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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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