One project I’m currently working on at
the Perth Mint is the replacement of our website. This involves topics like
SEO, “authority”, page rank etc and how to achieve such. It’s hard not to get
cynical about it, particularly when you come across tips for “Ultimate
Headlines” like:
- Maximum character count is 65 before
being cut off in search results
- Numbers + Adjective + Target Keyword +
Rationale + Promise; Ex. 10 Simple Steps You Can Take Today That Will
Make You Happier
- [Adjective] & [Adjective] [SEO
Keyword Phrase] That Will [Highly Desirable Promise of Results]; Ex. New
and Useful Content Marketing Trends That Will Drive You More Traffic
I probably should have chosen “The
Shocking Truth About Gold Demand That Will Explain Gold’s Price Action” for
the title of this blog post, but I decided to go with something cryptic
(based off If A Tree Falls) that ignores the
rules as part of my ongoing policy on this blog of writing stuff that most
people don’t want to read.
As has happened every time gold has experienced a large fall in the past,
most of the gold blogosphere was out with their reassuring talk because that
is what sells – confirmation you made the right decision. Central to a lot of
that was the idea that “real” demand was shockingly high. Before I address
that, some off-topic ramblings to get out of the way:
Ramble #1: To answer my own question, no, Comex kilobar
withdrawals don’t “works as an indicator of a bottom” in the medium
term :P Whilst I did note a lack of “any positive
narrative developing around gold that would drive big fund money” and that “the strong dollar story
is the biggest risk to gold breaking $1180” the fact is I didn’t call
the drop, primarily because Perth Mint was still seeing good kilobar demand and
premiums and I thought that the Chinese would be enough to support the market
(kilobar premiums have increased on this drop BTW, so recent Chinese demand
stories are not just permabull BS). It seems my advice on the 18th of
September that “you might want to trade against” my call, was the
right trade. Anyway, I’ll continue on with my “predictions” not because I’m
trying to be a guru, but to provide an alternative view using data points (eg
kilobar premiums, market narratives) that others don’t which you can factor
into your own decision making process.
Ramble #2: If you’re not seeking reassurance, which probably
means you bought gold for insurance and it is only has a modest weighting in
your portfolio, these posts are worth reading for an alternative to the
current permabull memes:
Ramble #3: Steven Saville of The Speculative Investor has started a blog which includes debunking like this and this. Added to my RSS feed list and
recommend including in you reading list.
Ramble Ends
One of the most enduring permabull memes is the physical-paper disconnect.
I’d suggest what the permabulls are now experiencing with their declining
sales/subscriptions and need to turn off comments on their blogs/forums is a
permabull-price disconnect. The gold price has disconnected from their
constant stories that “demand” for gold is strong. The readers are asking
questions and thinking heretical thoughts.
The problem stems from a simplistic idea of what demand is, as well as
selective focus on positive demand reports and ignoring negative reports. The
game of internet marketing requires dumbing issues down into 65 character
headline stories easily understood by lay readers. Taking a nuanced approach
by delving into the detail is counterproductive because it introduces
ambiguity and requires the reader to think, hard, when what they want is
comforting reassurance. It just leads down a path with lots of unanswerable
questions and denies the writer the ability to craft dramatic self-assured
headlines.
As an example, consider the difference between wholesale market withdrawals
versus end consumer demand. The point of the headline to this post is that
withdrawals by a wholesale participant (eg jeweller) may or may not be
reflective of demand that will actually affect the price. If the purchase by
the wholesale user is offsetting sales to consumers, then the wholesale
movements are reflective of price-affecting demand. However, if the wholesale
user is stocking (or destocking), then they would hedge that acquisition and
the impact on the price would be zero. How much of the Comex or SGE movements
are price responsive or price neutral? We don’t know for sure.
For an example of this issue, consider the World Gold Council’s quarterly
Gold Demand Trends report. This has two jewellery demand figures –
fabrication and consumption (which “is equal to fabrication plus/minus
jewellery imports/exports plus/minus stocking/de-stocking”). It is worth
also looking at page 16 of the 2014 Q2 report where they discuss
the difficulties of estimating supply and demand figures, highlighting the
difference in Chinese jewellery fabrication demand between CPM Group, Metals
Focus and GFMS.
Then you have the issue of manipulation, where someone could move stock
between visible exchanges/warehouses and OTC opaque vaults to give the
impression of strong demand or excess supply. Then add in the use of gold in
speculative cross-border arbitrage or commodity financing deals and we have
some uncertainty as to what "real" demand is.
The above is the reason I don’t look at total Comex movements and instead
focus on kilobar movements only, as it is a highly specific product in demand
in a specific region. Even so, it is not an entirely reliable metric,
although I suppose I should follow the fashion of the day and instead of
blaming myself, blame the bullion banks who found out I had shone a light on
their otherwise secretive activities and when their dis-info agents failed to
convince people that my kilobar theory was wrong and the suspiciously rounded
figures were just fraudulent, they purposefully moved kilobars out of Comex
into their unseen OTC vaults to discredit me and stop people from paying
attention to the numbers.
Finally, even if we could get accurate figures, as Robert Blumen explains in this excellent article, quantities
demanded (and therefore supplied) have “no causal connection with the
gold price”. The problem with Robert’s analysis for our permabull
writers is that his true drivers of the gold price - supply and demand
schedules – “are not scalar quantities and cannot be measured; they can
only be observed indirectly through the gold price itself”. Ouch, that
won’t do, the price fell and they need analysis that proves the falling gold
price was “wrong”.
I would take issue with Robert’s statement that investor schedules can’t be
measured – on exchange traded products the depth of bids and offers, and how
they change over time, give some limited insight into these preferences.
Unfortunately such data in the gold market is limited, but highly important.
Consider if you heard that a quantity of one home was bought in your street
for $100,000 during the last month. That is useful, but it would be more
useful to know that only one home was up for auction during that period and
there were five people bidding for it. However, your view of that one
$100,000 sale would change if you were told instead that three homes were
auctioned and there were only one or two bidders per home.
Robert’s article also addresses the flow/stock issue, which I covered in this post noting that “what
drives the gold price I would therefore argue, is not so much demand, but to
what extent existing holders of the 170,000t will withhold it from the
market”. Even so, the price as set by the marginal buyer and marginal
seller affect, in sort of feedback loop, the behaviour of the existing
holders. For example, everyone in the street sees that one $100,000 sale and
thinks their home is worth around $100,000, but should a fair proportion of
them attempt to sell their homes, the chance of them all getting $100,000
will be slim and the price would fall. That might not happen if they had
information that the number of homes auctioned was three and the number of
bidders was poor.
I also think that while Robert is logically correct that quantities have no
causal connection, he is underplaying the fact that people believe they do,
or probably more accurately, people believe everyone else believes they do.
Robert also notes that “trading continues because people are always
changing their minds about what they want to own” but his article
doesn’t consider what influences people to change their minds.
The conclusion is that the relationship between price and demand is complex
and ambiguous, subject to feedback loops and human interpretation. That is why
I’ve taken to Ben Hunt’s game/narrative theory approach.
So where are we now? While we have seen reports of retail demand surges,
mostly silver, and the Perth Mint’s kilobars premiums have moved up from
previous strong levels, the fact is that Western professional market selling
has overwhelmed China and other sources of demand. Perth Mint has seen a
little selling from Depository clients, but nothing of note but not any surge
in buying. We are not getting the same retail reaction we did on the
April 2013 drop. From a technical point of view I get much confidence in
drawing lines from chart levels over 5 years old – investor
circumstances/perceptions have changed. Until we see Western money move back
into gold we won’t get any sustained and meaningful price move. On that front
the pro market narrative is all negative:
Bloomberg: “There’s just not one
typical investment idea that’s supportive to gold right now,” George Zivic, a
New York-based portfolio manager at Oppenheimer Funds Inc., which oversees
$245 billion, said by phone Nov. 5. “With the potential of rates increasing,
dollar appreciation, it becomes synthetically expensive to hold gold as some
sort of a portfolio hedge. And then you have the reality of no real concerns
of inflation.”
Mineweb: Half of the 27
respondents surveyed on Wednesday and Thursday predicted gold prices will
breach a critical support at $1,100 per ounce by the end of this year. ...
"U.S. dollar strength should impact gold on a short-term basis,"
said John Meyer, analyst at brokerage SP Angel. ... "The drivers of a
sustained rally in gold are ephemeral at best," said Tai Wong, director,
metals trading at BMO Capital Markets in New York. ... "The mood of investors
could not be more bearish for precious metals," said Thorsten Proettel,
commodity analyst at LBBW.
I quote these guys not because I think they know what they are talking about,
but because this is what similar pro investors are reading and what they
think everyone else thinks about gold. On that basis the outlook is poor and
in uncharted territory. Sorry. We’ll just have to sit and watch how this
plays out over the next few months.
