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by Adrian Ash
BullionVault
Wednesday, 4 November 2009
Utterly bullishly,
London rules but rocks, while central banks star in "buying gold"
shocker...
RHONA O'CONNELL
did it on the train home, John Reade managed it before the conference
finished, and Ross Norman's team were at it throughout.
No chance then of our being
the first members to reflect on this week's LBMA Conference in
Edinburgh. But
BullionVault can at least relay a taste (minus the malts and
bagpipes), and we might get to have the last word as well.
Because India's IMF gold
news stole the headlines even before Tuesday's speeches began, and
gold itself has since grabbed the limelight, hitting fresh all-time
highs against the Dollar and Rupee (and Chinese Yuan, note).
Be sure to check both
Rhona's comments at
MineWeb and what FastMarkets say at
TheBullionDesk. (John Reade's conclusions have yet to reach the
LBMA website.) For us, three points stand out from the tenth annual
conference of the London Bullion Market Association.
#1. Utterly Bullishly
Bears don't fill hotels,
and Edinburgh was the first LBMA conference to pack the available space,
drawing a long (and disappointed) waiting list too. More than 300 people
attended the tenth but first such UK event, and it was no surprise to
learn that four-in-ten delegates worked at either brokers or banks.
Listening to the official speakers, however, it was a shocker to find
the supply-demand view of gold the commodity view so fast in
retreat.
Consumption destruction,
mine output up 6%, a flood of Cash4Gold-inspired scrap...Roll on the
Eeyores saying it could not last, or so we imagined. Plenty of speakers
(and guests) did cite gold's "unsustainable imbalance", but only to
dismiss what it might mean for near-term prices. Because 0% rates,
yawning government debts, and the slow, ineluctable shift of Western
power to gold-friendly Asia won't be beat.
Or as Irish and former UBS
economist David McWilliams neatly put it, "The Chinese proletariat is
seizing the means of production using worthless Dollars earned from the
United States" a fact so hard to ignore, it adds up to $1181 gold and
$18.10 silver by November 2010, at least on Tuesday's average guess from
the floor.
Amongst the opening day's
speakers, Aram Shishmanian, CEO of the World Gold Council, was due to
speak on "Issues Facing the Jewellery Industry". But he said straight
off he wouldn't bother with that, switching instead to what's driving
investment and safe-haven flows. Mehdi Barkhordar of Swiss refining
group MKS then spoke on the surge in
gold bar and coin demand, noting "a new Western mindset" more
typically seen driving Eastern gold hoarding:
-
Lack of trust in
governments;
-
Lack of trust in the
local currency;
-
Lack of trust in the
financial system;
-
Fear of inflation;
-
Only trust physical gold.
The real "impact of the
financial crisis" (as per Barkhordar's title) was in fact 2008's squeeze
on vaulting space and refining capacity, plus new opportunities in
small-bar and coin fabrication. Coming out of that crisis into whatever
crisis awaits, "There is a fundamental shift in the dynamics of the gold
market," concluded MKS's managing director.
"Gold has become
mainstream...[but] less committed or innovative players will struggle."
#2. London Rules But
Rocks
Innovation in gold products
and maintaining London's No.1 spot was a hot, heated topic, much
discussed away from the dias and breaking onto the stage in the
last-but-one session.
To be sure, innovation
would have a good way to go to beat Julius Bไr's "legal engineering",
building physically-backed funds and products (seems there's a
difference) whilst also shorting the Dollar. This gives Swiss money
"maximum participation in the price movement of the underlying"
according to Bไr's product engineer Stephan Mueller, an objective which
caused much head-scratching (well, at least at the back...) and
apparently took UBS's chief commodities strategist a couple of years to
fathom as well.
"Once in gold, you're short
all currency," said John Reade in his summing up, before explaining
that, one day, he got it. "Our Swiss clients wanted to be long of gold
priced in Dollars." Which still sounds like two trades at once to us.
And why not
buy gold and sell the Dow (367% gains in 10 years), or better still
the Rupee (down vs. the metal in 26 of the last 38 years)...?
Over in the physical
400-ounce
gold market, meantime, the Lehmans' crisis confirmed London's
dominance of physical storage and professional trading according to
pretty much everyone, with metal heading this way from Zurich according
to MKS. James Steel of HSBC also noted London's odd but continued
dominance of wholesale silver, picking up pretty much where Spain's
Latin American empire collapsed and coming despite Britain having no
silver mining, refining or sizeable consumption.
London's reign is set to
persist, Steel said, thanks to the infrastructure (vaults, assaying and
dealing) which that very dominance built. And whilst on the subject of
silver, industrial bulls must check the speech from the VM Group's
Jessica Cross...
Back in London meantime,
the Bank of England now stores some 400,000
gold bars in its vaults, said foreign exchange director Michael
Cross, worth $100 billion. That would mean some 2850 tonnes second
only to the US and Germany's hoards, but with well over 90% in custody
(and sub-custody) accounts, rather than held as the UK's own official
reserves.
So far, so good if not
complacent. The conference wasn't quite so at ease with deciding how to
maintain London's lead in precious metals worldwide. And seeing how the
Association is only that (albeit applying strict membership and code of
practice rules), bringing the various member firms together to agree a
global strategy would seem a big ask. The Good Delivery list sets the
standard for new exchanges and products worldwide, which given the
challenge ahead (from new localized products in local currency terms, as
Julius Bไr's Mueller observed) might prove good enough. Word is,
however, that the issue of cleared forwards will be addressed if not
resolved in the very near future.
#3. Central Banks Now
Buying Gold
Okay, so it's hardly news
after Tuesday's IMF announcement, and the GFMS consultancy (which is
only slightly less cautious than central banks) said as much in April:
Central banks would likely
be "net buyers" this year, with purchases outweighing sales. So what?
Well, hearing that same forecast or something very much like it from
a senior manager of the European Central Bank, thats what.
The first central banker to
address the London Bullion Market Association since Philipp Hildebrand
of the Swiss National Bank spoke in Montreux in June 2006, the ECB's
principal advisor in market operations didn't bring down the roof. "I
wouldn't be taking a huge risk to imagine that official holdings of gold
[globally] will stabilize or increase," Paul Mercier said, adding that
"I must stress that gold is still a vital asset for Europe's central
banks."
But while that's no news to
money historians, it's in fact a powerful statement from a central bank
official with or without advance knowledge of India's impending
200-tonne purchase. And reviewing my notes on the plane home, you might
think Paul Tudor Jones, David Einhorn or even Jim Rogers had put
Mercier's speech together.
"Why do we have gold?" he
asked, before citing economic security, the
capacity to deal with unexpected events, adding confidence to paper
currencies, and risk diversification. Pretty much the same advantages
were named by a French central bank at the start of this decade...and
France then went on to sell gold from its vaults, cutting its holdings
by one-sixth to 2,500 tonnes. But Herv้
Hannoun spoke after gold had been falling for almost two decades.
Whereas Paul Mercier spoke this week after 10 years of gold beating
everything else a period, as he noted, which also saw "the
largest-ever reduction in official holdings, a reduction of 3,700 tonnes."
Take it as the ultimate
contrarian "sell" if you wish. But given what everyone I spoke to thinks
is the fate of the Dollar (let alone Sterling...or Euros), M.Mercier's
carefully-phrased forecast looks a safe bet.
And as for Asia's growing
private demand...
BullionVault has noted
before that
China's Household Demand for Gold has doubled as a percentage of its
ever-growing annual savings over the last 10 years. In full-year 2008,
basis World Bank estimates and GFMS data, gold swelled to equal 1.8% of
saved household incomes.
But looking at Phillip
Klapwijk's chart above, as John Reade suggested in his summing up,
there's plenty of scope for further growth yet. China's gold demand has
lagged behind the platinum-group metals which are more in line with
its share of global demand for base metals and concrete.
So China's private market
is hardly deluged with gold at this stage. And that's with or without
the People's Bank nabbing part II of those IMF sales.
Adrian Ash
BullionVault
Gold price
chart, no delay |
Gold in 2009 |
