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Massed
bagpipes, fine malts and a bullish outlook for London's professional gold
dealers...
RHONA
O'CONNELL did it on the train home, John Reade managed it
before the conference finished, and Ross Norman's team were at it throughout.
No
chance then of our being the first members to reflect on this week's LBMA
Conference in Edinburgh. But BullionVault can
at least relay a taste (minus the fine malts and bagpipes), and we might get
to have the last word as well.
Because
India's IMF gold news stole the headlines even before Tuesday's speeches
began, and gold itself has since grabbed the limelight, hitting fresh
all-time highs against the Dollar and Rupee (and Chinese Yuan, note).
Be
sure to check both Rhona's comments at MineWeb and what
FastMarkets say at TheBullionDesk.
(John Reade's conclusions have yet to reach the LBMA website.) For us, three points stand out
from the tenth annual conference of the London Bullion Market Association.
#1.
Utterly Bullishly
Bears
don't fill hotels, and Edinburgh was the first LBMA conference to pack the
available space, drawing a long (and disappointed) waiting list too. More
than 300 people attended the tenth but first such UK event, and it was no
surprise to learn that four-in-ten delegates worked at either brokers or
banks. Listening to the official speakers, however, it was a shocker to find
the supply-demand view of gold – the commodity view – so fast in
retreat.
Consumption
destruction, mine output up 6%, a flood of Cash4Gold-inspired scrap...Roll on
the Eeyores saying it could not last, or so we imagined. Plenty of speakers
(and guests) did cite gold's "unsustainable imbalance", but only to
dismiss what it might mean for near-term prices. Because 0% rates, yawning
government debts, and the slow, ineluctable shift of Western power to
gold-friendly Asia won't be beat.
Or as
Irish and former UBS economist David McWilliams neatly put it, "The
Chinese proletariat is seizing the means of production using worthless
Dollars earned from the United States" – a fact so hard to ignore,
it adds up to $1181 gold and $18.10 silver by November 2010, at least on
Tuesday's average guess from the floor.
Amongst
the opening day's speakers, Aram Shishmanian, CEO of the World Gold Council,
was due to speak on "Issues Facing the Jewellery Industry". But he
said straight off he wouldn't bother with that, switching instead to what's
driving investment and safe-haven flows. Mehdi Barkhordar of Swiss refining
group MKS then spoke on the surge in Gold Bar and coin demand, noting "a new
Western mindset" more typically seen driving Eastern gold hoarding:
- Lack of
trust in governments;
- Lack of
trust in the local currency;
- Lack of
trust in the financial system;
- Fear of inflation;
- Only trust physical gold.
The
real "impact of the financial crisis" (as per Barkhordar's title)
was in fact 2008's squeeze on vaulting space and refining capacity, plus new
opportunities in small-bar and coin fabrication. Coming out of that crisis
into whatever crisis awaits, "There is a fundamental shift in the
dynamics of the gold market," concluded MKS's managing director.
"Gold
has become mainstream...[but] less committed or innovative players will
struggle."
#2.
London Rules But Rocks
Innovation
in gold products – and maintaining London's No.1 spot – was a
hot, heated topic, much discussed away from the dias and breaking onto the
stage in the last-but-one session.
To be
sure, innovation would have a good way to go to beat Julius Bär's
"legal engineering", building physically-backed funds and products
(seems there's a difference) whilst also shorting the Dollar. This gives
Swiss money "maximum participation in the price movement of the
underlying" according to Bär's product engineer Stephan Mueller, an
objective which caused much head-scratching (well, at least at the back...)
and apparently took UBS's chief commodities strategist a couple of years to
fathom as well.
"Once
in gold, you're short all currency," said John Reade in his summing up,
before explaining that, one day, he got it. "Our Swiss clients wanted to
be long of gold priced in Dollars." Which still sounds like two trades
at once to us. And why not buy gold and sell the Dow (367% gains in 10
years), or better still the Rupee (down vs. the metal in 26 of the last 38
years)...?
Over
in the physical 400-ounce gold market, meantime, the Lehmans' crisis
confirmed London's dominance of physical storage and professional trading
according to pretty much everyone, with metal heading this way from Zurich
according to MKS. James Steel of HSBC also noted London's odd but continued
dominance of wholesale silver, picking up pretty much where Spain's Latin
American empire collapsed and coming despite Britain having no silver mining,
refining or sizeable consumption.
London's
reign is set to persist, Steel said, thanks to the infrastructure (vaults,
assaying and dealing) which that very dominance built. And on the subject of
silver, industrial bulls must check the speech from the VM Group's Jessica Cross.
Back
in London meantime, the Bank of England now stores some 400,000 gold bars in
its vaults, said foreign exchange director Michael Cross, worth $100 billion.
That would mean some 2850 tonnes – second only to the US and Germany's
hoards, but with well over 90% in custody (and sub-custody) accounts, rather
than held as the UK's own official reserves.
So
far, so good – if not complacent. The conference wasn't quite so at
ease with deciding how to maintain London's lead in precious metals
worldwide. And seeing how the Association is only that (albeit applying
strict membership and code of practice rules), bringing the various member
firms together to agree a global strategy would seem a big ask. The Good
Delivery list sets the standard for new exchanges and products worldwide,
which given the challenge ahead (from new localized products in local
currency terms, as Julius Bär's Mueller observed) might prove good
enough. Word is, however, that the issue of cleared forwards will be
addressed – if not resolved – in the very near future.
#3.
Central Banks Now Buying Gold
Okay,
so it's hardly news after Tuesday's IMF announcement, and the GFMS
consultancy (which is only slightly less cautious than central banks) said as
much in April.
Central banks
would likely be "net buyers" this year, with purchases outweighing
sales. So what? Well, hearing that same forecast – or something very
much like it – from a senior manager of the European Central Bank,
thats what.
The
first central banker to address the London Bullion Market Association since
Philipp Hildebrand of the Swiss National Bank spoke in Montreux in June 2006,
the ECB's principal advisor in market operations didn't bring down the roof.
"I wouldn't be taking a huge risk to imagine that official holdings of
gold [globally] will stabilize or increase," Paul Mercier said, adding
that "I must stress that gold is still a vital asset for Europe's
central banks."
But
while that's no news to money historians, it's in fact a powerful statement
from a central bank official – with or without advance knowledge of
India's impending 200-tonne purchase. And reviewing my notes on the plane
home, you might think Paul Tudor Jones, David Einhorn or even Jim Rogers had
put Mercier's speech together.
"Why
do we have gold?" he asked, before citing economic security, the
capacity to deal with unexpected events, adding confidence to paper
currencies, and risk diversification. Pretty much the same advantages were
named by a French central bank at the start of this decade...and France then
went on to sell gold from its vaults, cutting its holdings by one-sixth to
2,500 tonnes. But Hervé Hannoun spoke after gold had been falling for
almost two decades. Whereas Paul Mercier spoke this week after 10 years of
gold beating everything else – a period, as he noted, which also saw
"the largest-ever reduction in official holdings, a reduction of 3,700
tonnes."
Take
it as the ultimate contrarian "sell" if you wish. But given what
everyone I spoke to thinks is the fate of the Dollar (let alone Sterling...or
Euros), M.Mercier's carefully-phrased forecast looks a safe bet.
And as
for Asia's growing private demand...
BullionVault has
noted before that China's Household Demand for Gold has
doubled as a percentage of its ever-growing annual savings over the last 10
years. In full-year 2008, basis World Bank estimates and GFMS data, gold
swelled to equal 1.8% of saved household incomes.
But
looking at Phillip Klapwijk's chart above, as John Reade suggested in his
summing up, there's plenty of scope for further growth yet. China's gold
demand has lagged behind the platinum-group metals – which are more in
line with its share of global demand for base metals and concrete.
So
China's private market is hardly deluged with gold at this stage. And that's
with or without the People's Bank nabbing part II of those IMF sales.
Disclosure: Long
physical gold
Adrian
Ash
Head of Research
Bullionvault.com
Also
by Adrian Ash
City correspondent
for The Daily Reckoning in London, Adrian Ash is head of research at BullionVault.com –
giving you direct access to investment gold, vaulted in Zurich, on $3 spreads
and 0.8% dealing fees.
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