Speculation & Gold

[Steve Netwriter]

Divergence

Divergence

With 100 paper claims on each real physical oz of gold, when faith in the system fails, the result will be divergence.

The demand for and hence value of the paper claims will plummet.

The demand for and hence value of real physical gold will rocket, as it will outstrip supply massively.

One only needs to look at a properly CPI adjusted gold price chart to see which way the price has been pushed since the 1980s.
The answer is down, so any suggestion that the price has been pushed up by the paper market is wrong. And the many recent revelations expose the truth of that.
Anyone who suggests that governments have orchestrated higher gold prices is massively deluded, and simply do not understand how the paper currency system works.

[Austrokiwi]

Yep thats Gatas position and it seems reasonable except when you look at the demand statistics coming out of the world gold council. in Tonnage terms demand has been dropping and the worlds largest consumers of gold have really pulled away from buying at the current price levels

My understanding is the gold price has been pushed higher by speculators ( using the 100 to 1 ratio) In western countries. Those traders have never ever planed to settle their contracts in physical metal. If either the states passes trading limits or it comes a cropper Silver will rise definitely due to the large number of unbalanced short positions against it. Gold on the other hand is supported by speculative long positions. Accordingly that might be a reactionary bounce up initially but then Gold could track down to as low as the US$600.00 level. This point of view is just as valid as Gata's which position ends up being right depends on the emotions that run in the market.

[Steve Netwriter]

GATA's view may agree with mine, but that is purely coincidental. The views expressed are mine.

Re the WGC, they wrote this:

Strong physical demand for gold 'continuing'
Wednesday, 31st March 2010

http://www.gold.org/news/2010/03/31/story/14437/strong_physical_demand_for_gold_continuing/

The strong physical demand for gold that has been noted in recent weeks is continuing, according to one expert. Walter de Wet at the Standard Bank in London told the Market Oracle: "Strong underlying physical demand for gold has continued [and] in recent days has become even stronger."
However, Mr de Wet is not the first analyst to note the surge in popularity of the yellow metal in recent months.
Simon Weeks, managing director of precious metals at ScotiaMocatta, told Reuters that investors are continuing to put their money into physical gold in the form of jewellery or bullion.
The upcoming wedding season in Asia is expected to increase demand for the yellow metal even further, while consumers continue to invest in the asset as an alternative to the ever-weakening value of global currencies.
He suggested that the faith in gold which has been seen in investors throughout the global economic downturn has helped prices to remain buoyant.

However, my views are based on a 10 year timescale, so to me any year to year fluctuations are of limited interest.
I can see no way in which the paper currencies can maintain their purchasing power, and thus I think they must fall relative to both gold and silver.

[Austrokiwi]

The quote you provide is limited to the time the article is written. I am awaiting with interest for the first quarter 2010 demand trends. When you look at the total annual Tonnage demand levels since 2000 it is clear there has been a steady drop.
India is the best example of this:
though last year India remained first in the world for consumer gold demand ( about three times larger than the US gold market) the reduction in gold purchasing was such that China almost surpassed India

( not because the Chinese consumer market suddenly increased its demand for gold but because the Indian Gold demand dropped phenomenally).


In regards to our paper currencies. we do not live in a world of pure Fiat currencies rather using Keynes description we have "managed currencies". At the current time the US$ does look sick but How much of that sickness will be passed on to the NZ$. The NZ$ is apparently over valued by 25% says the IMF yet it is the world currency market that sets the value of the NZ$. Obviously it is a matter of perspective the NZ$ is a commodity currency, and High NZ interest rates make a carry trade favourable towards the NZ$. The risk for the NZ$ is that one day the carry trade dynamic will change in which case the "IMFs concerns" will become the drivers of value.

I see the same with Gold; the fundamental supply and demand drivers suggest a gold price much lower than it is now. However as long as there is a critical mass of buyers who are worried ( and/or speculating) about the management of paper currencies then their concerns will dictate the gold price. For me this creates a high level of risk of a sudden reversal. For me the solid wealth protection value of gold was eroded to nothing some time between November 2007 and May 2008.

[Steve Netwriter]

Be careful what source of information you use. The WGC/GFMS are not IMO trustworthy.

"Global consumption fell 8.6 percent to 719.5 metric tons from a year earlier, the London-based industry group said in a report today. That's the lowest level since the first quarter of 2003. Jewelry demand declined 22 percent and electronics, the biggest industrial use for gold, slid 26 percent."
This sounds pretty dire, doesn't it? This means that global demand for gold fell 67.7 tonnes.
But wait a minute! There is this little gem. ...
"Central banks bought 14 tonnes of gold more than they sold, the first quarterly net purchases since at least 2000, according to the council, based on figures from London-based research company GFMS Ltd. The so-called official sector had net sales of 69 tonnes in the second quarter last year, the report said. Wozniak said GFMS wouldn't identify any of the buyers. Central bank purchases aren't counted in the 719.5 tonnes of total demand because they are considered a traditional source of supply, she said."
You have got to be kidding me! Net buyers aren't counted as demand because traditionally they are sellers!
That is just the most contrived reporting to come up with the negative gold news GFMS always wants to produce. This means that the change in demand from the central banks, going from selling a net 69 tonnes to buying 14 tonnes, is a positive difference of 83 tonnes. This means that global demand for gold increased by 2 percent, instead of declining 8.6 percent.
Now why would an industry group that is supposedly meant to be a pro-gold advocate want to turn a 2 percent growth in demand to an 8.6 percent decline?
We can rule out an honest mistake because this is the ultimate in dishonesty: ignoring central bank demand. It is not the first time either. GATA has long criticized GFMS for its reporting of gold market statistics, particularly with respect to its ridiculously low gold loan numbers. GFMS failed to report the 450 tonnes of gold accumulated by China over the last five years, while GATA had sources that revealed not only the buying but the quantity as well.
But this is not the only nonsense in GFMS statistics. There also is this:
"Other such sources showed gains, including a 6 percent rise in mine production from the second quarter of 2008, and a 21 percent jump in recycled metal, the report said."
A 6 percent increase in mine supply? Here is the news from the third-biggest gold producer in the world, South Africa:

http://www.dispatch.co.za/article.aspx?id=337268

"In June 2009 the country's gold output fell 12.2 percent compared with the same month last year. South Africa is the world's third-largest gold producer, behind China and the United States."
China's production did increase by 13 percent. However, although South Africa is the third-biggest producer at 220 tonnes, it is not far behind China, which produces 280 tonnes. So this means that gains in China's gold production are roughly offset by declines in South Africa's. So where did 6 percent total worldwide gold mine output growth come from?
Newmont Mining, the world's biggest gold mining company, increased production by a meager 1.2 percent, while Anglogold Ashanti saw a 10 percent and reduced hedges by 1.4 million ounces in the quarter, which further reduced supply to the gold market.
A 6 percent growth in gold mine output is a fabrication.
The gold price has been suppressed by the gold cartel such that the price is at or below the cost of production. This is not an incentive to grow; it is the exact opposite.
GFMS has a hidden agenda and deliberately misreports gold market information. Could the firm's motivation possibly be aligned with the gold cartel? It would be interesting to know who funds GFMS' research.

from:

Adrian Douglas: GFMS cooks books to make gold look bad

http://www.gata.org/node/7699

[Austrokiwi]

GFMS and the world gold council are biased but not against gold you have to read their statics and make up your own mind. They at least have the only consistent set of statistics available. As for quoting Gata's an article on Gatas web site its a bit like calling the pot black. Gata are generally extremely ignorant of the US$ history..........time and time again I read article from them stating how the US was built on a gold standard. The seem to forget the US$ was built on Silver based on the Spanish 8 reale piece and took the name dollar from the German Thaler. World wide: from the 1500s to the mid to late 19th Century Silver was money. In Europe Silver has been mney from the 1200s at least:

Pounds sterling = 120 silver pennies of 925 standard
The Mark was a similar measure based on a Weight of silver.
The Chese name for its currency is based on the word for Silver.


Yet Gata insists the worlds monetary system for the last 1000 years or so was built on gold.


In the end we will find out if gold is under or over valued, I in the mean time are more trusting in the statistics from the world gold council rather than a bunch of geriatrics who have no knowledge of economic history. Sorry for the rant But I just can't Gata as anything other than a weird monetary cult. I have to admit It my blind side I read their stuff but usually get annoyed with the lack of accuracy after the first paragraph. I do admit I like their idea of an Audit of the fed but for totally different reason to their claim the gold has gone.

[Munga]

I do not know anything about investing in gold or silver but was reading this article from which was a link from the Keizer Report website and thought those of you who invested in gold may find it interesting.

April 7th, 2010 by stacyherbert
Respond


Stacy Summary: Oh boy, if all these gold and silver stories of late are even half true; it’s going to be one crazy time in the precious metals market soon.

• The Latest Gold Fraud Bombshell (Zerohedge)

The Latest Gold Fraud Bombshell: Canada's Only Bullion Bank Gold Vault Is Practically Empty



Submitted by Tyler Durden on 04/07/2010 10:30 -0500

• Bank Run
• Commodity Futures Trading Commission
• Hong Kong
• Morgan Stanley
• Precious Metals

Continuing on the trail of exposing what is rapidly becoming one of the largest frauds in commodity markets history is the most recent interview by Eric King with GATA's Adrian Douglas, Harvey Orgen (who recently testified before the CFTC hearing) and his son, Lenny, in which the two discuss their visit to the only bullion bank vault in Canada, that of ScotiaMocatta, located at 40 King Street West in Toronto, and find the vault is practically empty. This is a relevant segue to a class action lawsuit filed against Morgan Stanley, which was settled out of court, in which it was alleged that Morgan Stanley told clients it was selling them precious metals that they would own in full and that the company would store, yet even despite charging storage fees was not in actual possession of the bullion. It appears that this kind of lack of physical holdings by all who claim to have gold in storage, is pervasive as the actual gold globally is held primarily in paper or electronic form. Lenny Organ who was the person to enter the vault of ScotiaMocatta, says "What shocked me was how little gold and silver they actually had." Lenny describes exactly how much (or little as the case may be) silver was available - roughly 60,000 ounces. As for gold - 210 400 oz bars, 4,000 maples, 500 eagles, 10 kilo bars, 10 one kilogram pieces of gold nugget form, which Adrian Douglas calculates as being $100 million worth, which is just one tenth of what the Royal Mint of Canada sold in 2008, or over $1 billion worth of gold. As Orgen concludes: "The game ends when the people who own all these paper obligations say enough and take physical delivery, and that's when the mess will occur."
Also note the interesting detour into what Stephan Spicer of the Central Fund Of Canada, said regarding his friend at a major bank, who wanted access to his 15,000 oz of silver, and had to wait 6-8 weeks for its to be flown in from Hong Kong.

It is funny that central bankers thought they could take the ponzi mentality of infinite dilution of all assets coupled with infinite debt issuance, as they have done to fiat money, and apply it to gold, in essence piling leverage upon leverage. They underestimated gold holders' willingness to be diluted into perpetuity - when the realization that gold owned is just 1% of what is physically deliverable, you will see the biggest bank run in history.

[Austrokiwi]

Munga its an interesting story. NZ had its no gold scheme that folded in the late 80s early 90s when gold owners found there was no gold in the vault. I think Stevenet writer and I see the same problems its just we each see different consequences. The London Gold market and other big players have been able to sell paper gold without the real stuff simply because the traders have never ever had the intention to settle the contracts with real gold. They are not interested in owning the stuff only how much money they can make by speculating on prices rises or falls. With 100-1 speculative ratios a small price change in gold or silver can reap huge profits ( and losses) As I understand it this speculative market is ruled by a few large players.....and, IMHO, I am not big enough to play with them without getting hurt.

[eri]

my newspaper today says that india is currently running 15% inflation

they might have to get used to gold above US$1000

[Austrokiwi]

my newspaper today says that india is currently running 15% inflation

they might have to get used to gold above US$1000

They might indeed. Add into that that GFMS is now saying the cost of Production has reached an average of US$900 oz. That might be good news but the other side of the coin is that the increase in mining production has been the opening up of what had been previously uneconomic areas, a drop in price could see those areas close down again. Of course that would have an effect on the supply side of the equation and would put a solid floor on the Gold price ( something I haven't seen in 2 years).

[Steve Netwriter]

A "solid floor on the gold price" LOL

That's because it's been GOING UP.

Austro, you really should mention CB demand. China, Russia, India. It's not all jewellery demand you know

One problem I have with GFMS is that they neatly balanced supply with demand, but didn't know about all that China buying. So they got it way wrong. Unreliable source IMO.

[Austrokiwi]

A "solid floor on the gold price" LOL

That's because it's been GOING UP

.

Yes it was going up but most of it was speculative froth and still mostly is.

The key for me in deciding to buy is to work out where the floor is if the price drops that assists me in guaging the risk of loss if sentiment for gold turns. For much of the last two years the floor has been sitting around the US$600.00 level. You can see from that that buying at 1200 involved a potential, no matter what you assess the probability of that as, 50% loss. For a risk intolerant contrarian investor like me that was too high a risk

Austro, you really should mention CB demand. China, Russia, India. It's not all jewellery demand you know

CBs when they purchase do so quietly and where ever possible at price lows at current price levels China has said it won't buy, what it is doing is building up reserves from its own production. India has purchased and I haven't heard of it having any further plans to purchase more gold. I have heard gold traders speculate on the possibility but they are trying to drive the price higher ( so they can sell off on the highs and then re-buy on the lows)

One problem I have with GFMS is that they neatly balanced supply with demand, but didn't know about all that China buying. So they got it way wrong. Unreliable source IMO.[

Gata and others also didn't know about china buying. The fact remains that GFMS as biased towards gold as they are provide the only consistent set of statistics for any one to make an analysis. The fact they exclude central banks is a problem but CBs don't set the market price at the moment ( that stopped in 1971/2) it is the market which is currently driven by traders using 1/100 trading ratios.

As Gata supporters have noted should a significant options trader decide to take delivery there is a very good chance the London Bullion exchange could default on delivery( as might happen with other gold suppliers). Now Gata thinks that would see the price rocket. I can see the logic but also note that many other occasions when a similar dynamic has occurred the commodity involved has usually seen a price collapse not rise.

For me I am now starting to see ( not confirmed) a rise in the floor for gold. As I noted in my last post it has gone from US$600 to US$900, that may well be good news but I will still sit back and wait to see what happens. We are coming to the end of the part of the year that sees the most buying and then will be entering the summer doldrums if the new floor is confirmed then for me it is a sign the risk is diminishing

[eri]

gold puts on another spurt to US$1234

think that's a new record as the Nov. rally took it to about $1230

fitting that brown leaves #10 at this time


The UK eventually sold about 395 tons of gold over 17 auctions from July 1999 to March 2002, at an average price of about US$275 per ounce, raising approximately US$3.5 billion.

a loss to the british tax payer of about 5 Billion pounds

[Austrokiwi]

Its interesting watching and makes my holding look good...............but next week it could be down to near $1100 again. Until Gold maintains its level consistently for several months I can't see the point in getting excited about daily fluctuations. As for it being an all time high................Its no where near the High in NZ$ terms of last year.

[eri]

here it is against the euro

that's what you spend everyday isn't it?

http://www.gold-eagle.com/goldcorner/goldeuro.html