The following is a post by long time financial commentator Jesse Crossroads Cafe blog.
He maintains that interested onlookers keep a steely eye on physical ‘gold float‘ supply availability from the western world to the eastern world.
I read an interesting article yesterday, the point of which was that the price of gold is running as the inverse of the Chinese Yuan. Bing, bang, boom, end of story.
And there may be some truth to that. But it is hardly the whole story.
When looking for correlations, one has to consider a number of elements, and try to sort out correlations that are often mixed, and what is coincident more so than causative.
Below is a chart that compares the price of gold with the inverse of the US Dollar Index (DX).
And it should be noted that this is the price of gold in Dollars. And so there will always be some effect of the value of the dollar in this, since gold is a world currency and not specifically American.
In my own studies, and multivariate correlation analysis, sometimes gold runs inversely to the dollar, but at other times it runs with it, or somewhat indifferently to it.
So what this shows is the obvious, that there are a number of things that effect its price, and may do so differently at different times.
As I have noted here, many times over the past year or so, the price of gold has been running inverse to the Dollar because it appears that major players and hedge funds are trading gold as a currency cross, without regard to its supply and demand as a commodity money, as opposed to a central bank fiat currency. And that at some point this is going to lead to a ‘break’ in the market.
But I think that a correlation to the Yuan here is probably misplaced. Although it is becoming increasing important on the world stage because of the spectacular growth of its domestic economy, the Chinese Yuan is not driving the value of the US Dollar. And for that matter, it is not even included in the weighting of the Dollar DX Index.
Why quibble though?
The important point is that gold is being traded in the currency crosses. This is not always the case, but sometimes it is. And more importantly, the price of gold is being heavily gamed by speculators, and with increasing leverage if the indications we have are correct.
And because of this, at some point gold, which is somewhat unique because it is a commodity currency, is going to assert its independent nature. And it may very well blow a hole in the speculative scheming that has been allowed to go on for years, without being checked and moderated by the regulators, even as other paper asset bubbles have been allowed to grow.
It has done so even in the recent past, as it exploded up to $1900, after years of steady price suppression. And then it fell back to the same old same old, but at a much higher base price than it had been at for almost twenty years.
What changed you might ask? The disgorgement of gold by the Western Banks encountered a steady and determined accumulation of the physical metal in Asia and the Mideast. Because of this global central banks went from net sellers to net accumulators. This trend is well documented and unmistakable.
For those who say that there is no price manipulation of gold, even at this point with all that has been uncovered in the markets, I say have a good day. Because that debate is surely over, except for the most stubbornly and willfully blind to what is painfully obvious to anyone who carefully watches the trading in the metals as it happens with an open mind to the data.
But again, why quibble?
Let’s see how this unfolds, and keep an eye on the ‘gold float’ which is the physical gold bullion that is available for delivery into the markets of Asia. Because it is being steadily accumulated there, and is not likely to be reintroduced into the Western markets, except at significantly higher prices.
And in this case, if I and others are correct in our analysis, let the devil take the hindmost when the reversion to the fundamentals occurs, which I believe that it will, and with a vengeance. It always does, but eventually. And that is where trading and prudent portfolio management come in to play.
Markets go to extremes because most speculators are clever, but not wise. They will keep on a trend and a ‘winning’ trade often until it is utterly exhausted, and then run for the exits, leaving the carnage they leave behind to be taken care of by others. And all that you will see of them is when they come back for a handout, a bailout, for the very damage that they themselves caused, but will blame on others.
Remember dear SD readers, the flow of physical bullion from west to east has been going on for about a decade steady.
In late 2015, we saw some of the largest gold bullion imports by China at coincidentally some of the lowest price points since the 2011 highs.
Valcambi 1600 ton
Metalor 800 ton
Heraeus 500 ton
PAMP 500 ton
— James Henry Anderson (@jameshenryand) April 26, 2018
But you can hear for yourself (in either the link in the tweet above⬆ or in the video embedded player below⬇) from the head of 1 of the 4 largest physical gold refineries in Switzerland what life was like for him in October 2015.
Recall that gold US dollar prices later bottomed that year near $1,050 oz and rebounded sharply in 2016.
Other than Switzerland only South Africa, Japan, and China have a few other major gold refineries. Switzerland is still the most dominate major physical gold refining nation in the world.
I’ll embed it at the key moments, best parts are about 4:27 to some 10 minutes in, basically confirms what many of you might already know for a fact.
I imagine this guy and his major Swiss gold refinery are still24x7 grinding out 32.15 oz gold kilo bars for China in 2018.
Have a listen…
About the Author
James Anderson has a BA in finance from Loyola University New Orleans. He has both worked and invested in the physical investment grade bullion markets prior to the 2008 global financial crisis.