Gold Premium Surges In China – Wise ‘Aunties’ And Wealthy Buying

Today’s AM fix was USD 1,405.25, EUR 1,074.68 and GBP 918.64 per ounce.

Yesterday’s AM fix was USD 1,396.75, EUR 1,072.61 and GBP 915.00per ounce.

Gold climbed $27.10 or 1.96% yesterday to $1,412.00/oz and silver also gained 2.57%.

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Gold inched down today after yesterday’s 2% gain. Gold was higher in Australian dollars after the Aussie dollar fell on concerns about the Australian economy.

Monday’s economic data showed U.S. manufacturing activity had slowed to the lowest level in almost 4 years. The still fragile nature of the U.S. economy will support gold.

Poor economic data is confusing the bulls who continue to under estimate risk. The monthly nonfarm payrolls figures out on Friday will give further guidance regarding whether the U.S. is tipping into recession.

Deutsche Bank has recommended buying gold in Japanese yen and Australian dollars.

The bank cites the significant increase in Japan’s balance sheet as likely to cause the yen to weaken further and says the Australian dollar is overvalued.

While gold in yen is down just 3.6% in 2013, in the last 12 months the yen has fallen by 10.1% against gold showing gold’s importance as a hedge against currency devaluations.

As long as the world’s economy remains in tatters then safe havens will be few and far between.

While gold’s safe haven credentials have taken a bit of a battering of late, they will again prove themselves over the long term.

The banking crisis in Cyprus has shown that even bank deposits are not safe and globally there are plans for so called ‘bail ins’ or deposit confiscation for banks that become insolvent.

The premium gold buyers in China are willing to pay to take immediate delivery of gold, as bullion jumped four-fold in April after prices fell sharply.

Store of wealth buyers thronged jewellery stores and bullion brokers in China in order to buy gold jewellery, coins and bars.

Photos of Chinese “aunties,” a term of respect for older women, clearing shelves in goldsmith shops made headlines in government media such as the People’s Daily and millions of Weibo microblog accounts after the 14% plunge in prices in the two days through April 15.

The biggest such drop since 1983 was seen as an unprecedented opportunity by some, which prompted fabricators to replenish inventory by taking delivery on the Shanghai bourse.

The Bloomberg CHART OF THE DAY (above) shows that in the 12 months through April 12, before the rout, gold for immediate delivery in China traded at an average premium of $7.22 an ounce to the prevailing London counterpart, according to Shanghai Gold Exchange data.

The premium has averaged $32 an ounce since mid-April, as physical demand surged, and was at $17.15 at 2:17 p.m. in Shanghai.

“Premium is a function of demand and supply, and right now you could interpret the high premium in Shanghai as a sweetener to entice the overseas gold supply to flow into China,” Qu Mingyu, a trader at Bank of China Ltd. in Shanghai said on May 24.

Even before the mid-April price drop, China’s gold imports jumped to a record in the first quarter, according to official data, and probably rose further through May, Qu said.

China’s output of 403 metric tons in 2012 made it the world’s largest producer for a sixth straight year, according to the China Gold Association. Domestic demand was 776 tons last year, which outpaced supply and spurred imports, according to the World Gold Council.

The store of wealth demand is not just from Chinese ‘aunties.’ There remains an under estimation of the demand coming from wealthy Chinese and high net worth and ultra high net worth individuals (HNWs and UHNWs).

This has not been commented upon or analysed but we have direct experience of wealthy Chinese people looking to store gold in Hong Kong and Switzerland, as have other storage providers.

Given the significant cultural affinity for gold in China, there is likely to be sizeable demand from wealthy Chinese people looking to diversify and protect their new found wealth.

To characterise Chinese demand for physical gold as solely from “aunties” is to simplify Chinese demand. Indeed, besides Chinese people buying gold, Chinese companies and of course the official sector and the People’s Bank of China are also likely accumulating gold.

The significant broad based demand for gold in Asia, and particularly from India and China, continues to be ignored and under estimated by gold bears such as Nouriel Roubini.


Gold Bar “Supply Constraints” In Singapore Sees Record Premiums

Gold Bar “Supply Constraints” In Singapore Sees Record Premiums

Gold rose to a one-week high, as the dollar and stocks retreated after another 5% plunge in Japan’s Nikkei. Silver, platinum and palladium advanced also.

Physical gold demand remains robust internationally and supply issues in Singapore have led to premiums reaching a record high there.

Gold Spot $/oz, Daily, 3 Year – (Bloomberg)

Some of the buying on futures markets may be shorts being forced to cover their record short position. The COT (Commitments of Traders) data clearly shows that there is the strong possibility of a significant squeeze of speculators short gold. This could be a catalyst to propel gold higher.

Cross Currency Table – (Bloomberg)

Traders and speculators are watching the $1,413/oz resistance level. A daily close above this level will likely trigger the beginnings of a short squeeze.

Holdings in the largest bullion-backed exchange-traded product expanded yesterday for the first time since May 9.

Strong premiums for gold bars in Asia show that jewellers and investors are busy buying bullion on this dip. In Singapore, Reuters reports that “supply constraints” have sent premiums to “all time highs” at $7 to spot London prices.

Animal spirits are returning to the gold market in the ‘Land of the Dragon’ in this the ‘Year of the Snake’.

The volume for the Shanghai Gold Exchange’s benchmark cash contract surged to 19,599 kilograms yesterday from 15,641 kilograms the day before. In two days the volumes have nearly doubled and surged from 10,094 kilograms to 19,599 or 94%.

Nikkei Index, Daily, 1 Year – (Bloomberg)

Animal spirits have been greatly in evidence in global equity markets for many months now with abnormally strong gains seen in many surging markets. This is despite a very uncertain global economic outlook and great uncertainty regarding corporate earnings in the coming months.

With many stock markets overvalued on a host of benchmarks, there is the real risk of a material correction in the U.S. and other markets and this should lead to renewed diversification into gold.

It will also lead to renewed safe haven demand if other markets see stocks plummet as has been seen in Japan in recent days.

S&P 500 Index, Daily, 4 Year – (Bloomberg)

The 17% correction seen in the Nikkei in the last week alone, looks likely in the coming months in other markets which are increasingly being driven by liquidity, debt and margined speculation rather than value investing.

The rotatation out of gold and into stocks seen in recent months could reverse very quickly and investors may just as quickly rotate back into gold in order to hedge significant macroeconomic risks.


Understanding Gold Market Dynamics

To an extent that reveals a thorough misunderstanding of the market forces, the financial media has failed to consider the different motivations and beliefs that drive the different types of investors who are active in the gold market. By treating the gold market as if it were comprised of just one type of investor, analysts have drawn false conclusions about the recent volatility.

Broadly speaking, the gold market consists of long-term investors, which are comprised of primarily private individuals who believe in gold as a better store of value than fiat currencies, and short-term traders, who are primarily financial professionals looking to play on momentum trades. The groups invest with different time horizons and with varying goals.

Those with a long-term view tend to see gold as a hedge against inflation and as security against financial uncertainty. They tend to buy both paper gold (in the form of ETFs), and physical gold (in the form of coins, bars and, in some cases, jewelry). The physical market is divided between these small buyers and the central bank bullion buyers who acquire gold as national currency reserves.

In contrast, short-term players, like hedge funds, mutual funds, and institutional day traders tend to be much more sensitive to trends and technical analysis. Trading effectively both ahead of and behind a particular asset price trend requires quick decisions and precise trade execution. To achieve this, these players tend to buy the vast majority of their gold in the form of easily traded ETFs. Certainly over the last decade, gold had established a clear upward momentum that such traders could not afford to ignore. To profit from this trade, participants did not need to care why gold was rising. A simple understanding of chart dynamics was sufficient.

Short term traders also tend to pay very close attention to activities of leading institutions.  When they sense that sentiment has turned among big market players, they will follow the expected momentum. On April 10th of this year, Goldman Sachs downgraded its 2013 gold forecast substantially. Gold fell hard on Friday of that week and then on April 15th gold had its biggest down day in 30 years. The GLD traded over 93 million shares that day, up from an average of 14 million. The price decline led to large liquidations by many gold ETFs.

While the big institutions are driven by momentum into gold, they also relied on fears related to inflation and economic uncertainty. However, many have now abandoned these concerns. In reaching its bearish conclusion on gold, Goldman Sachs cited low global inflation, and surging equity markets in the U.S. and Japan as reasons to believe that the bull run in gold had come and gone. However, their conclusions are hasty.

In seeing a diminished threat of inflation, mainstream analysts fail to appreciate that much of the trillions of dollars of Quantitative Easing (QE) continues to be hoarded in bank deposits. The velocity of money, which has much to do with rising prices, remains at generational lows.  It is not until banks lend this money out, usually on a leveraged or fractional basis, that it becomes part of the money supply and therefore actively push up prices. Therefore, while QE creates a risk of future inflation, even hyperinflation, it remains only as a latent risk. In addition, as we have argued many times, official government statistics have tended to hide the true extent of rising prices. Faced with low inflation and QE driven stock and bond markets reaching new nominal highs almost daily, inflation hedgers have sold gold and reallocated funds into stocks, bond markets, and even real estate. But recent sell offs in Japanese equities and bonds could hint at the limit in such an expectation.

However, demand for physical gold continues to rise in China and India, while central banks added 109.2 tonnes to their reserves in Q1, 2013. Even in the U.S., demand for gold jewelry rose for the first time since Q3, 2005 and global demand for gold coins and bullion rose by 10 percent on a year-over-year basis. Additionally, the U.S. Mint announced it would be resuming its suspended sales of 1/10 oz. American Eagles at 40% over spot price. Despite this strong demand for physical gold, ETFs saw outflows of 176.9 tonnes in Q1 2013. Clearly a disconnect between physical long-term investors and short term traders has begun to emerge.

This past week, Fed Chairman Ben Bernanke hinted that if economic conditions were to continue improving there could be a ‘tapering’ off of the Fed’s massive $85 billion a month QE program. The mere hint of even a reduction in QE was enough to send stock markets tumbling. Most likely the market turmoil strengthened the hand of policy doves on the FOMC. The Fed can harbor few illusions about the ability of stock and real estate prices to hold up when Fed support is withdrawn. This suggests QE virtually without limit.

As the central banks of Japan, England and the EU appear to have followed with their own programs of unprecedented QE, it looks as if the tightening expectations that are driving the sell off in gold are poorly founded. I would expect that ever greater torrents of fiat cash will continue to drive stock and bond markets up and interest rates and currency values down. Based on the dynamics of the physical market, it would appear that many smaller investors agree.  As a result, we could conclude that the overall sentiment towards gold is not nearly as negative as we have been recently led to believe.