THE RUN ON COMEX PHYSICAL GOLD CONTINUES
As our regular readers know, we’ve been monitoring the flow of gold out of COMEX member warehouses. What we are seeing is a steady outflow of physical gold from JP Morgan and other member warehouses. Another prominent recent example is Scotia Bank. Two weeks ago according to the COMEX Metal Depository Statistics report, some 282,000 troy ounces were withdrawn in that one week alone. This is roughly nine metric tonnes. Since March of this year, the outflow from Scotia’s gold vault totals staggering 1,160,000 troy ounces, or 37 metric tonnes- almost 43% of Scotia’s eligible COMEX gold in less than three months!
Among the possible explanations for this unusual activity, we think the most prominent are that Scotia is either exiting the COMEX gold business or more likely, Scotia’s customers are taking possession of the gold they had stored in the Scotia COMEX vault. Last week we wrote about Texas intending to take possession of the gold they have stored in the vault of the New York Federal Reserve Bank.
This is happening all over the world at the national level as well. Government central banks are repatriating their gold, most famously Germany, which in 2012 requested delivery of 674 metric tonnes stored here in the USA and were told by the US government that it would take eight years. According to Bloomberg, as of January 2015, a mere 85 tonnes had been delivered from New York to Germany. Physical availability of gold continues to be stretched.
THE CHINA WILD CARD, THE YUAN AND GOLD PRICES
In one of the most significant developments of modern finance, The Bank of China Ltd. is the first Chinese bank to join the London Bullion Market Association (LBMA) whose members include Goldman Sachs Group Inc., Societe Generale SA, Bank of Nova Scotia, HSBC Holdings Plc and Barclays Plc. LBMA is responsible for the well-known, twice daily, “London fix” of gold prices for the London over the counter gold market.
China is stepping up efforts to impact the gold and currency markets. As we have written before, China is both the world’s largest producer and buyer of gold. As China maneuvers to position the Yuan as a world reserve currency in competition with the US Dollar and to have the Yuan added to the International Monetary Fund’s basket of reserve currencies, the Peoples Bank of China has since 2009 tripled their publicly reported gold reserves to 3,510 metric tonnes, second only to the US reported reserves of 8,331 metric tonnes. Most industry analysts consider the publicly declared China gold reserves to be significantly below the actual reserves.
We are of the opinion that current gold prices are being held artificially low in the paper market “spot” price and do not reflect a free and open supply and demand market for the physical metal. China stands to reap a huge benefit from buying gold at these low price levels and has aggressively become a more active and influential player in the paper gold market in recent years. With international currency reserves in excess of $4 trillion, we may reasonably speculate China is manipulating gold prices to their advantage while diversifying their reserves and supporting their bid for reserve currency status with the IMF. The Chinese accumulation of gold is clearly the major force in the redistribution of physical gold reserves internationally and China benefits greatly from artificially low gold prices.
At some point in the near future, as China parlays the Yuan into an international reserve currency, it will be to China’s great advantage for gold prices to rise rapidly to significantly higher levels. The IMF has said they will announce their decision in August or October of this year. Investing in physical gold ahead of this event just makes sense.
FINALLY, A WORD FROM FIDELITY…
Well, three words actually- “Buy precious metals.”
Liquidity in the bond markets has been drying up for several months. We have seen “flash crashes” in German Bunds and US Treasuries this quarter with central bank intervention to prop up the bid in these events. US Treasury Bonds and German Bunds are the highest rated debt in the world, so a weak bid for these bonds is the ultimate flashing red warning light for bond investors. The liquidity for the secondary market in high grade corporate and high yield corporate bonds is far worse.
In what is an surely an early warning signal to bond investors, Ian Spreadbury, a bond fund manager at Fidelity Investments has recommended that investors leave the theatre before the anyone shouts “fire” – “The message is diversification. Think about holding other assets. That could mean precious metals, it could mean physical currencies.”