India: A surge in Gold imports widens trade deficit in October

India's merchandise trade deficit widened to $13.4 billion in October from $10.6 billion a year ago, as gold imports quadrupled on year-on-year (y-o-y) basis while exports fell by 5% y-o-y. Non-oil non-gold exports – an indicator of domestic demand – continued to expand although at a significantly slower pace compared to September. However, a 19% y-o-y fall in oil imports due to lower crude oil prices -$87/barrel (Indian basket) in October 2014 vis-à-vis $107.4/barrel in October 2013 - helped to cap the rise in trade deficit in October.

Despite the expected widening in CAD in Q2, we forecast for India's CAD at $32 billion (1.5% of GDP) for FY15, similar to FY14. Lower oil prices and continued restriction on gold imports will help to keep the CAD in check. CRISIL Research expects oil prices to average $100-105 per barrel (Brent) in FY15. Oil imports constitute nearly one third of India's total merchandise imports. Therefore, lower oil prices will significantly bring down total imports. With the Fed tapering having ended, a faster-than- expected increase in interest rates in the US, if it were to happen, could trigger capital withdrawals from emerging economies including India. To reduce India's vulnerability to any such external shocks we believe that the government is likely to continue with import curbs on gold.

Indian gold imports jumped to 106.3 tonnes ($ 4.2 billion) in October – the highest monthly imports this fiscal year, from 26 tonnes ($1.1 billion) a year ago. Higher demand spurred by the festive season and low prices (Rs 1222.5/troy ounce vis-avis Rs 1316.2/troy ounce a year ago) is likely to have led to the rise in imports of the yellow metal. 

The RBI and government officials are believed to be re-evaluating current restrictions on gold imports to identify and plug possible loopholes in the import policy. In FY14, the government raised imports duty on gold to 10% and made it mandatory for 20% of all gold imports to be held for exports of jewellery. According to CRISIL Research, gold imports for FY15 are likely to touch 800 tonnes – higher than 653.5 tonnes last fiscal despite these restrictions.

Total imports rose by 3.6% y-o-y in October. While oil imports declined, non-oil imports grew by 18.9% y-o-y in October led by both higher gold and well as higher core (non-oil non-gold) imports.

Core (non-oil, non-gold) imports rose by 5.6% y-o-y in October – expanding for the sixth consecutive month. Prior to this, core imports had been falling consecutively since May 2012, with the exception of a few months (Figure 1). Sustained growth in core imports in the past few months confirms that a nascent recovery in domestic demand has begun. However, the numbers are still too weak to provide a relief.

Slower growth in exports in October can be partly explained by a high base effect (Figure 2). Export growth in the same period a year ago had surged to 14.3% y-o-y. For the rest of this fiscal year, the base effect is likely to turn favourable as export growth fell sharply in the period November 2013-April 2014, averaging a mere1.9% y-o-y during this period. 

The largest drag to export growth came from engineering goods (-9.18% y-o-y), pharmaceuticals (-8.33% y-o-y), gems and jewellery (-2.25% y-o-y) and cotton yarn exports (-13.84% y-o-y). Petroleum products exports also declined but only marginally (< 1% y-o-y).

India back to being world’s top gold consumer

India reclaimed its world’s top gold consumer crown from China as demand for jewellery surged almost 60% in the third quarter of the year, fresh data from the World Gold Council (WGC) shows.

Global demand, however, fell to its lowest in nearly five years as Chinese buying slid by a third and gold jewellery, the biggest single area of consumption, dropped 4% to 534 tonnes.

Overall, the south Asian nation —which had lost his position as the world’s No.1 gold consumer to China in 2011—bought 39% more gold in the run-up to Diwali and the start of the traditional wedding season.

The WGC said that a weakening of gold prices in rupee terms had boosted demand in India, and that confidence in the new government led by Narendra Modi had also contributed to the rise.

The increase in Indian purchases is more marked because demand for gold in the same period in 2013 was particularly weak, due to government restrictions on gold imports designed to limit the country's current account deficit.

“It is now beyond debate that import restrictions have had little impact on the demand for gold and yet have strengthened the unauthorized supply channels,” according to WGC India’s Managing Director P.R. Somasundaram.

Gold smuggling into India has skyrocketed since the government ratcheted up restrictions and taxes on legitimate imports of the precious metal. According to the council, about 200 tons of gold came through unofficial route last year and a similar quantity is also expected this year.

WGC Managing director of investment strategy Marcus Grubb noted the fiures for India and China this quarter reinforce the need to understand the factors which underpinned an "exceptional Q3" last year.

"People around the world buy gold for different reasons at different times, reinforcing the unique self balancing nature of the gold market. With recycling at a seven year low and mine supply looking increasingly likely to be constrained in the future the outlook for physical gold demand remains strong,” he said in today's statement.

Key findings from the report:

·         Jewellery remains the biggest component of gold demand, representing more than half of all demand at 534t, which is 4% lower year on year. Jewellery demand was driven by India, which increased 60% to 183t. UK and US demand was also strong. Chinese jewellery demand fell 39% to 147t as the jewellery market caught its breath after an exceptional year for demand last year.

·         Central banks bought 93t of gold in Q3 2014, 9% lower year on year, but the 15thconsecutive quarter that banks were net purchasers of gold.

·         Investment demand (bars and coins and ETFs) was up 6% to 204t. However, there was a 21% fall in bar and coin demand from 312t to 246t following unprecedented levels of demand last year. ETF outflows stood at 41t compared to 120t in the same period last year.

·         Technology demand was 98t, 5% lower than a year ago as the industry continued its shift towards alternative materials in technological applications.

·         Total supply fell by 7% year on year to 1,048t.  Mine production was up slightly 1% to 812t, but recycling of gold continued to abate, declining 25% year on year to 250t, and on a year to date basis is the lowest level since 2007.

The full report is available here.

What The Swiss Gold Referendum Means For Gold Demand

The referendum for the Swiss Gold Initiative is scheduled for November 30th and the propaganda war - between the Swiss National Bank (SNB) and the Swiss Parliament on one side and the Swiss People's Party (SVP) on the other - has begun and we expect it to escalate as the day draws ever nearer. Having already questioned the 'location, location, location' of Switzerland's current gold stash, and examined the initiative in great depth here, JPMorgan notes that not only might the forthcoming Swiss gold referendum stabilize gold prices at a time when Gold ETF demand continues to decline, but warns, it also appears that markets under-appreciate this event.

As JPMorgan explains,

Gold ETF flows continued to bleed losing $4bn or 6% of AUM cumulatively since the end of August.

Gold Miners ETFs, which have held up relative well up until recently also suffered over the past two weeks (Figure 7).

The downtrend in Gold ETF flows represents a headwind for gold in the face of subdued physical demand recently.

The latest data from China Gold Association, reported physical gold demand by Chinese investors of only 185 tonnes in Q3, down from 246 in Q2 and 322 in Q1.

While Chinese physical demand remains subdued...

[ZH - a point we note is very much in the eye of the newspaper holder]

Who do you choose to believe?

h/t @sobata416

 *  *  *

The forthcoming Swiss gold referendum could stabilize gold prices at a time when Gold ETF demand continues to decline.

It also appears that markets under appreciate this event.

If the referendum is passed, the Swiss National Bank (SNB) will be forced to increase reserves by around 1,500 tonnes over five years, i.e. 300 tonnes per year.

This 300 tonnes per year accounts for 7.5% of annual gold demand of 4,000 tonnes per year.

*  *  *

As Grant Williams noted previously, with the establishment being unable to actively campaign AGAINST the Initiative, all has been quiet for many months; but with the dawning awareness that this little campaign might actually grow some legs, a few members of that establishment have been getting a little antsy...

(Centralbanking.com): ...Now, with less than two months until the vote, the central bank is intensifying its communication. It opened a “dossier” on its website yesterday where it will post materials outlining why it “reject[s] the initiative”.

“Monetary policy transactions directly change our balance sheet. Restrictions on the composition of the balance sheet therefore restrict our monetary policy options,” [SNB Vice-chairman Jean-Pierre] Danthine explained.

“A telling example is our decision to implement the exchange rate floor vis-à-vis the euro... with the initiative’s legal limitation in place, we would have been forced during our defence of the minimum exchange rate not only to buy euros but also to buy gold in large quantities.

 “Our defence of the minimum exchange rate would thus have involved huge costs, which would almost certainly have caused foreign exchange markets to doubt our resolve to enforce the rate by all means.”

Sometimes I think these people are completely delusional.

So, let me get this straight: gold is a relic which restricts your ability to do such vital things as... oh, I dunno, promise to print unlimited amounts of your currency in order to peg it to another, failing currency and thereby debase it by 9% in 15 minutes? Or it might mean the market doesn’t have complete faith that you might be completely relied upon to do really smart things like that?

Disaster!

Somebody. Please? Make it stop.

The Swiss establishment has been reliant upon the public’s ignorance in these matters, but now they are up against a formidable opponent in Egon von Greyerz. Not only that, but they can clearly see that, as elsewhere around the world, the public is fast becoming disenchanted with the status quo; and that is potentially very dangerous for these people.

What is important to understand here is that if the initiative passes it will be part of the Swiss constitution IMMEDIATELY — not in two years, as many blogs and websites are suggesting. This means that the government and parliament cannot touch it. Only another referendum can change it. This is proper democracy for you.

The closer we get to the vote on November 30, the bigger this story is going to become, and the bigger it becomes, the higher the chance that the yes vote wins.

Should that happen, it will undoubtedly set off alarm bells throughout the gold market, as yet more physical gold will need to be repatriated and another sizeable, price-insensitive buyer will enter the marketplace.

China Aims For Official Gold Reserves At 8500 Tonnes

China should accumulate 8,500 tonnes in official gold reserves, more than the US, according to Song Xin, President of the China Gold Association, General Manager of the China National Gold Group Corporation and Party Secretary. He wrote this in an opinion editorial published on Sina Finance July 30, 2014. Gold is money par excellence in all circumstances and will help support the renminbi to become an international currency as “gold forms the very material basis for modern fiat currencies”, Song notes. In the short term the Chinese will not back the renminbi with gold (establish a fixed renminbi price for gold), but

The previous President of the China Gold Association (CGA), Sun Zhaoxue, was also the General Manager of the China National Gold Group Corporation, these jobs are apparently connected. Song took over from Sun as CGA President and Manager of China National Gold in February 2014. Remarkably, when Sun was in office he wrote equally candid articles (in Chinese) about the importance of gold for China’s economy. Sun’s most renowned article is titled “Building A Strong Economic And Financial Security Barrier For China”, published on August 1, 2012, in Qiushi magazine, the main academic journal of the Chinese Communist Party’s Central Committee (click here for a translated version). From Sun:

The state will need to elevate gold to an equal strategic resource as oil.

Currently, there are more and more people recognizing that the ‘gold is useless’ story contains too many lies. Gold now suffers from a ‘smokescreen’ designed by the US, which stores 74% of global official gold reserves, to put down other currencies and maintain the US Dollar hegemony. Going to the source, the rise of the US dollar and British pound, and later the euro currency, from a single country currency to a global or regional currency was supported by their huge gold reserves.

Individual investment demand is an important component of China’s gold reserve system, we should encourage individual investment demand for gold. Practice shows that gold possession by citizens is an effective supplement to national reserves and is very important to national financial security.

 Song’s vision is in line with these statements which confirms the strategy of the Communist Party of China to aggressively accumulate official gold reserves and to stimulate individual gold investment in order to strengthen the Chinese economy and protect it from internal and external shocks.

Note, Song is the President of the CGA that for political reasons largely understates Chinese gold demand figures in order to conceal China’s true hunger. Though clearly expressing his point of view in the next article, he could not disclose deviant data regarding CGA demand numbers. Actual Chinese wholesale gold demand in 2013 was 2197 tonnes, as is confirmed numerous times.

Translated by LK, gold investor from Hong Kong.

Gold Will Support Renminbi As It Moves To Join World

By Song Xin, General Manager of the China National Gold Group Corporation, Party Secretary and President of the China Gold Association.

2014-05-06 edition 6

For China, the strategic mission of gold lies in the support of RMB internationalization, and so let China become a world economic power and make sure that the “China Dream” is realized. 

Gold is the only thing carrying the dual mantels of a commodity as well as a monetary substance. It’s both a very ‘honest’ asset and forms the very material basis for modern fiat currencies. Historically, gold has played an irreplaceable role in responses to financial crises and wars as it comes to protecting a country’s economic security. Because of this, gold carries with it an honored and divine-given strategic mission in the ascend of the Chinese people and the pursuit of the “China Dream”.

The Important Function Of Gold

Gold is the world’s only monetary asset that has no counter party risk, and is the only cross-nation, cross-language, cross-ethnicity, cross-religion and cross-culture globally recognized monetary asset. Gold is the last protection for a country’s economic security; it safeguards a nations sovereignty in times of crises. A textbook example happened in 1997 during the Asian financial crisis. To work through Korea’s severe debt problem, the IMF’s condition for a rescue package was to sell large enterprises. In the end, the Korean government had no choice but to call on its people to donate gold to settle the foreign debt, and it was only through this act that the chaebols at the center of the country’s economy and independence survived.

From our country’s point of view, gold has played an irreplaceable role in the development of our economic society. In the wars during the Revolution [1921-1937] gold provided strong support in the economic development of the liberated zones and achievements in reforms; in the three years of natural disasters, the nation used gold reserves to obtain information on living and production conditions and took actions to alleviate hardship. At the start of the great Reforms (1980’s), gold boosted our foreign reserve levels and helped the promising private sector and it advanced society. After 1989, we suffered economic sanctions from Western countries for a while and the PBOC used our gold reserves to enter into swap agreements to obtain needed foreign currencies. Right now, gold is still serving its functions to protect against economic risks; contributing in ever more important ways to our financial security. For the moment, although in general the international scene is peaceful, conflicts can develop in certain regions. If there should be a blockade or regional war, there could be only one method of payment left: gold.

The strategic Mission Of Gold

Since the 18th People Congress, general secretary Xi Jinping brought up the goal to revive our nation, to realize the “Chinese dream “. One important part of this dream is to have a strong economy. Though China is already the world’s second largest economy, there is still a long way to go to become an economic powerhouse. The most critical part to this is that we don’t have enough say in matters such as international finance and matters regarding the monetary system, the most obvious of which is the fact that the RMB hasn’t fully internationalized.

Gold is a monetary asset that transcends national sovereignty, is very powerful to settle obligations when everything else fails, hence it’s exactly the basis of a currency moving up in the international arena. When the British Pound and the USD became international currencies, their gold reserve as a share of total world gold reserves was 50% and 60% respectively; when the Euro was introduced, the combined gold reserves of the member countries was more than 10,000 tonnes, more than the US had. If the RMB wants to achieve international status, it must have popular acceptance and a stable value. To this end, other than having assurance from the issuing nation, it is very important to have enough gold as the foundation, raising the ‘gold content’ of the RMB. Therefore, to China, the meaning and mission of gold is to support the RMB to become an internationally accepted currency and make China an economic powerhouse.

In this view, our gold reserves are very low, both in terms of a nominal level as well as a percentage of official reserves. From the nominal level, the total official reserves of gold in the world stands at 30,000 tonnes, of which the USA has been occupying the first place at 8133.5 tonnes – 26 % of the world total. Germany has 3387.1 tonnes and Italy and France both hold more than 2,400 tonnes. Ours is 1054 tonnes at the sixths place – only 3.4% of the world total. As a percentage of a country’s total reserves, US gold reserves amount to 71.7 % and European nations have kept their levels between 40% to 70%. The average of the world is about 10%, but for us it’s only 1%.

That is why, in order for gold to fulfill its destined mission, we must raise our gold holdings a great deal, and do so with a solid plan. Step one should take us to the 4,000 tonnes mark, more than Germany and become number two in the world, next, we should increase step by step towards 8,500 tonnes, more than the US.

All-round, Multi-channel Increases In Gold Levels. Fulfill Our Part In Enabling Gold To Accomplish Its Strategic Mission.

How to achieve growth in our gold reserve? Apart from the PBOC directly buying in the open market, we should use also use the following strategies:

1. Relax gold import controls, grant large scale gold enterprises permits to import gold. In 2013, our gold consumption reached 1176.4 tonnes. Compared to the 426 tonnes of local production, there is a shortage of 750 tonnes. To meet this gap, we presently let the 12 commercial banks with gold-trading rights import standard gold ingots. But these banks lack the ability to refine and assay gold, they can only import standardized gold, missing the large amount of non-standardized gold and wasting the international resources that we could reach. By relaxing import controls, the large-scale gold companies can then obtain this gold and use their own technology to refine it into standard quality gold. This can help meet demand in the market, or turn gold into official reserves as required.

2. Establish a gold reserve building fund. This can be seeded using capital from the State Treasury, and open it for participation by private-sector capital in the public. It should be controlled by the State and used to target diverse off-shore gold resources, acquire mines and raw gold and in so doing, extend our reach beyond our borders and add a layer of opaque reserves to otherwise standard reserve numbers.

3. Establish a Gold bank. We need to establish our gold bank as soon as possible, and enable it to break the barrier between the commodity and monetary world. It can further help us acquire reserves and give us more say and control in the gold market. It may be guided under the PBOC and led by the China Gold Association, involving leading gold industry companies and commercial banks, and it’s business would include: gold pricing (fix), gold financing and leasing, gold-guaranteed payments, gold saving accounts, gold lending, gold production chain financing and issuance and trading of paper gold and other gold investments. This gold bank can then naturally use market-oriented methods to change commodity gold into monetary gold reserves, thus help us increase our strategic gold reserves.

Koos Jansen via BullionStar.com,

One Chart, One Question

Just for fun, let's look at one chart and ask one question: is this stock continuing its downtrend or is it in the process of reversing? To avoid any bias, I've removed any clues to its identity.

Glancing at three common indicators, MACD, stochastic and RSI (relative strength), we note they have all turned up or are starting to turn up.

We also notice that what looks like a key line of support/resistance was broken sharply to the downside, and price has reverted equally sharply back up to that line.

So far, this could be interpreted as a bounce back to resistance, a move that will be followed by a resumption of the downtrend, or it could be interpreted as a classic Bear Trap, a sharp move below support that sucks in all the Bears who are anticipating a further collapse in price.

Which interpretation is most likely to be correct? It's too early to say, but the possibility that price has traced out a falling wedge suggests that the Bear Trap/reversal scenario might well be in play, as falling wedges are classic reversal patterns.

Now that we've conducted an unbiased overview, I can reveal the mystery stock: it's actually not a stock, it's a commodity: bat guano, a highly valued natural product.

Like many of the commodities, bat guano has been in a free-fall, and the majority of financial pundits have been calling for further declines. Even bat guano Bulls have reluctantly conceded the inevitability of further large declines.

Very few bat guano analysts are calling for a reversal here.

The sentiment, in other words, is uniformly negative--everybody's on one side the boat in the bat guano trade.

Add the overwhelmingly negative sentiment to the falling wedge/Bear-Trap spike down/recovery, and it seems the majority (Bears) might be surprised by a major reversal here.

OK, the chart isn't actually bat guano. That was another way of maintaining an unbiased view. As far as I know, there is no bat guano index.

So what's this chart of? Everybody's favorite emotional trade: Gold.

Charles Hugh-Smith of OfTwoMinds blog,

Best Day For Gold Since September 2013

Following a heavy volume flush and reversal around midnight ET, gold prices surged today. The 3.3% rally is the best day since September 2013.

Best day in 14 months...

With a big flush reversal overnight...

And ETF holdings slammed back to levels first seen in March 2009...

Swiss yes vote could lift gold price 18%

Gold was trending lower for a sixth straight session on Thursday hitting fresh four-year lows, but a market desperate for bullish news could find it in Switzerland at the end of the month.

The Swiss go to the polls on November 30 in a referendum that will lay down new rules for the country's central bank concerning its gold reserves.

Surveys are divided about support for the "Save Our Gold" camp that would force the Swiss National Bank to hold 20% of its reserves in gold, repatriate bullion held outside its borders and halt all sales, but a yes vote would be just what investors who nursing a 30%-plus drop in the price over the past two years need.

To meet the 20% requirement the SNB will have to buy between 1,500 – 1,800 tonnes on the open market, which at today's ruling price would set the fiscus back nearly $60 billion.

Financial Review quotes Bank of America analyst Michael Widmer as saying a positive outcome may push gold above $1,350 an ounce, more than 18% higher than today's price.

Joni Teves, an analyst at UBS AG in London, told the Australian website "it would have a major impact if it passes":

"If they do launch a buying program, it would have effectively a constant bid in the market."

Currently, the bank has 1,040 tons of gold, with roughly 70% stored in Switzerland, 20% at the Bank of England and 10% at the Canadian central bank.

If the SNB starts buying Switzerland, it would be placed third on the list of official gold reserves by country behind the US and Germany.

Switzerland produces no gold itself but it's the world's gold refining hub, a major global center for bullion vaults and boasts the world's 8th largest official hoard of gold.

The country was also late coming off the gold standard and as recently as 1999 its constitution required the franc to be 40% backed by gold.

Physical Gold Shortage Worst In Over A Decade: GOFO Most Negative Since 2001

The last time there was an systemic physical gold shortage was in July 2013. It is then that, for the first time in 5 years, the 1-month Gold forward offered rate, or GOFO, went negative. We said:

Today, something happened that has not happened since the Lehman collapse: the 1 Month Gold Forward Offered (GOFO) rate turned negative, from 0.015% to -0.065%, for the first time in nearly 5 years, or technically since just after the Lehman bankruptcy precipitated AIG bailout in November 2011. And if one looks at the 3 Month GOFO, which also turned shockingly negative overnight from 0.05% to -0.03%, one has to go back all the way to the 1999 Washington Agreement on gold, to find the last time that particular GOFO rate was negative.

 Fast forward to today, when as noted over the past week there has been a massive shortage of precious metals - most notably silver which as of this moment is indefinitely unavailable at the US Mint - as a result of the tumble in the paper price, and following 8 days of sliding and negative 1 month GOFO rates, today the physical metal shortage surged, as can be seen by not only the first negative 6 month GOFO rate since last summer's much publicized gold shortage when China was gobbling up every piece of shiny yellow rock available for sale, but a 1 month GOFO of -0.1850%: the most negative it has been since 2001!

Said otherwise, the physical shortage is the worst it has been in over a decade, even as the price of paper gold continues to drop!

And for those for whom the topic of GOFO inversion is new, here is how we described the situation last time:

* * *

What is GOFO (Gold Forward Offered Rates)?

GOFO stands for Gold Forward Offered Rate. These are rates at which contributors are prepared to lend gold on a swap against US dollars. Quotes are made for 1-, 2-, 3-, 6- and 12-month periods.

Who provides the rates?

The contributors are the Market Making Members of the LBMA: The Bank of Nova Scotia–ScotiaMocatta, Barclays Bank Plc, Deutsche Bank AG, HSBC Bank USA London Branch, Goldman Sachs, JP Morgan Chase Bank, Société Générale and UBS AG.

When are the rates quoted?

The means are set at 11 am London time. These are the rates shown on the LBMA website.  To show derived gold lease rates, the GOFO means are subtracted from the corresponding values of the LIBOR (London Interbank Offered Rates) US dollar means.  These rates are also available on the LBMA website.

How are the GOFO means established?

At 10.30 am London time, the Reuters page is cleared of all rates. Contributors then enter their rates for all time periods. A minimum of six contributors must enter rates in order for the means to be calculated. At 11.00 am, the mean is established for each maturity by discarding the highest and lowest quotations in each period and averaging the remaining rates.

What are some uses for GOFO means in the market?

They provide a basis for some finance and loan agreements as well as for the settlement of gold Interest Rate Swaps.

* * *

Unpleasant similarities with Libor and most other fixed (literally and metaphorically) rates aside, what is known is that under normal market conditions, GOFO is always positive, or in other words gold serves as a money-equivalent collateral for a pseudo-secured loan against paper fiat (USD in this case) hence the low interest rate.

Sometimes, however, normality inverts and the rate goes negative and as such serves as a useful indicator of gold market dislocations. Thus, while disagreements exists, one can safely say that what GOFO is, is simply a blended indicator of liquidity, counterparty or collateral (physical availability) stress in the gold market. Since it is next to impossible to isolate just which component is causing the indicated disturbance, it is prudent to be on watch for all three.

The best known example of a complete collapse in the GOFO rate, is the September 1999 Washington Agreement on Gold, which in brief, was an imposed "cap" on gold sales (mostly European in the afteramth of Gordon Brown's idiotic sale of UK's gold) to the tune of 400 tons per year. The tangent of the Washington Agreement is quite interesting in its own right. Recall the words of Milling-Stanley from the 12th Nikkei Gold Conference:

"Central bank independence is enshrined in law in many countries, and central bankers tend to be independent thinkers. It is worth asking why such a large group of them decided to associate themselves with this highly unusual agreement...At the same time, through our close contacts with central banks, the Council has been aware that some of the biggest holders have for some time been concerned about the impact on the gold price—and thus on the value of their gold reserves—of unfounded rumours, and about the use of official gold for speculative purposes.

"Several of the central bankers involved had said repeatedly they had no intention of selling any of their gold, but they had been saying that as individuals—and no-one had taken any notice. I think that is what Mr. Duisenberg meant when he said they were making this statement to clarify their intentions."

Of course, this happened in a time long ago, when the primacy of Fractional reserve banking was sacrosanct, when the first Greenspan credit bubble (dot com) was yet to appear, and when barbarous relics were indeed a thing of the past, only to be proven oh so contemporary following not one, not two, but three subsequent cheap-credit bubbles which have vastly undermined the religious faith in fiath and central banking, sending the price of gold to all time highs as recently as 2011.

Another subsequent negative GOFO episode occurred in early 2001, which coincided with what has been rumored to be a speculative attack and reversal of the futures market. However, while pushing 1 month rates negative, 3 month rates remained well positive.

Indeed, the only other time when both 1M and 3M GOFOs were both negative or almost so (3M touched on 0.05%) was in the aftermath of the AIG bailout following the Lehman collapse in November 2008.

Fast forward to today, when all GOFOs, from 1M all the way to 6M just went negative.

And while both Antal Fekete and Sandeep Jaitly, traditionally two of the most vocal pundits in the arena of gold backwardation and temporal and collateral gold market arbritrage, are likely come up with their own interpretations of what may be causing this historic inversion, the reality is that one can't know for sure until after the fact. It may be one of many things:

• An ETF-induced repricing of paper and physical gold
• Ongoing deliverable concerns and/or shortages involving one (JPM) or more Comex gold members.
• Liquidations in the paper gold market
• A shortage of physical gold for a non-bullion bank market participant
• A major fund unwinding a futures pair trade involving at least one gold leasing leg
• An ongoing bullion bank failure with or without an associated allocated gold bank "run"
• All of the above

The answer for now is unknown. What is known is that something very abnormal is once again afoot at the nexus of the gold fractional reserve lending market. 

Gold prices: where they’re headed and how to profit

As far as investment and trading opportunities go, gold is currently the stock market’s poor cousin. No one really craves the yellow ore at this time. The reality is that unless you are looking for jewelry, there’s really no reason to buy the metal right now.

Back in September, when I last discussed the prospects for this precious metal, I wrote that “in the absence of further turmoil in Ukraine, gold prices could deteriorate to below $1,200, possibly even $1,180.”

The precious metal did bounce to the $1,225 level recently on concerns surrounding ISIS and the economic situations in both Europe and China. Since then, it has also collapsed to below $1,200 to $1,170 for the December contract.

Following the Federal Reserve’s recent elimination of its third round of quantitative easing (QE3) and its hinting at higher interest rates coming sometime in 2015, the metal is now at its lowest level since April 2010. The strong advance reading of the third-quarter gross domestic product (GDP) growth at 4.5% and the strong earnings growth in S&P 500 companies are also making us lean towards higher rates. With this, the greenback has been moving higher, which is hurting the demand for gold due to its denomination in U.S. dollars.

In addition, inflation, a supporter of gold, continues to look benign both at this time and as we move forward. The metal is used as a hedge against inflation and risk, so in the absence of these two key variables, I’m not surprised to see prices move lower on the charts. And it could worsen.

Moreover, the so-called positive impact of buying from India and China appears to be neutralized. The lead off towards Christmas is a major buying period for India, but don’t expect a strong surge in prices unless the country buys the entire Fort Knox gold reserve.

In fact, according to an article published by Bloomberg, in October, more than $1.3 billion left U.S. exchange-traded funds (ETFs) that focused on precious metals. (Source: Roy, D., “Gold Bulls Retreat With $1.3 Billion Pulled From Funds,” Bloomberg web site, November 3, 2014.)

On the charts, the breakdown at the psychological $1,200 level is bearish. Now, we could see a bounce back, but it would likely have to be triggered by a sudden swelling in geopolitical risk. The reality is that traders and investors are looking at equities at this time and not gold.

Gold is simply not desirable as a buy-and-hold investment; at this time, it should only be traded.

The precious metal’s break below $1,180 is bearish. Failure to rally could see gold move lower towards the technical support level around $1,125; alternatively, an oversold bounce could drive prices back up towards $1,200. A lot will have to do with the state of the global economy and geopolitical risk.

You can trade the uncertainty of gold via the use of a long option straddle on an ETF like SPDR Gold Shares (NYSEArca/GLD). This strategy would involve a two-legged trade via the buying of a put option and a call option with the same strike price and expiry. Through the use of this investment strategy, you make money should gold move enough in one direction or the other to cover the premium paid to initiate the trade.

by George Leong, B. Comm.

Dumping $1.5 Billion In Gold Futures At 00.30 ET

For the 5th day in a row, "someone" has decided that 00.30ET (11 am IST) would be an appropriate time (assuming the 'seller' is an investor who prefers best execution rather than the standard non-economically-rational share-repurchaser in America) to be dumping large amounts of precious metals positions via the futures market. Tonight, with over 13,000 contracts being flushed through Gold - amounting to over $1.5 billion notional, gold prices tumbled $20 to $1151 (its lowest level since April 2010). Silver is well through $16 and back at Feb 2010 lows. The USDollar is also surging.

The timing of the dump is right as Japanese trading breaks for lunch

Gold dumped...

and silver too..

One more random thing... the oddly spurious correlation between gold prices and Japanese bank VaR proxies is back again

CHART: Silver price weakness won't last

Silver futures managed to eke out modest gains on Monday after a more than 6% tumble last week to lows last seen early in 2010.

At around $16.10 an ounce, silver is down 17% this year and nowhere near the contract high of just over $48 an ounce in April 2011 (or the Hunt-induced spike to $48.70 in 1979).

Capital Economics is not alone among analysts expressing surprise at the weakness in the silver price this year "given that industrial metals prices have been more resilient and industry accounts for about 60% of global silver usage."

At around 73 the gold/silver price ratio is now close to levels last seen at the height of the global financial crisis and the independent researcher expects the ratio to be trimmed to a more normal 60.

Capital Economics predicts a rise in the silver price to $20 an ounce by end-2015 and $23 by end-2016 and "with the risks on the upside."

Gold to avg $1,170 an ounce in 2015: Natixis

Gold prices are likely to average $1,170 an ounce next year and $1,180 an ounce in 2016, said Natixis in its Metal Review.

Since the month of June, the price of gold has been steadily declining and in September prices breached the $1,200 an ounce mark. Behind this drop has been a strengthening dollar throughout Q3, supported by higher yields as the US bond market gradually priced in imminent rate hikes. Throughout this period, gold consumption in both China and India has been weak, while investment and central bank demand has remained limited.

According to Natixis, events in the US are expected to exert the biggest impact on gold prices. As the US economy improves, so investors’ need for a safe haven dissipates. With this economic improvement comes a strengthening dollar as the US bond market pushes yields higher in anticipation of interest rate hikes. These factors are expected to have a mildly negative effect upon gold prices over the forecast horizon, given the substantial rally in the dollar and rise in US yields that has already taken place so far this year.

On the producers’ side, there is a risk that miners may return to hedging future output if gold prices threaten to fall below cash costs of production. Due to aggressive cost cutting by gold producers, all-in sustaining costs of production have fallen to somewhere around $960 an ounce. That said, there are still many mines operating at higher costs that could potentially need hedging. This represents a potential source of supply in the market, which could help to accelerate any decline in prices.