is nice and cozy. This is straight from our friends in the BC and Alberta provincial governments who we do work for. No government on the planet represents the will of the people anymore.

Re: Glen Beck. I've only heard him speak on the radio driving south of the border and on tele only 5 or 6 times but it is so obvious that he is not a friend of conservative Americans. I promise. He's just this jittery, emotion-manipulating little man and controlled opposition. I remember seeing Rick Perry as attending the Bilderberg Bridge Tournament when I learned that Gordon Campbell has done so as well. Perry is controlled opposition and no friend of anybody here as well. Accept it, Texans.

Dumping those 5000 short contracts could light one heck of a short squeeze fire.

You'll be hearing more from me in a couple more weeks. Take cover, trolls.

Off to celebrate!

Spartacus Rex
Jun 14, 2013 - 4:31pm

Gold and Silver Disaggregated COT Report (DCOT) for June 14

HOUSTON -- This week’s Commodity Futures Trading Commission (CFTC) disaggregated commitments of traders (DCOT) report was released at 15:30 ET Friday. Our recap of the changes in weekly positioning by the disaggregated trader classes, as compiled by the CFTC, is just below. This week we are also adding in the net positioning of traders the CFTC classes as “Commercial” in the Legacy COT report.

(DCOT Table for June 14 and Legacy COT commercial positioning for data as of the close on Tuesday, June 11. Source CFTC for COT data, Cash Market for gold and silver.) Please note: Data auto retrieved and unverified until this note removed.

In the DCOT table above a net short position shows as a negative figure in red. A net long position shows in black. In the Change column, a negative number indicates either an increase to an existing net short position or a reduction of a net long position. A black figure in the Change column indicates an increase to an existing long position or a reduction of an existing net short position. The way to think of it is that black figures in the Change column are traders getting “longer” and red figures are traders getting less long or shorter.

All of the trader’s positions are calculated net of spreading contracts as of the Tuesday disaggregated COT report.

We also focus on the Legacy COT positioning of traders deemed “Commercial” by the CFTC, which includes Producers, Merchants, Processors and Users, plus Swap Dealers in a single category. The Legacy COT report preceded the Disaggregated COT report and we have tracked and charted it for many years, focusing on the movement and positioning of commercial traders – The “Big Hedgers.”

- See more at: https://www.gotgoldreport.com/2013/06/gold-and-silver-disaggregated-cot-...

Spartacus Rex
Jun 14, 2013 - 4:32pm

GGR Chart of the Week

GGR Chart of the Week


(XAU monthly)

The Philly Gold and Silver Index (XAU) has strongly oversold gold. As of May we argue the XAU had discounted the gold price back to 2003 levels, or an equivalent gold price between $400 and $500 the ounce. Gold is currently trading more than $900 higher than that, of course. More...


Negative liquidity, or more wealth exiting a market than entering, can and often does go to wild extremes in the world’s equity markets.

When markets trade to wild extremes they are presenting gamers/investors/traders/Vultures with longer term opportunities. Note the major bottoms for this popular index in 2001 and 2008. Note that both were “bottoms.” Therefore we know that the outgoing tide of liquidity did indeed peak (trough?) and reverse course to the opposite.

Note that funds and individuals who accumulated positions in the months just prior to the eventual reversal back to positive liquidity were handsomely rewarded even if their timing failed to capture the actual lowest print.

This suggests to us that very long term options may offer professionals an asymmetric opportunity in the current setup – if one believes the current spate of negative liquidity is on borrowed time, or is in the process of reversing now. (Pros only. In particular the Jan 17 2015 out-of-the-money calls for index exchange traded funds, such as the GDX and GDXJ, among other broad based vehicles with widely accepted optionality.)

Disclosure: Members of the GGR team may be long calls and/or short puts in the securities mentioned at the time of publication.

- See more at: https://www.gotgoldreport.com/2013/06/ggr-chart-of-the-week-.html#more

s1lverbullet
Jun 14, 2013 - 4:33pm

No way Turd

I thought we were going to 18 for sure. I'm glad I got jittery and pulled the trigger two days ago.

Spartacus Rex
Jun 14, 2013 - 4:34pm

Dave in Denver: Here's Why The "Taper" Won't Happen

FRIDAY, JUNE 14, 2013

Here's Why The "Taper" Won't Happen

The purveyors of this piece of media re-direct/distraction forgot to tell us that QE isn't intended to help the economy. It's intended to keep the too big to fail banks - both domestic and foreign - solvent and to keep the Government outfitted with low-cost Treasury bond financing.
Skeptical? Then spend some time reading this latest analyst I wrote and was published by Seeking Alpha:
Based on two key factors, not only will the Fed not taper, but it will be ultimately forced to up the ante on QE or risk a serious accident in the banking system and in the economy.
Here's the full article: Tapering Risks Triggering A Stock Market Avalanche

Two more pieces of data reported today that further reinforce the argument I laid out in my article. First, per the monthly TIC report, which details foreign cash flows in and out of our system, Treasury bond sales by foreign investors (mainly central banks and hedge funds) hit a record in April: LINK The Fed will actually have to print more money to replace that money or risk significantly higher rates. And second, in another of a long string of disappointing economic reports, May's industrial production report came in flat vs. the expected up .2% and capacity utilization declined. This further confirms that manufacturing and end-user demand is dropping. This will give Bernanke further room to, minimally, keep QE where it is and, ultimately, justify taking it up a notch sometime this fall.
ag1969
Jun 14, 2013 - 4:35pm

Kind of Sad...

To see Jake go down in flames like that. I have appreciated his comments as well.

https://www.usagold.com/bulliongoldcoinsales.html

Spartacus Rex
Jun 14, 2013 - 4:36pm

More from Dave in Denver

Up Next For The Insiders Looting Our System And Destroying Our Country...

Hey, what's the big deal? Slaughtering women and children in Afghanistan/Pakistan and the Middle East is merely inconsequential collateral damage in the noble pursuit of money
Green Lantern
Jun 14, 2013 - 4:41pm

@StrongJedi

That was a totally awesome response!! Well beyond my understanding of rocket engineering. My training ended in about the 4th grade.

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