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World Gold Council
21 октября, 15:33

The Great Physical Gold Supply & Demand Illusion

Submitted by Koos Jansen from Bullionstar.com Gold supply and demand data published by all primary consultancy firms is incomplete and misleading. The data falsely presents gold to be more of a commodity than a currency, having caused deep misconceptions with respect to the metal’s trading characteristics and price formation. Numerous consultancy firms around the world, for example Thomson Reuters GFMS, Metals Focus, the World Gold Council and CPM Group, provide physical gold supply and demand statistics, accompanied by an analysis of these statistics in relation to the price of gold. As part of their analysis the firms present supply and demand balances that show how much gold is sold and bought globally, subdivided in several categories. It’s widely assumed these balances cover total physical supply and demand, which is incorrect as the most important category is excluded. The firms though, prefer not to share the subtle truth or their business models would be severely damaged.   The supply and demand balances by the firms portray gold to be more of a commodity than a currency, as the gist of the balances reflect how much metal is produced versus consumed - put differently, the firms mainly focus on how much gold is mined versus how much is sold in newly fabricated products. However, in reality gold is everlasting and cannot be consumed (used up), all that has ever been mined is still above ground carefully preserved in the form of bars, coins, jewelry, artifacts and industrial products. Partly because of this property the free market has chosen gold to be money thousands of years ago, and as money the majority of gold trade is conducted in above ground reserves. Indisputably, total gold supply and demand is far in excess of mine production and retail demand. As most individual investors, fund managers, journalists, academics and precious metals analysts consider the balances by the firms to be complete, the global misconception regarding gold supply and demand is one of epic proportions. Physical gold is a profound anchor in our global financial system and thus it’s of utmost importance we understand the fine details of its trading characteristics.  Supply & Demand Metrics By The Firms The firms can argue that the difference between what they present as supply and demand (S&D), as opposed to what I deem to be a more unadulterated approach of S&D is due to contrasting metrics. Accordingly, we’ll discuss their metrics to reveal their infirmity. In a nutshell, the firms only count the physical gold S&D flows that are easy to measure, while leaving out the most important part: institutional supply and demand.  Although the firms all have slightly different methodologies to measure S&D, from comparisons the numbers appear to be quite similar. For our further investigation we’ll spotlight the metrics and models by GFMS. The reason being, GFMS has been the only firm that was willing to share a full description of their methodology for publication – to be viewed here. Metals Focus (MF) provided a partial methodology, the World Gold Council and CPM Group declined to comment. Let’s have a look at GFMS its S&D categories. On the supply side is included: Mine supply (newly mined gold) Scrap supply (gold sourced from old fabricated products) On the demand side is include: Jewelry demand (gold content used in newly manufactured jewelry products bought locally at retail level, adjusted by jewelry exported and imported). Industrial demand (the volume of gold used in industrial applications, for example bonding wire, products used in semiconductors/electronics and dental alloys). Retail bar investment (the net volume of bars that are purchased by individual investors through retail channels). Coin investment (a combination of published data from mints and also a proprietary survey conducted by GFMS detailing where coins are sold). The above four demand categories summed up are often referred to as “consumer demand” by the firms. Furthermore GFMS includes: Net hedging (change in physical market impact of mining companies’ gold loans, forwards, and options positions) Net official sector (total central bank selling or buying) ETF inventory build (change in ETF inventory) Exchange inventory build (change in exchange inventory) The last four categories can be either supply or demand. In example, when central banks (the official sector) in total are net sellers this will be listed as a negative demand figure, as is shown in the S&D balance by GFMS below from 2006 until 2009, when central banks in total are net buyers this will be listed as a positive demand figure, as is shown in the balance from 2010 until 2015. For a clear overview of the GFMS S&D balance please have a look at all line items below. Exhibit 1. Courtesy GFMS. Global gold S&D balance as disclosed in the Gold Survey 2016. According to GFMS Supply consists of Mine production, Scrap and Net Hedging. In turn, Demand consists of Jewelry, Industrial Fabrication, Retail Investment, and Net Official Sector. After balancing Supply and Demand this results in a Physical Surplus/Deficit. Then, ETF Inventory Build and Exchange Inventory Build are added/subtracted from the Physical Surplus/Deficit to come to a Net Balance. GFMS likes to pretend their balance is complete and occasionally articulates any surplus or deficit arising from it is positively correlated to the price of gold, which is anything but true, as I will demonstrate step by step.   The Firms Exclude Majority Gold Supply & Demand Most important what’s excluded from the balance is what we’ll refer to as institutional supply and demand, which can be defined as trade in bullion among high net worth individuals and institutions. Usually the bullion in question comes in 400-ounce (12.5 Kg) London Good Delivery (GD) bars having a fineness of no less than 995, or smaller 1 Kg bars having a fineness of no less than 9999. In addition, bullion bars can weigh 100-ounce or 3 Kg, among other less popular sizes, generally having a fineness of no less than 995. Bullion can be traded without changing in weight or fineness, but it can be refined and/or recast for transactions as well, in example from GD bars into 1 Kg bars. In some cases institutional supply and demand involves cross-border trade, when bullion is sold in country A to a buyer in country B, in other cases the bullion changes ownership without moving across borders. Provided are two exemplifications of institutional S&D: An (institutional) investor orders 400 Kg of gold in its allocated account at a bullion bank in Switzerland - which would be purchased in the Swiss wholesale market most likely in GD bars. This type of S&D will not be recorded by GFMS. A Chinese (institutional) investor buys 100 Kg of gold directly at the Shanghai Gold Exchange (SGE), the Chinese wholesale market, in 1 Kg 9999 bars and withdraws the metal from the vaults. Neither this transaction will be registered by GFMS – or any other firm. These examples show the S&D balances by GFMS are incomplete. For illustrational purposes, below is a chart based on all S&D numbers by GFMS from 2013, supplemented by my conservative estimate of institutional S&D. Including institutional transactions total S&D in 2013 must have reached well over 6,600 tonnes. Exhibit 2. Global gold S&D 2013 by GFMS, including conservative estimate institutional S&D. GFMS Covers The Tracks With Help From The LBMA Although GFMS intermittently admits their number are incomplete (they have to), at the same time they’ve been battling for years to eclipse apparent institutional S&D for its audience. Dauntless tactics were needed when in 2013 institutional demand in China reached roughly 1,000 tonnes and over 500 tonnes in Hong Kong. Institutional demand in the East was predominantly sourced through GD bars from the London Bullion Market, which were refined into 1 Kg 9999 bars that are more popular in Asia. For the cover up GFMS went to great lengths to refute the volumes of gold withdrawn from SGE vaults, and accordingly have the London Bullion Market Association (LBMA) adjust statistics on total refined gold by its member refineries. Remarkably, the LBMA cooperated. Allow me to share my analysis in detail. In 2013 something unusual happened in the global gold market as Chinese institutional demand exploded for the first time in history. Hundreds of tonnes of institutional supply from London in the form of GD bars were mainly shipped to Switzerland to be refined in 1 Kg 9999 bars, subsequently to be exported via Hong Kong to meet institutional demand in China. From customs data by the UK, Switzerland and Hong Kong the institutional S&D trail was clearly visible. From 2013 until 2015 there was even a strong correlation between the UK’s net gold export and SGE withdrawals. Demonstrated in the chart below.  Exhibit 3. Correlation between UK net gold export and SGE withdrawals. Because of the mechanics of the gold market in China, Chinese institutional demand roughly equals the difference between the amount of gold withdrawn from SGE designated vaults (exhibit 4, red bars) and Chinese consumer demand (exhibit 4, purple bars). In the exhibit 4 below you can see this difference that brought GFMS in a quandary, especially since 2013. For more information on the workings of the Chinese gold market and the size of Chinese institutional demand please refer to my post Spectacular Chinese Gold Demand Fully Denied By GFMS And Mainstream Media. Exhibit 4. Chinese wholesale demand (SGE withdrawals), versus GFMS consumer demand versus apparent supply. Stunningly, since 2013 GFMS has tried to convince its readers through numerous arguments why SGE withdrawals crossed 2,000 tonnes for three years in a row, while Chinese consumer demand reached roughly half of this. Yet the arguments have failed miserably to explain the difference - they rationalize only a fraction, read this post for more information. And GFMS did more to eclipse apparent institutional S&D. They colluded with the LBMA. To be clear, I cannot exactly measure global institutional S&D. However, let me make an estimate of apparent institutional demand for 2013. Notable, in 2013 a flood of gold crossed the globe from West to East. Chinese institutional demand accounted for 914 tonnes and Hong Kong net imported 579 tonnes - the latter we’ll use as a proxy for additional Asian institutional demand, as Hong Kong is the predominant gold trading hub in the region.  In total apparent institutional demand in 2013 accounted for (914 + 579) 1,493 tonnes. If we add all other demand categories by GFMS shown in exhibit 1, total demand in 2013 was at least 6,619 tonnes. Be aware, this excludes non-apparent institutional demand. Exhibit 5. Global gold demand 2013 by GFMS, including apparent institutional demand. Because nearly all wholesale gold demand in Hong Kong and China is for 1 Kg 9999 bars, the global refining industry was working overtime in 2013, mainly to refine institutional and ETF supply in GD bars coming from London. In December 2013 I interviewed Alex Stanczyk of the Physical Gold Fund who just before had spoken to the head of a Swiss refinery. At the time Stanczyk told me [brackets added by me]: They put on three shifts, they’re working 24 hours a day and originally he [the head of the refinery] thought that would wind down at some point. Well, they’ve been doing it all year [2013]. Every time he thinks it’s going to slow down, he gets more orders, more orders, more orders. They have expanded the plant to where it almost doubles their capacity. 70 % of their kilobar fabrication is going to China, at apace of 10 tonnes a week. That’s from one refinery, now remember there are 4 of these big ones [refineries] in Switzerland. As a consequence, statistics on “total refined gold production” in 2013 by “LBMA accredited gold refiners who are on the Good Delivery List”, which the four large refineries in Switzerland are part off, capture the immense flows of institutional S&D - next to annual mine output and scrap refining. On May 1, 2015, the LBMA disclosed total refined gold production by its members at 6,601 tonnes for 2013 in a document titled A guide to The London Bullion Market Association. It’s no coincidence this number is very close to my estimate on total demand (6,619 tonnes), as apparent institutional demand in Asia was all refined from GD into 1 Kg bars. Here’s exhibit 2 from another angle. Exhibit 6. Global gold S&D by GFMS, including apparent institutional S&D, versus total refined gold production 2013. In the table below we can see the LBMA refining statistics for 2013 at 6,601 tonnes. Exhibit 7. Courtesy LBMA. Screenshot from A guide to The London Bullion Market Association captured by Ronan Manly in May 2015. After this publication GFMS was trapped; these refining statistics revealed a significant share of the institutional S&D flows they had been trying to conceal. What happened next - I assume - was that GFMS kindly asked the LBMA to adjust downward their refining statistics. First and painstakingly exposed by my colleague Ronan Manly in multiple in-depth posts, the LBMA kneeled and altered its refining statistics to keep the charade in the gold market going. On August 5, 2015, the LBMA had edited the aforementioned document, now showing 4,600 tonnes in total refined gold production. (Click here to view the original LBMA document from the BullionStar server, and here to view the altered version from the BullionStar server.) Have a look. Exhibit 8. Courtesy LBMA. Altered document on refining statistics by the LBMA August 2015. In the altered version it says: Total refined gold production by the refiners on the List was estimated to be 4,600 tonnes in 2013, owing to recycling of scrap material, above world mine production of 3,061 tonnes (source Thomson Reuters GFMS). A few important notes: In the altered version the LBMA mentions “an estimate” for “total refined gold production”, while it doesn’t need to make an estimate as all LBMA accredited gold refiners who are on the Good Delivery List are required to provide exact data to its parent body. The exact data was disclosed in the first version of A guide to The London Bullion Market Association, and it stated, “total refined gold production by the refiners on the List was 6,601 tonnes”. In the altered version the LBMA states the refining statistics were sourced from Thomson Reuters GFMS, but the LBMA doesn’t need GFMS for these statistics. The fact they mention GFMS, though, suggests a coordinated cover up of institutional S&D. Not only the firms, also the LBMA publishes incomplete and misleading data. The altered version stated refining production totaled 4,600 tonnes, which is a round number and obviously quickly made up. A few weeks after the numbers were adjusted, the LBMA adjusted the numbers again, this time into 4,579 tonnes (click here to view from the BullionStar server). Clearly, on several occasions there has been consultation with the LBMA to get the statistics in line with GFMS. In the original document the LBMA states, “Total refined gold production by the refiners on the List was 6,601 tonnes in 2013, more than double world mine production of 3,061 tonnes”, while in the altered version they state, “Total refined gold production by the refiners on the List was estimated to be 4,600 tonnes in 2013, owing to recycling of scrap material, above world mine production of 3,061 tonnes”. Notable, GFMS prefers to have total supply focused around mine and scrap production, instead of including institutional supply. The original refining statistics (6,601 tonnes) are still disclosed in the LBMA magazine The Alchemist (#78 on page 24), to be viewed from the LBMA server here. The fine details about how often and when the LBMA changed its refining statistics can be read in Ronan Manly’s outstanding post Moving the goalposts….The LBMA’s shifting stance on gold refinery production statistics. And so nothing is spared in trying to uphold the illusion of the GFMS S&D balance to be complete. In another example GFMS excluded gold purchases by the central bank of China from its S&D balance. In June 2015 the People’s Bank Of China (PBOC) increased its official gold reserves by 604 tonnes, from 1,054 tonnes to 1,658 tonnes. During that quarter (Q2 2015) all other central banks worldwide were net buyers at 45 tonnes. Thus, in total the Official Sector was a net buyer at 649 tonnes. Now, let’s have a look at GFMS' S&D balance for Q2 2015: Exhibit 9. Courtesy GFMS. Global gold S&D balance as disclosed in the Gold Survey 2015 Q2. Net Official Sector purchases are disclosed ay 45 tonnes. GFMS decided not to include the 604 tonnes increment by the PBOC simply because it didn’t fit their balance model. A 604 tonnes increment in would have set the “net balance” at -480 tonnes. Readers would have questioned the balance from this outlier, and so GFMS decided not to include the tonnage. According to my sources PBOC purchases were sourced from institutional supply (from abroad and not through the SGE), which is a supply category not disclosed by GFMS and therefore the tonnage was a problem. (Note, GFMS disclosed the PBOC increment in text, but not in their balance.) For more information read my post PBOC Gold Purchases: Separating Facts from Speculation. Gold Is More A Currency Than A Commodity The biggest flaw of the balance model by GFMS is that it depicts gold to be more of a commodity than a currency. It’s focused on mine output and gold recovered from old fabricated products on the supply side, versus retail sales of newly fabricated products on the demand side. In parlance of the firms, how much is produced (supply) versus consumed (demand). Official sector, ETF and exchange inventory changes are then added to the balance. This commodity S&D balance approach by GFMS has caused deeply rooted misconceptions about the essence of gold and its price formation. The price of a perishable commodity is mainly determined by how much is annually produced versus how much is consumed (used up). However, gold is everlasting, it cannot be used up and its exchange value is mainly based on its monetary applications, from being a currency, or money if you will. Logically the best part of its trading is conducted in above ground reserves. From my perspective the impact of global mine supply, which increases above ground stocks by roughly 1.5 % annually, and retail sales have less to do with gold’s price formation than is widely assumed. Back to GFMS. Have a look at the picture below that shows their S&D flows for 2015.  Exhibit 10. Courtesy GFMS. The global S&D flows for 2015. GFMS pretends total supply is mine production plus some scrap, which is then met by jewelry demand in addition to retail investment, industrial fabrication and official sector purchases. The way they present it is misleading. These S&D flows are incomplete; they suggest gold is traded like any other commodity. But what about institutional S&D in above ground bullion? Trades that define gold as an international currency. Let’s do another comparison; this time between what GFMS calls Identifiable Investment demand, consisting of… Retail bar & coin ETF demand …versus my what I deem to be a more unadulterated approach of investment demand, consisting of… Retail bar & coin ETF demand Institutional demand According to my estimates, in 2015 apparent Chinese institutional demand accounted for roughly 1,400 tonnes (exhibit 4). In the Gold Survey 2016 GFMS states on page 15 [brackets added by me]: Total [global] Identifiable Investment, … posted a modest 5 % increase in 2015, to reach 990 tonnes. That’s quite a tonnage between global Identifiable Investment by GFMS at 990 tonnes and apparent Chinese institutional demand at 1,400 tonnes. We should also take into account non-apparent institutional demand, gold that changes hands in trading hubs like Switzerland. Unfortunately we can’t always measure institutional S&D, but that doesn’t justify denying its subsistence. Have a look at the chart below that shows the large discrepancy. In the next chapter we’ll specifically discuss the significance of investment demand in relation to the price of gold. Exhibit 11. Global Gold Investment Demand 2015. My point being: what many gold market participants and observers think is total supply and demand is just the tip of the iceberg. This truly is a staggering misconception created by the firms. The global gold market. H/t Dan Popescu. When observing the GFMS balance in exhibit 1 its incompleteness is self-evident. At the bottom we can see the line item “net balance”, which reflects the difference between total supply and total demand. According to GFMS, if the “net balance” is a positive figure there was a surplus in the global gold market, and if “net balance” is a negative figure the market has been in deficit. In the real world this figure is irrelevant. Gold supply and demand are by definition always equal. One cannot sell gold without a buyer, and one cannot buy gold without a seller. Furthermore the gold market is deep and liquid. So how come there is a difference between total supply and total demand in the GFMS balance? As I’ve demonstrated before, because GFMS doesn’t include institutional S&D that in reality makes up for the difference and far beyond. In all its simplicity the “net balance” item reveals their data is incomplete. Let’s have another stab at this. How can “net balance” exist in the real world, for example in 2009? According to GFMS the gold market had a 394 tonnes surplus in 2009. But how? Were miners left with 394 tonnes they couldn’t sell? Or some supranational entity decided to soak up the surplus to balance the market? Naturally, this is not what happens. Total supply and total demand are always equal, but GFMS doesn’t record all trades. Moreover, in my opinion the words “surplus” and “deficit” do not apply to gold. There can be no deficit in gold; there will always be supply. At the right price that is. Sometimes Keynesian economists claim there is not enough gold in the world for it to serve as the global reserve currency. Austrian economists then respond by saying that there will always be enough gold at the right price. I agree with the Austrians and their argument also validates why there can be no deficit in gold.   There is more proof the “net balance” item presented by GFMS is meaningless. Although according to GFMS the market had a 394 tonnes “surplus” in 2009 the price went up by 25 % during that year. This makes no economic sense. A surplus suggests a declining price, not the other way around. Tellingly, S&D forces presented in GFMS balances are often negatively correlated to the gold price, as was the case in 2005, 2006, 2009, 2010 and 2014 (exhibit 1). In conclusion, GFMS S&D balances are not only incomplete, the resulting “net balance” items are misleading with respect to the price. Below are a few charts that demonstrate this conclusion. If we plot “net balance” versus the end of year price of gold we can see the correlation is often negative. Have a look below. Green “net balance” chart bars show a positive correlation to the gold price, red chart bars show a negative correlation (note, the left axis is inverted for a more clear overview between any “deficit/surplus” and the price of gold). As you can see nearly half of the “net balance” chart bars are negatively correlated to the price of gold. Exhibit 12. GFMS’ gold market “net balance” versus the gold price. We can quarrel if the “net balance” in 2014 was positively or negatively correlated to the price. I say the correlation was negative as the gold price in 2014 remained flat in US dollars but was up in all other major currencies, in contrast to the “surplus” presented by GFMS. Mind you, although the “net balance” item is often negatively correlated to the gold price, in the Gold Survey 2016 GFMS states on page 9: In terms of the Net Balance, 2015 marked the third year in which the gold market remained in surplus, and therefore it is not surprising that the bear market continued.      And on page 14: The forecast reduction in global mine output and a gradual recovery in demand will see the physical surplus narrow in 2016, providing support to the gold price and laying the foundation for better prospects.   GFMS likes to pretend any “surplus” or “deficit” arising from their balance is correlated to the price, but the facts reveal this is not true. Let us plot the “physical surplus/deficit” line item by GFMS (exhibit 1) versus the gold price. This results in even more negative correlations. Exhibit 13. GFMS gold market “physical surplus/deficit” versus gold price. This exercise reveals that a positive correlation between either a “surplus” or “deficit” arising from a GFMS balance and the price of gold is just a coincidence. No surprise when one is aware their S&D data is incomplete. Remarkably, the last chart was also published in the Gold Survey 2016, but GFMS chose not to invert the left axis and doesn’t disclose what we see is a surplus or deficit. As a result the largest surpluses (2006, 2007, 2009, 2010) seem to correlate with a rising price, though in reality they did the opposite. Compare the chart below with the one above. Exhibit 14. Courtesy GFMS. GFMS also publishes S&D balances for silver (a monetary metal that is comparable to gold). For silver the presented correlations by GFMS between a “surplus” or “deficit” in relation to the price are even weaker. Exhibit 15. GFMS silver market “net balance” versus silver price, as disclosed in the Silver Survey 2016. Exhibit 16. GFMS silver market “physical surplus/deficit” versus silver price, as disclosed in the Silver Survey 2016. According to GFMS the silver market is always in deficit, but the price goes up and down. Obviously GFMS neglects to measure institutional S&D for silver.  Conclusion In my opinion, when Gold Fields Mineral Services (GFMS) was erected many decades ago they made a mistake to adopt a commodity S&D balance approach. Surely with the best intentions they gather intelligence and retrieve data from the market. But we must be aware this is not the full picture. The most significant data is not disclosed by GFMS. When it comes to what drives the price of gold GFMS and I agree it’s determined by gold’s role as a currency in the global economy. When reading the chapter PRICE AND MARKET OUTLOOK in the Gold Survey 2016, GFMS shares its insights with respect to the gold price. Factors mentioned are: Turmoil in global stock markets A Chinese hard landing Geopolitical tensions in the Middle-East Central bank stimulus (QE) Global economic weakness Interest rates policy by central banks Low risk asset / safe haven demand So if these factors drive the gold price, in what S&D category would this materialize? Would (large) investors buy and sell jewelry? Or bullion bars? I think the latter. According to my analysis the price of gold is largely determined by institutional demand, and to a lesser extent ETF and retail bar & coin demand. Let’s do an exercise to see what physical gold S&D trends correlate to the price. The majority of supply on the GFMS balance consists of mine output and the majority of demand on the GFMS balance consists of jewelry consumption. But if we plot these volumes versus the price of gold in a chart, there is no push and pull correlation. For example, when the gold price surged from 2002 until 2011 jewelry consumption was not rising. Neither was it outpacing mine supply. The opposite happened, to be seen in the graph below. This is because jewelry demand is price sensitive – when the price goes up jewelry demand goes down, and vice versa. Jewelry demand is not driving the price of gold. Exhibit 17. GFMS retail demand, versus mine and scrap supply versus the gold price. I also added retail bar & coin demand. Interesting to see is that retail bar & coin demand is on one hand a price driver, moving up and down in sync with the gold price, on the other hand it can be price sensitive having brief spikes when the price of gold declines. The best correlation between physical S&D in relation to the gold price can be seen in institutional and ETF S&D. One of the largest gold trading hubs in the West is the UK, home of the London Bullion Market that also vaults the largest ETF named GLD. The UK has no domestic mine production, no refineries and national gold demand is neglectable in the greater scheme of things. Therefore, by measuring the net flow of the UK (import minus export) we can get a sense of Western institutional and ETF demand and supply. For example, if the UK is a net importer - import demand being greater than export supply - that signals a net pull on above ground stocks. Approximately one third of the UK’s net flow corresponds to ETF inventory changes, the other two thirds reflect pure institutional S&D. Exhibit 18. UK net flow versus the gold price. Exhibit 19. UK net flow, GLD inventory change, gross import and gross export versus the gold price. In the charts above we can observe a remarkable solid correlation between the UK’s net flow and the gold price. The UK is a net importer on a rising price and net exporters on declining price. The shown correlation can't be a coincidence, though there's no guarantee it will prevail in the future. The two charts above show the gold price is mostly determined by institutional supply and demand in above ground reserves. Effectively, GFMS is hiding the most important part of global physical gold flows. When I asked an analyst at one of the leading firms why his company doesn’t measure institutional S&D he told me candidly, “because it’s extremely difficult to accurately estimate it”. And it is. As I wrote previously, I can’t exactly measure global institutional S&D either. However, very often publicly available information gives us a valuable peek at it, and it shows to be more relevant to the gold price than what the firms keep staring at. Not knowing exactly what institutional S&D accounts for doesn’t mean GFMS shouldn’t pay attention to it. But the firms keep trying to uphold the illusion the data they’ve been selling for decades is complete. For if they would plainly confess it was incomplete, future business could be severely damaged. What I blame these firms is that they’ve created a meme that the gold market is as large as annual mine supply. This has caused all sorts of misconceptions. Often I read analyses based on a comparison between quantitative demand and mine output. Such analyses are likely to jump erroneous conclusions. H/t Ronan Manly, Bron Suchecki, Nick Laird from Goldchartsrus.com Appendix Simplified overview gold flows 2015:

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02 октября, 14:00

Gold market rife with rumors of likely LBMA partner to increase transparency

The bullion market was awash with rumors September 30 relating to the possible winner of the recent request for proposal by trade body the London Bullion Market Association, with Autilla a standout name as a possible contender to be awarded the contract to increase market transparency. One source close to the situation said that the […] The post Gold market rife with rumors of likely LBMA partner to increase transparency appeared first on The Barrel Blog.

19 сентября, 08:30

Золото дорожает. Можно ли на нём заработать?

Правило инвесторов: продавай на максимуме, покупай на минимуме. Золото в последние годы несколько лихорадит, но если посмотреть на его пиковые значения, то этот актив мог принести большие доходы его владельцу. И сейчас как раз время рассмотреть, что же влияет на его цену и как на нём заработать. Последние три года золото заставило инвесторов понервничать: после исторического максимума в сентябре 2011 года на уровне $1920 за унцию цена на металл неуклонно пошла вниз, достигнув минимального за пять лет значения в декабре 2015 года — $1050,6. Обычно инвестиции в золото являются тихой гаванью для инвесторов, которые в условиях большой волатильности предпочитают инвестировать в стабильно ценный металл. Вероятно, тем, кто купил золото на минимуме, пора "открывать шампанское": с начала 2016 года тренд по нему пошёл резко вверх. По информации World Gold Council (WGC), организации, исследующей развитие рынка золотодобывающей промышленности, в первом полугодии 2016 года цены на золото выросли на 22% и достигли $1316 за унцию. Неудивительно, что на фоне низких цен вырос и мировой спрос на него: за первое полугодие он вырос до практически рекордных 2355 тонн. Почему растут цены на золото? В целом спрос на золото проявился не везде: мировые центробанки снизили закупку золота в резервы на 3%, ювелирный спрос упал на 19%, а технологический — на 3%. Главным драйвером роста стал спрос на золото в качестве выгодного инвестиционного инструмента. На рынке физического золота даже появился дефицит: впервые за несколько лет спрос превысил предложение почти на 155 т.   Главная причина возросшего интереса к золоту — растущая инфляция, небольшой выбор доходных и стабильных инструментов, а также пока неясная для многих политика ФРС насчёт ставок. Пока базовая ставка ФРС находится на 0,25–0,5%, и в США не раз заявляли, что намерены её поднять. Однако пока в стране не пройдут президентские выборы (состоятся 8 ноября), вряд ли какие-либо действия будут предприняты, соответственно, инвестиции в долларовые инструменты пока малодоходны. Покупку золота населением можно считать своеобразной защитой от долларовой инфляции. По данным Бюро статистики США, с января 2000 года по июль 2016-го накопленный уровень инфляции в стране составил 42,99%. В Европе ставки вообще нулевые (или отрицательные, то есть инвесторы фактически платят за то, чтобы инвестировать в те или иные активы, и не получают дохода). Отсюда и растёт спрос на проверенные веками стабильные инструменты — золото, серебро, платина и т.п. "Золото хорошо тем, что оно любит плохие новости мировой экономики", — говорит советник по макроэкономике генерального директора "Открытие брокер" Сергей Хестанов. "Поддержку" золоту оказал также Брексит: решение Британии покинуть Евросоюз, активная президентская кампания в США, проблемы в банковском секторе Италии и другие факторы. Не видя возможностей заработать на вложениях в реальную экономику, многие инвесторы предпочитают вкладываться в реальные активы, из которых самым классическим и является золото. Как "нажиться" на золоте? Существует четыре самых распространённых способа вложиться в золото: открыть обезличенный металлический счёт (ОМС) в банке, купить физические слитки золота, купить ювелирные украшения или золотые инвестиционные монеты. Счета ОМС, пожалуй, самый популярный инструмент для инвестиций в золото. При его открытии человек получает золото не в физическом виде, а в виде суммы, которая зачисляется на счёт. Как правило, минимальный взнос на ОМС составляет денежный эквивалент 0,1 грамма золота (по другим металлам требования могут быть другими).  Своим опытом инвестирования в ОМС с Лайфом поделилась московская студентка Мугима Каримова, которая в 2014 году открыла в одном из банков ОМС. "Мониторила статьи в Интернете и пришла к выводу, что вложения в металлы — самое выгодное дело, так как курс на валюту скачет непредсказуемо", — вспоминает Мугима. Доход от такого вклада не мгновенный. Разница между тем, что она вложила, и тем, что получила, стала заметной только через полгода. На момент открытия вклада грамм золота стоил около 1200—1300 рублей. Девушка перевела в золото 50 тысяч рублей и уже через год получила плюс 12 тысяч на счету. По словам начальника управления по развитию пассивных и комиссионных продуктов банка "Глобэкс" Ирины Волис, счета ОМС подходят наиболее финансово грамотным клиентам, которые следят за рынком, готовы принимать на себя риски и самостоятельно отслеживают колебания цены на металлы для расчёта входа-выхода. Другой способ — покупка физических слитков, конечно, привлекает своей идеей: ты становишься обладателем "золотого кирпича", это романтично и звучит красиво. Однако многие забывают о трудностях этого варианта.   — Конечно, слитки покупать надёжнее, так как их у тебя точно никто не отберёт, но там множество дополнительных расходов: налоги, выплаты за хранение в банковской ячейке и т.д., и я решила, что всё это не потяну, — объясняла своё решение Мугима Каримова. По мнению экспертов, слитки считаются хорошим вариантом, если в планах инвестировать деньги для очень долгосрочного накопления или даже для будущих поколений. Стоит только напомнить, что за 15—20 лет стоимость золота может вырасти в 4—5 раз и это перекроет инфляцию во многих странах. Но, покупая золото, надо помнить: НДС на эту операцию составляет 18% (при обратной продаже налог не возвращается), а стоимость ячейки в год обойдётся минимум в 3000 рублей. Есть ещё расходы на экспертизу, если захотите продать золото. Альтернативой золотому слитку станет более компактная, а порой и более доходная золотая инвестиционная монета. Её покупка не облагается НДС, а со временем стоимость монеты меняется не только от цены на металл: чем старше монета, тем она более привлекательна для нумизматов. "Золотой монетный дом" специально для Лайфа сделал график роста цены самой популярной российской золотой инвестиционной монеты "Георгий Победоносец" (средняя цена по году). Из данных видно, что стоимость купленной в 2006 году монеты за 10 лет увеличилась практически в шесть раз!   Единственными недостатками вложения денег в инвестиционные монеты можно назвать относительно низкую ликвидность и довольно долгий (годы) срок инвестирования. Наконец, неплохую прибыль могут принести драгоценные изделия: о заветном золотом колечке в подарок от любимого — и первой инвестиции в счастливое совместное будущее — мечтает как минимум каждая вторая девушка. Однако при изготовлении украшений используются в основном сплавы, что снижает их стоимость по сравнению с золотыми слитками и монетами. Эксперты сходятся во мнениях, что вкладываться в ювелирные украшения стоит, если те имеют культурную или историческую ценность. "Инвестировать в ювелирные изделия следует только в том случае, если у вас есть возможность покупать их относительно недорого, либо в других странах, либо в виде лома драгметаллов", — советует читателям потомственный ювелир Александр. Золото любит тех, кто "постарше" — Золото — такой же биржевой товар, как любой другой, — утверждает Сергей Хестанов. Для того чтобы определиться, стоит или не стоит сейчас вкладываться в драгоценный металл, следует понимать одну простую вещь: если речь идёт о вкладе сроком минимум на 20—30 лет, то золото, равно как и другие драгоценные металлы, стоит покупать всегда, считает Сергей Хестанов. — Такой вклад в любом случае в конечном итоге окажется выгодным, ведь самый длительный период падения цены на золото — меньше 20 лет, — говорит эксперт. В золоте имеет смысл хранить небольшой процент сбережений, который напрямую зависит от возраста инвестора: чем он старше, тем выше доля рекомендуемого вложения, говорит аналитик ГК "Финам" Тимур Нигматуллин. Эксперт даже разработал собственную формулу, позволяющую вычислить, какое количество дохода стоит инвестировать в драгоценные металлы, процент вложения вычисляется просто: возраст инвестора минус 30. Согласно утверждению Нигматуллина, тем, кто ещё не достиг 30, инвестировать в золото рано и стоит обращать внимание на более высокодоходные инструменты — акции, ETF (торгуемые на бирже фонды) и так далее.

09 сентября, 17:08

China’s Rising Gold ETF Market: A Hybrid

In 2013 we’ve witnessed the inception of the Chinese gold ETF market. At first demand for the gold ETFs was neglectable, as investors mostly preferred to buy the physical gold directly at the Shanghai Gold Exchange (SGE) or buy jewelry or investment bars through retail channels. This year, however, there has been a major shift in gold ETF demand in China. The physical holdings of Chinese gold ETFs have surged five-fold from 7 tonnes at the end of January, to 35 tonnes at end of August. The Huaán Yifu Gold ETF, which was holding 23 tonnes in August, entered the global top 15 list.   Exhibit 1. All physical holdings of Chinese gold ETFs are stored within SGE designated vaults. The interest in China’s nascent gold ETF market was even mentioned by the World Gold Council in a recent Gold Demand Trends report. In this post, we’ll add some texture to China's gold ETF market; how are the gold ETFs constructed and how can they be compared to the largest Western gold ETF, the SPDR Gold Trust. At this moment the market share of Chinese gold ETFs is still small - within China as well as globally, but knowledge about the workings of these ETFs will be valuable when they acquire significant market share in the future. Kindly note, all mechanics and examples presented in this post are simplified. What Is A Gold ETF? ETF is short for Exchange Traded Fund. ETFs trade like stocks and its price usually tracks an underlying asset or index. Like stocks, ETFs have a primary market and a secondary market. The secondary market is the stock exchange where most ETF investors trade. What makes ETFs special is the primary market where ETF shares are created and redeemed. Let us use the SPDR Gold Trust (symbol: GLD) to illustrate how the primary market works. Mainly through the creation and redemption process of shares, the GLD share price tracks the gold price. Primary GLD market participants include (from the prospectus): The Sponsor (World Gold Trust Services, LLC, which oversees the performance of the Trustee and the Custodian) The Trustee (BNY Mellon Asset Servicing, which is responsible for the day-to-day administration of GLD) The Custodian (HSBC Bank plc, which holds the gold bars in custody, there can be sub custodians) The Authorised Participants (the institutions which are authorised to create and redeem GLD shares, at this moment the Authorised Participants are Barclays Capital, Inc., Credit Suisse Securities (USA) LLC, Goldman Sachs & Co., Goldman Sachs Execution & Clearing, L.P., HSBC Securities (USA) Inc., P. Morgan Securities Inc., Merrill Lynch Professional Clearing Corp., Morgan Stanley & Co. LLC, RBC Capital Markets, LLC, Scotia Capital (USA) Inc., UBS Securities LLC and Virtu Financial BD LLC). GLD is traded on the New York Stock Exchange Arca (NYSE Arca) Exhibit 2. The (simplified) process of creation and redemption of GLD shares by an Authorised Participant through the Trustee. If an Authorised Participant (AP) wants to create GLD shares, it needs to deposit gold into the account of the Trust and subsequently the Trustee will provide the AP with GLD shares. The creation application must be made in multiples of 100,000 shares (a block of 100,000 shares is called a basket). Since every GLD share represents approximately 0.1 ounce of gold, in order to create 100,000 GLD shares the AP needs to deposit 10,000 ounces of gold into the account of the Trust. (In reality, 1 GLD share actually represents a little less than 0.1 ounce of gold, the reason for this will be explained later on in this post.) The redemption process works the other way round. If an AP wants to redeem GLD shares, it deposits 100,000 GLD shares at the Trust and subsequently the AP receives 10,000 ounces of gold. The purpose of APs creating and redeeming GLD shares is usually arbitrage. As previously mentioned the gold equivalent of 1 GLD share is roughly 0.1 ounce, nevertheless GLD shares and actual gold are traded in two different markets. As a consequence, the price of 1 GLD share can differ from the price of 0.1 ounce of gold. If the price of GLD and the price of gold diverge, this is where arbitrage comes into play for the APs. Accordingly, the arbitrage by APs through creation and redemption of shares contributes to GLD’s price tracking the gold price. Suppose (simplified), the price of 1 GLD share is $110 - caused by supply and demand for GLD shares at the NYSE Arca - while the price of 0.1 ounce of gold is $100 in the gold market. An AP can grasp this opportunity by buying (or first leasing) 10,000 ounces of gold to deposit in the GLD Trust account after which the Trustee will create 100,000 GLD shares for the AP. The new shares created are then sold by the AP on the stock market, which will cause the price of GLD to go down. The arbitrage opportunity will be used by APs until it’s closed. If the price of GLD shares is lower than the price of gold, the arbitrage opportunity works the other way around, APs can buy shares, redeem them for gold at the Trustee and sell the gold. In the aforementioned example trade when the AP (via the Trustee) created 100,000 GLD shares his investment was $10,000,000 (10,000 ounces at $100 per 0.1 ounce). The AP’s revenue was $11,000,000 (100,000 GLD shares worth $110 a piece). The AP’s profit in this exercise was $1,000,000. ($110-$100)*100,000 = $1,000,000 As readers can see from the example, the holdings of GLD were increased by 10,000 ounces of gold. Almost every day the holdings of GLD vary and the change is often caused by arbitrage of APs. One theory is, when demand for GLD shares is strong (usually by Western investors) and the share price is trending higher than the price of the gold equivalent, the APs jump the arbitrage, create shares and GLD inventory swells. Then, if growth in GLD inventory correlates to a surging gold price (which can be observed in exhibit 3 below) we can speculate the gold bull market in part has been caused by Western investment demand in GLD. Exhibit 3. Now we have established the workings of the largest Western gold ETF, we will have a look at how the Chinese gold ETFs are constructed, and compare them to GLD. China’s Gold ETF Market Below are the 4 Chinese gold ETFs currently in existence that we’ll discuss. - Bosera Gold Exchange Open-Ended Securities Investment Fund - Guotai Gold Exchange Open-Ended Securities Investment Fund - Huaán Yifu Gold Exchange Open-Ended Securities Investment Fund - Efund Gold Exchange Open-Ended Securities Investment Fund In China every gold ETF share represents approximately 0.01 gram of gold. By creating or redeeming gold ETF shares (Chinese) APs receive or deliver a basket of 300,000 shares, which equals to 3Kg of gold. This threshold is much lower than that of GLD, of which a basket equals to 310Kg of gold. The gold acceptable for Chinese ETFs are the spot (physical and spot deferred) gold contracts listed on theSGE - for example Au99.99. Therefore, all the physical holdings of China’s gold ETFs are stored within SGE designated vaults. Moreover, there is a range of features that make China’s gold ETFs quite different from GLD. 1. Chinese Gold ETF Shares Can Also Be Created Or Redeemed Through Cash Unlike GLD, which only allows the use of gold to create shares, and only allows the use of shares to redeem gold, China’s gold ETFs also allow shares to be created and redeemed through cash in the primary market. An AP can present cash to the Fund Manager who handles the creation and redemption process for a Chinese gold ETF. The Fund Manager is comparable to the Trustee of GLD. Thereby, through an AP individual investors can create or redeem gold ETF shares with cash as well. Suppose, a Chinese investor wants to arbitrage the difference between the price of a gold ETF and the price of gold. In this example the price of the gold ETF is higher than the price of gold, so the investor want use cash to create shares to sell on the stock market. The investor can present cash to an AP who in turn will create shares via the Fund Manager. The amount of cash used in this transaction to create shares is equal to the cash value of the spot gold contracts that are needed to create the shares without the use of cash. Vice versa, in case an investor wants to arbitrage the price of a gold ETF when it’s lower than the price of gold, the investor can present shares to an AP to redeem for cash. Exhibit 4. Creation and redemption process of Chinese gold ETF shares through cash. In China the APs can be securities firms and commercial banks. The securities firms are often not SGE members. Therefor, the number of APs that support gold ETF shares creation and redemption through cash is often larger than the number of those that support shares creation and redemption through spot gold contracts. For example, in the case of Efund Gold ETF, the fund has authorised 13 securities firms (APs) to process creation and redemption through cash, but only 2 banks (APs) to process creation and redemption through spot gold contracts (Industrial and Commercial Bank of China and Bank of Communications). 2. The Flexibility Of The Fund Manager The Trustee of GLD doesn’t have much flexibility in managing the assets. Its duty is mainly processing the creation and redemption orders of GLD shares. Therefore, the gold holdings of GLD are mainly allocated gold and according to the prospectus [brackets added by me]: Gold held in the Trust [GLD]’s allocated account is the property of the Trust and is not traded, leased or loaned under any circumstances. In China, the Fund Managers of the gold ETFs have more flexibility. The gold contracts that China’s gold ETFs hold include not only spot physical contracts like Au99.99 and Au99.95, but can also be spot deferred contracts like Au (T+D), and notable all these “spot contracts” may be leased (sometimes swapped) within the SGE system. Additionally, every Chinese gold ETF can invest 10% of its fund assets (5 % of net fund assets in case of Efund Gold ETF) in “other financial instruments” allowed by the China Securities Regulatory Commission (CSRC). For example, the excerpt below is from the Efund Gold ETF’s prospectus [brackets added by me]: The investment scope of the Fund [Efund Gold ETF] is liquid financial instruments, including gold physical contracts (including spot physical contracts, spot deferred contracts, etc), bonds, asset-backed securities, bond repos, bank deposits, money market instruments, and other financial instruments which laws, regulations or the CSRC allow the Fund to invest in the future (but these have to satisfy the relevant rules of the CSRC). If laws, regulations or regulatory institutions allow the Fund to invest in other instruments (including but not restricted to gold derivatives like forwards, futures, options and swaps), after necessary procedures, the Fund Manager will include them into the investment scope. The portfolio percentage: The fund asset invested in gold spot contracts is not lower than 95% of the net asset value of the Fund. All the 4 gold ETFs in China can participate in gold leasing. Some can participate in gold swaps and some can pledge the gold to borrow money. The excerpt below is from the Huaán Yifu Gold ETF Prospectus: The Fund can do gold lease and pledge gold to borrow money. Effectively the Fund Manager of the Huaán Yifu Gold ETF can make money by, for example, leasing the fund’s assets. The excerpt below is From the Guotai Gold ETF Prospectus: The Fund can do gold lease, gold swap and invest in gold spot deferred contracts, etc, in order to lower the operating expenses and lower tracking error. The Fund does margin trade only for the purpose of risk management and enhancement of the efficiency of the asset allocation. As a result, the Fund Managers of Chinese gold ETFs have significant flexibility in handling the fund assets. Please remember that all gold leasing, swapping, etc. has to be done within the SGE system and the gold cannot leave the SGE designated vaults. From the CSRC’s website [brackets added by me]: Article 4. Gold ETFs may not deposit physical gold into the [SGE] vault or withdraw physical gold from the [SGE] vault. Margin trade is only for the purpose of risk management and enhancement of the efficiency of the asset allocation.  Exhibit 5. The bottom row shows the minimum percentages the Gold ETFs must invest in “spot contracts”, though some of this gold can be involved in leasing. 3. NAV Per Share Recalculation Since the inception of GLD in 2004 its share gold equivalent is steadily declining lower than 0.1 ounce of gold. That’s because the Sponsor, Trustee and Custodian don’t provide services for free. They need to earn money and their earnings must come from the Net Asset Value (NAV) of the ETF. In other words, the gold in the Trust is gradually sold to pay for operational expenses. From the GLD prospectus: The amount of gold represented by the Shares will continue to be reduced during the life of the Trust due to the sales of gold necessary to pay the Trust’s expenses irrespective of whether the trading price of the Shares rises or falls in response to changes in the price of gold. Each outstanding Share represents a fractional, undivided interest in the gold held by the Trust. The Trust does not generate any income and regularly sells gold to pay for its ongoing expenses. Therefore, the amount of gold represented by each Share has gradually declined over time. This is also true with respect to Shares that are issued in exchange for additional deposits of gold into the Trust, as the amount of gold required to create Shares proportionately reflects the amount of gold represented by the Shares outstanding at the time of creation. Assuming a constant gold price, the trading price of the Shares is expected to gradually decline relative to the price of gold as the amount of gold represented by the Shares gradually declines. On November 18, 2004, 1 GLD share exactly equaled 0.1 ounces of gold, but by now (September 2016) 1 GLD share equals 0.09542 ounces of gold, a decline of almost 5 % over the course of 12 years. This explains why currently the amount of ounces needed by an AP to create a basket of shares has become less than 10,000 ounces, and continues to decline. In China’s gold ETF market, although the gold represented by the ETF instruments also decline as with GLD, the share values are periodically re-adjusted to ensure the NAV per share remains (roughly) 0.01 gram of gold. For example, from the Bosera Gold ETF prospectus: Fund share re-calculation means the fund manager based on the necessity of the operation of the fund, under the premise that the total NAV is unchanged, adjusts the total fund shares outstanding and NAV per share.  There is nothing complicated about the re-calculation. There are simply periodic adjustments when the Fund Manager sets the value of the shares (in yuan) higher because the gold content equivalent is elevated, from below 0.01 gram to 0.01 gram, whereby the Fund Manger “adjusts the total fund shares outstanding” downward. 4. Linked Funds In China, every gold ETF is accompanied by a Linked Fund. The Linked Fund mainly invests in the Target Gold ETF as can be seen in the list below. The Linked Fund is usually a common open-ended mutual fund. While 90 % of the assets under management of the Linked Fund must be invested in its Target Gold ETF, the Fund Manager still has some room for managing the remaining 10%. Exhibit 6. For example, from the Bosera Gold ETF-linked Fund’s prospectus: The Fund mainly invests in Bosera Gold Exchange Open-Ended Securities Investment Fund, gold contracts listed on the Shanghai Gold Exchange, gold futures contracts listed on the Shanghai Futures Exchange, bonds and other financial instruments which the CSRC allows the fund to invest, like securities lending and borrowing, gold lease, etc. For more clarity I’ve drawn a graph to illustrate the ratios of investment allocation by the Guotai Gold ETF and the Guotai Gold ETF-linked Fund. Exhibit 7. Although, at this stage it’s not completely clear to me what would be the benefit for investors to invest in the Linked Fund, as opposed to the Target Gold ETF. 5. Voting Rights GLD holders only have limited voting rights. The excerpt below is from the GLD prospectus, Under the Trust Indenture, Shareholders have no voting rights, except in the following limited circumstances: (i) shareholders holding at least 66.66% of the Shares outstanding may vote to remove the Trustee; (ii) the Trustee may terminate the Trust upon the agreement of Shareholders owning at least 66.66% of the outstanding Shares; and (iii) certain amendments to the Trust Indenture require 51% or unanimous consent of the Shareholders. In China’s gold ETFs shareholders have more voting rights and can vote to decide on a lot of important issues. The excerpt below is from the prospectus of Bosera Gold ETF: In one of the following circumstances, based on the consent of the fund manager, the fund custodian or the fund shareholders who hold 10% (including 10%) of the fund shares outstanding, it is mandatory to hold fund shareholders’ meeting: 1. Termination of the fund contract; 2. Change of the operation of the fund; 3. Increase of the remuneration of the fund manager or the fund custodian, but excluding the circumstances in which the increase of the remuneration is mandatory by the requirements of laws or regulations; 4. Replacement of the fund manager or fund custodian; 5. Amendment of the fund category; 6. Amendment of the fund investment target, scope or strategy (excluding the circumstances in which laws, regulations or the CSRC have other relevant requirements); 7. Amendment of fund share holders’ meeting proceedings, voting methods and voting procedures; 8. Termination of listing but excluding circumstances in which the fund no longer satisfies listing requirements and the listing is terminated by the Shenzhen Stock Exchange; 9. Merger of the fund with other fund(s); 10. Other items that have material influence on the rights and responsibilities of the parties to the fund contract and necessitate the fund share holders’ meeting to amend the fund contract; 11. Other items that are required by laws, regulations, the fund contract or the requirements of the CSRC to hold the fund share holders’ meeting. Even the Linked Fund shareholders of China’s Gold ETFs can participate in voting: The fund shareholders of the linked fund of this fund can attend or send representatives to attend the fund shareholders’ meeting and participate in voting, based on the share holding of the linked fund. The equivalent number of fund shares with voting rights and correspondent votes are: the product of the total shares of this fund held by the linked fund multiplied by the linked fund shares held by the respective link fund share holder as a percentage of the total linked fund shares outstanding. The result of the calculation is rounded to the nearest whole number. Ironically, to me there seems to be more democracy and openness in China’s gold ETFs than in GLD. On the other hand, Chinese gold ETFs have a fundamentally different foundation, a hybrid design I would say. China’s gold ETF market was erected in 2013 and is still evolving. In the future, there may be more complex gold ETF related financial structures that have a big impact on China’s overall gold market. I shall follow it closely. Addendum In exhibit 5 we can see which Chinese commercial bank is the custodians of which Chinese gold ETF. Without a doubt the physical holdings in each Chinese gold ETF (exhibit 1), stored within SGE designated vaults, will appear on the bank balance sheet of the custodian bank. This (important) information will be added to my previous post What Are These Huge Tonnages In “Precious Metals” On Chinese Commercial Bank Balance Sheets? as a new chapter. The main sources used for this article are the prospectuses from the Bosera Gold ETF, Guotai Gold ETF, Huaán Yifu Gold ETF and Efund Gold ETF, and the prospectuses of the Linked Funds of these Gold ETFs, Bosera Gold ETF-linked fund, Guotai Gold ETF-linked fund, Huaán Yifu Gold ETF-linked fund and Efund Gold ETF-linked fund)

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08 сентября, 18:30

New net stable fund ratios may have dire impact on the gold industry, sources say

The gold industry could be in for a wake-up call, and further liquidity squeeze, when potential new net stable fund requirements are passed at the start of 2018, sources close to the situation have been telling S&P Global Platts. Although the potential rejig of legislation — being pushed by the European Commission — relating to […] The post New net stable fund ratios may have dire impact on the gold industry, sources say appeared first on The Barrel Blog.

07 сентября, 18:11

5 Reasons Why Gold ETFs Can Regain Their Mojo

There are plenty of reasons for gold ETFs to surge ahead.

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01 сентября, 15:36

What Are These Huge Tonnages In Precious Metals On Chinese Commercial Bank Balance Sheets?

Submitted by Koos Jansen. Originally published at BullionStar.com There has been much conjecture since 2014 about the increasing numbers in the “precious metals” category on the balance sheets of listed Chinese commercial banks. By the end of 2015 China’s largest banks were holding RMB 598 billion in precious metals. Some analysts think that the precious metals on Chinese commercial bank balance sheets are gold reserves purchased on behalf of the Chinese central bank, while others surmise that Chinese banks buy gold at the Shanghai Gold Exchange (SGE) and then lend it out so the precious metals on the balance sheets solely represent leased gold. In latter analysis it’s then assumed the leasing inflates the amount of gold withdrawn from SGE designated vaults. Most certainly there is leased gold on Chinese banks’ balance sheets, but this can hardly influence SGE withdrawals, as I have previously explained. Read this and this article for more information. What do we know beyond the gossip about the precious metals holdings on Chinese commercial bank balance sheets? From studying the annual reports of the respective banks and additional documentation we know the precious metals can be at least the following things (if I find more clues this post will be updated): Gold savings that belong to the banks’ customers Gold inventory for the banks’ retail gold business Gold leasing business Gold held for hedging purposes Gold held outside China Since the Chinese silver market was liberalized much earlier than gold I don’t think there is any edge for Chinese commercial banks to have a predominant role in the silver market. So, probably most of the precious metals on the balance sheets in question are gold related. Below is an overview of the precious metals holdings of listed Chinese commercial banks as of 31 December 2015, measured in yuan (RMB). There are 16 listed Chinese commercial banks on China’s A-share market but Huaxia Bank didn’t disclose its precious metals holding in its annual report. If all aggregated precious metals holdings relate to gold, the upper bound is approximately 2,682 tonnes of gold. Exhibit1. Source: Annual reports Helpful for understanding this article is my post The Mechanics Of The Chinese Domestic Gold Market.  1. Customers’ Gold Savings A substantial amount of the precious metals reflect (fully backed) customers’ gold deposits in the form of Gold Accumulation Plans (GAP), recorded as an asset and a liability on the balance sheets of the banks. However, to me it’s unknown how much gold is exactly accumulated in China through GAPs.  Let’s go through the annual reports of the Chinese banks having the largest precious metals holdings, seeking for information with respect to GAPs. According to the 2015 annual report of Bank of China (BOC): Precious metals comprise gold, silver and other precious metals. The Group retains all risks and rewards of ownership related to precious metals deposited with the Group as precious metals deposits, … and it records the precious metals received as an asset. A liability to return the amount of precious metals deposited is also recognized. From the BOC website its GAP seems to be in its infancy, so I don’t expect it to comprise much gold. ICBC on the other hand, introduced a GAP in 2010 and is thought to be largest in China. From reading ICBC’s 2015 annual report [brackets added by me]: Seizing the opportunities arising from customers’ wealth increase and capital market growth, the Bank made efforts to establish a mega asset management business system across the whole value chain and enhance its specialized operating capabilities on the strength of the Group’s asset management, custody, pension and precious metal businesses, … The [ICBC] Group records the precious metals received as an asset. A liability to return the amount of precious metals deposited is also recognized. … On ICBC’s website we read: According to statistics, by the end of 2014, the business size of ICBC’s GAP was more than 250 tonnes, a 150% YOY increase. GAP clients are more than 1 million. Screenshot from ICBC’s Ruyi Gold Accumulation Plan. In the 2015 annual report by China Construction Bank (CCB): While consolidating our traditionally advantageous businesses in housing finance and cost advisory service among other things, we actively expanded our presence in … precious metals. The Bank supported product innovation, provided and optimized new products such as … gold purchase and saving. The Bank proactively responded to changes in the precious metals market via pursuing marketing expansion, enlarging customer base and enforcing product innovation. The Bank launched innovative products and business models, including gold accumulation plan …. To me it’s unknown how much gold CCB’s GAP comprises. All in all, part of the precious metals on the listed Chinese commercial banks’ balance sheets are gold savings held on behalf of clients instead of reflecting the banks own metals. (Likely, gold saved in Chinese GAPs is not stored in SGE designated vaults.) 2. Bank Gold Inventory Chinese banks offer a wide range of retail gold investment products for sale at local branches and through internet order. Naturally, any gold inventory for this business is recorded on the balance sheets. From ICBC’s 2015 annual report: To echo the changes in market demands, the Bank developed a variety of new brands on assorted themes and introduced a slew of products, e.g. Chinese Zodiac Coins and Panda Gold and Silver Coins, under agent sales. The Bank expanded the online channels, through which the flagship store “ICBC Gold Manager” witnessed substantial growth of sales, and it also piloted the direct distribution of logistics suiting to the characteristics of e-commerce. ICBC gold bars. According to the World Gold Council roughly 60 % of Chinese retail gold investment demand is supplied through commercial banks.  Courtesy World Gold Council. Note, “retail investment demand” excludes direct purchases at the SGE by individuals and institutions. Additionally, I have no proof, but it can be that some of the inventory in the vaults of the SGE is appearing on the Chinese bank balance sheets. Most of the banks listed in exhibit 1 have a PBOC gold import license. Once the bullion is imported into the Chinese domestic gold market, often done through consignment, it must be sold first through the SGE. By the time it has arrived in an SGE designated vault and before it's withdrawn, possibly it's shown on the balance sheet of the importing bank. Though, this analysis is speculation. 3. Gold Leasing Probably the largest share of the precious metals on the balance sheets have to do with gold leasing. At the moment, there are no official accounting rules or guidelines related to how to record bank’s gold leasing activities. (In this post, I don’t distinguish between gold leasing and gold lending because the essence is the same.) However, most banks seem to still put gold leasing activity in the precious metals category of their balance sheet.  Helpful or understanding the coming paragraphs is my post Chinese Commodity Financing Deals Explained (which is about the Chinese gold lease market).  According to the A-share annual report of the Bank of Communications [brackets added by me]: Precious metals that are not related to the Group’s trading activities including coins and medallions sales are initially measured at acquisition cost and subsequently measured at the lower of cost and net realizable value. Precious metals that are related to the Group’s trading activities including precious metals lease and [precious metals] interbank lending are initially and subsequently recognized at fair value, with changes in fair value arising from re-measurement recognized directly in profit or loss in the period in which they arise. Apparently, the Bank Of Communications has its gold leasing business disclosed on its balance sheet in the precious metals category.  Below is from the 2015 annual report of Shanghai Pudong Development Bank (page 17): Translated: Exhibit 2. Source Shanghai Pudong Development Bank Shanghai Pudong Development Bank saw its precious metals holdings grow from RMB 11,707,000,000 on December 31, 2014, to RMB 28,724,000,000 on December 31, 2015. As the main cause for the growth in precious metals is considered to be "increased physical gold leases", we must conclude in the case of Shanghai Pudong Development Bank nearly all precious metals on its balance sheet relate to gold leasing. But does this mean Chinese banks buy gold on the SGE and then lease it out? Not necessarily. Chinese banks mainly do back-to-back gold leasing - simply connecting supply and demand. Banks don’t have much money of their own. They need to borrow money or gold either from savers or in the interbank market to make loans. Would it make sense for banks to borrow money in order to buy gold to subsequently lend out gold? Or would it be more logic for banks to borrow gold to subsequently lend out gold? From a source who worked at the precious metals trading desk at ICBC in 2014 I was told first hand ICBC has little gold of itself for leasing, most of the gold lend out is borrowed from third parties. These third parties are mostly SGE members or overseas banks that lend gold through the Chinese OTC market. By the way, all commercial bank gold leasing is settled through the SGE system. ICBC operates in the lease market as an intermediary by connecting supply (lessors) and demand (lessees), while striking a fee. ICBC can borrow gold from international banks or local gold owners with an SGE Bullion Account, and lend the gold to miners, jewelers or speculators. My assumption is that the international gold lease rate is lower than the Chinese gold lease rate, which attracts gold from the international market into the Chinese domestic gold market. (Whenever a gold loan is to be repaid from the Chinese domestic gold market to an international lender, not the physical metal is exported, but funds cross the Chinese border, as physical gold export is prohibited from the Chinese domestic gold market.) Also note, if banks would buy the gold to lend out, they are exposed to the price risk of gold. In order to cover this risk, banks need to hedge but this will involve additional costs. As a result, the logical solution is for banks to do back-to-back gold leasing. The Bank of Beijing is a good example to illustrate back-to-back gold lending. Unlike other Chinese banks, Bank of Beijing does not put gold leasing in the precious metals category. It has a separate line in its books for gold leasing. According to the 2015 annual report of the Bank of Beijing (page 123 and 132): Exhibit 3.1. “Leased out” is lending. The unit is RMB million. Exhibit 3.2. “Leased in” is borrowing. The unit is RMB million. As readers can see from the excerpts above, the Bank of Beijing indeed does back-to-back gold leasing as precious metals “leased in” (RMB 1,400,000,000) are equal to precious metals “leased out”(RMB 1,400,000,000). I suspect most gold leasing by Chinese banks is back-to back leasing.  Because the Bank of Beijing has its leasing business noted in a separated line than its "precious metals", we can see a huge discrepancy between the Bank of Beijing’s precious metals holdings in exhibit 1 (RMB 55,000,000) and its back-to back leasing business in exhibit 3 (RMB 1,400,000,000).  Exhibit 4. Total yearly leasing turnover must not be commingled with the amount of gold leased out at any point in time. The latter is unknown as far as I know. Other banks don’t have a separate line for the gold leased out but as mentioned before, they put it in the precious metals category. A widely-accepted method to treat borrowed gold is to include a liability called “financial liability at fair value through profit and loss”. Readers who can understand Chinese are recommended to click this and this link. The ICBC annual report provides an example of how the liability is recorded. Source: the 2015 annual report of ICBC. In conclusion, back-to-back gold leasing will result in an asset and a liability, for most banks highly overstating the precious metals category. When looking at exhibit 4 we can see the enormous growth in yearly Chinese gold leasing turnover, which must have enlarged Chinese banks' balance sheets.   According to my analysis a large portion of the precious metals on the balance sheets of Chinese banks is back-to-back leasing, which effectivly is gold that stays inside the SGE vaults, and thus does not impact SGE withdrawals.    4. Hedging China’s commercial banks offer derivatives to retail and institutional customers. Bank of China’s Qi Jin Bao is an example. Qi Jin Bao is in fact gold option business. The retail customer pays a certain amount of money (option premium) and buys a gold call option or put option. For example (simplified): suppose the current gold price is $1300/oz and a retail customer is bullish on gold and believes that the gold price will rise in 3 months time. Therefore, the retail customer buys a 3 months call option with a notional amount of 100 oz of gold at the strike price of $1300/oz from Bank of China and pays an option premium of $35/oz. If the gold price indeed goes up in 3 month’s time, the retail customer will make money. However, derivatives are a zero-sum game. If the retail customer makes money, then the Bank of China definitely loses money. If the gold price goes up to $2000/oz, Bank of China will lose big time. In order to mitigate this risk, Bank of China will (borrow money to) buy gold to hedge the short call position and the gold purchased will appear on the balance sheet. 5. Gold Held Outside China Gold on the balance sheets of Chinese commercial banks doesn’t necessarily have to be gold held in China. Chinese banks like ICBC, BOC and Bank of Communications have direct access to the LBMA. As a result, gold on the balance sheets of Chinese commercial banks can be located outside China mainland. On January 29, 2014, ICBC bought 60 % of the existing shares in Standard Bank Plc from Standard Bank London Holdings Limited. After completion of the acquisition, Standard Bank Plc was renamed as ICBC Standard Bank on 27 March 2015. In the 2015 annual report of ICBC (Group), which includes ICBC Standard Bank, we see that ICBC Standard Bank held RMB 18,426,000,000 in precious metals assets (equivalent to 83 tonnes of gold) on December 31, 2015. Source: the 2015 annual report of ICBC. As ICBC Standard Bank can be seen as an international gold arm of its group - ICBC Standard Bank is a London Bullion Market Association market maker for spot trading and a clearing member of London Precious Metal Clearing Limited (LPMCL) - we may assume any precious metals assets of ICBC Standard Bank are not located in China mainland.  Conclusion From the descriptions above, the precious metals holdings on the balance sheets of Chinese commercial banks are quite complicated to decipher. One thing is for sure, it's not all gold owned by banks and leased out, neither is it all purchased by banks on behalf of the Chinese central bank. In order for us to learn more exactly what the precious metals on the balance sheets represent we need more information, more investigation is needed by gold analysts. Hopefully this blogpost can serve as a springboard to a better collective understanding. Addendum In addition to Gold Accumulation Plans many Chinese banks offer a variety of (paper) gold hedging and speculation broker services to their clients. For example, in the annual report 2014 from Agricultural Bank of China (ABC) we can read: … Precious metals … As a major precious metal market maker in the PRC, the Bank provided customers with precious metal trading, investment and hedging services through ... trading of precious metal derivatives ... and trading ... the Shanghai Futures Exchange and the London precious metals market. So, through ABC clients can trade paper gold, but these derivatives would be recorded off-balance sheet, or in a separate line next to "precious metals". More from the ABC annual report 2014: Our off-balance sheet items primarily include derivative financial instruments, contingent liabilities and commitments. We enter into currency rate, interest rate and precious metals related derivative financial instruments for the purposes of trading, asset and liability management and business on behalf of customer. Similarly, in BOC's annual report 2015 we read: Off-balance Sheet Items Off-balance sheet items include derivative financial instruments, .... The Group entered into various derivative financial instruments relating to ... precious metals and other commodities for trading, hedging, asset and liability management and on behalf of customers.  Implying, from my judgement, all the precious metals on-balance sheet are not (customers') paper gold.  

01 сентября, 07:06

Спасибо санкциям. Золотодобыча России растет благодаря Западу

О пользе санкций для российской экономики не писал только ленивый. В отдельных областях народного хозяйства изменения настолько масштабны, что отмахнуться от них попросту не получится. Так сельское хозяйство получило шанс занять место западных производителей на рынке продовольственных товаров. И аграрии реализовали эту возможность. Пока не все проекты вышли на полную мощность, но показатели производства свинины и мяса птицы говорят сами за себя.