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Indian monsoon & 12.5% interest gold loans

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While writing this article came up which is mildly negative for Indian gold demand (as it is only talking 80 tonnes) as it seems the jewellery industry is going to be further crimped by a new rule limiting their gold deposit schemes (ie people lend gold to jewellers to fund their business) to 25% of their assets. The really interesting thing is that the new law also prevents the jewellers from paying more than 12.5 per cent annual returns on those gold loans! Talk about using gold as money. I suppose they have to pay those rates due to the risk of them running off with the gold or going bankrupt.<br />
Just wait to Wall Street finds out about these yields - beats current junk bond rates. With investors desperate for yields in ZIRP environment will we see Wall Street selling Indian Jeweller bonds at 10% (yep 10%, where do you think those bankers bonus come from)?<br />
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Indian monsoon & 12.5% interest gold loans

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While writing this article came up which is mildly negative for Indian gold demand (as it is only talking 80 tonnes) as it seems the jewellery industry is going to be further crimped by a new rule limiting their gold deposit schemes (ie people lend gold to jewellers to fund their business) to 25% of their assets. The really interesting thing is that the new law also prevents the jewellers from paying more than 12.5 per cent annual returns on those gold loans! Talk about using gold as money. I suppose they have to pay those rates due to the risk of them running off with the gold or going bankrupt.<br />
Just wait to Wall Street finds out about these yields - beats current junk bond rates. With investors desperate for yields in ZIRP environment will we see Wall Street selling Indian Jeweller bonds at 10% (yep 10%, where do you think those bankers bonus come from)?<br />
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While writing this article came up which is mildly negative for Indian gold demand (as it is only talking 80 tonnes) as it seems the jewellery industry is going to be further crimped by a new rule limiting their gold deposit schemes (ie people lend gold to jewellers to fund their business) to 25% o…

GLD amendment refers to "unforeseen reasons" for unallocated failure

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GLD has some amendments to its terms up for vote, one of which is <i>"that creations may only be made after the required gold deposit has been allocated to the Trust Allocated Account from the Trust Unallocated Account"</i> (hat tip I Shrugged; see here for an explanation of the existing creation process). What is interesting is the explanation of why they are making this amendment:<br />
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<i>"This amendment provides additional security for Shareholders by eliminating potential risks related to  issuing baskets of Shares against unallocated gold if the Custodian was to become insolvent or <b>if the unallocated gold was otherwise not allocated for some other unforeseen reason</b>."</i><br />
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My emphasis on the bold bid. The risk they are referring to here is because the Authorised Participants only deliver unallocated to the Custodian and it is up to the Custodian to find the physical to allocate. This puts all the pressure on the Custodian. The amendment does raise the following questions:<br />
<ul>
<li>Why the need to clarify this now, is there something the World Gold Council (who sponsors GLD) knows about the state of the market that didn't exist before?</li>
<li>Why would unallocated gold now have a risk of not being allocated?</li>
<li>Is there an increased risk of intra-day failures for large unallocated allocations?</li>
<li>What are these unforeseen reasons?</li>
<li>And why are none of the more excitable gold commentators hyping this up as more proof of the end of the London bullion banking system? :)(Probably because they didn't get the letter as they are smart enough not to hold GLD, which has numerous other issues which only make it suitable for short term trading IMO).</li>
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I don't think this is a case of the WGC responding to public criticism, as I haven't seen any commentary on this detail/technical matter of ETF operation. Maybe they just thought they would close up this risk point while they were making changes to the management fee revenue. However, that would beg the question of when did they become aware of the "potential risks" in the creation process and why didn't they fix it earlier?<br />
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At this point I would just note it as a data point, rather than a sign of "an imminent LBMA default", which was first predicted by one commentator in April 2013, which, even by the lax standards of internet accountability, is a fail (don't shoot the messenger, but clearly the fractional reserve bullion banking system is more robust than many give it credit for).<br />
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For the Perth Mint at the moment wholesale and retail demand are weak at best. Kilobar demand was so low we were considering shipping gold TO London but there has been a little pick up in kilobar interest this week. The recent GLD additions are positive but other ETFs have had liquidations so this indicator is unclear. All considered I don't see this as a situation where London is under pressure.<br />
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The other amendment to GLD is a rejig of who pays its costs and gets its management fee. Currently the Trustee pays (by selling gold behind the ETF):<br />
<ul>
<li>Sponsor (ie WGC): 0.15%</li>
<li>Marketing Agent: 0.15% </li>
<li>Custodian: approximately 0.066%</li>
<li>Administration Fees: approximately 0.03% to 0.04%</li>
<li>Trustee: $2 million</li>
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The proposal is that the WGC will take on all costs and only charge the Trust 0.40%. It just formalises the existing "Fee Reduction Agreement" by which the WGC was absorbing any costs above 0.40% so that GLD holders only paid 0.40%.<br />
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I can't see any material change here. Possibly the WGC feels they may be able to control or reduce costs better now that GLD is established and hence it sees an opportunity to make a bit more profit out of GLD beyond the current arrangement, as noted in the amendment letter <em>"the net amount earned by the Sponsor could be greater or smaller than the fee of 0.15% of the daily ANAV of the Trust it currently earns, depending on the actual expenses of the Trust."</em><br />
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Coincidental this happens when two large South African miners (Gold Fields and AngloGold Ashanti) dropped out of the WGC and thus the WGC lost a big revenue source? While that announcement happened after the amendment letter, the WGC would have know about this move by the miners for some time. Just another move towards the WGC becoming more self funded.</div>
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GLD has some amendments to its terms up for vote, one of which is "that creations may only be made after the required gold deposit has been allocated to the Trust Allocated Account from the Trust Unallocated Account" (hat tip I Shrugged; see here for an explanation of the existing creation process)…

No Indian gold import policy change explains RBI gold swap

<div dir="rtl" style="text-align: right;" trbidi="on">After a lot of speculation about what changes the 2014 Indian budget would bring for gold import policies, we got zip. That now supports my speculation on why the Reserve Bank of India (RBI) announced, ahead of the budget, a combined quality and loco swap of its gold: it was a temporary political fix to the problem of:<br /><br />1. Making promises to the gold industry during the election campaign that it would wind back gold import restrictions.<br />2. Reality, once in office, that such relief on gold imports would negatively affect India's current account deficit.<br /><br />Standard political MO: "Oh, it is a lot worse than we thought, we can't honour our promises, it is the previous Government's fault". Interestingly, on the eve of the budget the Indian gold industry hadn't read the warning signs and thought there would be relief, with Bachhraj Bamalwa, of All India Gems and Jewellery Trade Federation, speculating that the duty would be cut to 6% and even that <em>"the government might remove the 80:20 rule in a gradual, 'phased' manner"</em>. This view was probably helped along by statements from the Government like <em>"any action on gold should take into account the interests of the public and traders, not just economics and policy"</em>. Well it is clear they sided with economics and policy.<br /><br />There were some warning signs, with this Reuters article quoting commentators noting that the Government was <em>"moving back and dithering on their decisions, and in a sense playing politics".</em> Another sign was this Report that <em>"India risks losing its investment-grade sovereign rating if it fails to get its finances into shape"</em> with S&P warning <em>"there was a one-third chance of a downgrade </em>[of India]<em> to "junk" without a big improvement in the fiscal deficit and in implementing reforms."</em><br /><br />For me, the strongest sign the new Indian government was going to back away from its promises was the RBI gold swap announcement and the local gold industry should have paid more attention to it, because its timing was very unusual: just before the election about gold which had been sitting in RBI's vaults in India for decades. Why was this non-standard gold suddenly an issue?<br /><br />I think it is a reasonable speculation that the RBI knew in advance that the new Government could not open up the import restrictions and have a flood of gold imports affecting the current account deficit and the country's rating. This gold swap was then a planned action to placate the industry by releasing supply into the local market in a way that would not affect the current account deficit.<br /><br />The RBI is aware of the local gold supply issues, have loosened the 80:20 rule a little in March by allowing some banks without three years worth of exports to import gold, but only on the basis that they had current customers to export gold to (see this Reuters article).<br /><br />Sidebar: the clear message from the Indian session at the recent Singapore Gold Forum was that it was the 80:20 rule that halted gold imports and not the duty hikes. On that basis I was expecting some duty cut as that would have made it look like the Government had done something while not making any difference to how much gold could be imported.<br /><br />So how does this gold swap work and not impact the current account deficit? Firstly, a swap involves two legs, as explained here, in this case being:<br /><br />1. Sell non-LBMA standard gold loco India<br />2. Buy LBMA standard gold loco UK<br /><br />No doubt the RBI had some interest in upgrading its non-standard gold (as it makes it easier in the future to mobilise it in a financial crisis, like it did in 1991) but it could have just sent it to a local refinery. However, this would not have had any impact on local supplies as the gold would have just went straight back into the RBI's vault.<br /><br />The key is that the swap results in a net supply of gold into the local Indian market, but the replacement gold is supplied from London (or Switzerland, as we will see shortly). The net supply in India will result in a reduction of the local premium (which the public will welcome) but more importantly, it will give the local gold industry material to work with (of which they are starved) and this should increase employment. The reason this swap will not affect the current account deficit is because the cash legs of a swap are netted, so the RBI will only be paying a few dollars per ounce out of its offshore USD reserves.<br /><br />Regarding the swap, I had a debate with twitter based precious metals analyst Silver Watchdog who thinks the RBI swap would also involve leasing. I see this as unnecessarily complex, which his diagram indicates. The leasing angle only makes sense if you believe that there is a shortage of gold in London (as the second leg of the swap pulls physical out of the London market), so only if the RBI subsequently leases their newly acquired London gold will this take pressure off the London market. Apart from there being no indication that the RBI was intending to do this, Perth Mint does not see any such shortages in London at this time.<br /><br />I would note here that while bullion banks will probably quote on this swap, the advantage is with the refiners given the quality upgrade required. The one in the box seat is the local Indian refinery PAMP-MMTC who, through PAMP's parent MKS, is capable without bullion bank help to do <em>"options, hedging and EFP’s; location, purity and quality swaps; forward leasing arrangements</em>". PAMP would have no problem refining the gold locally and supplying 400oz bars into London out of its Switzerland operations.<br /><br />While India has 557 tonnes of gold reserves, there is no indication of how much non-standard gold they hold or are looking to swap. This Reuters article notes that the RBI <em>"would decide further in regard to quantity, swap-ratio </em>[i.e. swap fee]<em>, timing etc. of the gold to be swapped"</em>. The reference to "timing" implies that the RBI is looking to supply their gold over a period of time, which would make sense if you want to alleviate local gold industry supply problems and help them out for as long as possible.<br /><br />Whatever amount is involved it will only last for a limited time, in the order of months, not years, given India's appetite for gold. So this is just a short term fix to a political problem and ultimately shortages will resume due to the 80:20 rule.<br /><br />Of course, it is entirely possible that the RBI's swap is solely about upgrading its gold reserves and the timing is purely coincidental. That would clearly be the case if the replacement gold was going back into the RBI's vaults in India, rather than with the Bank of England as reported by Reuters. However, as we are dealing with central banks, where transparency even on simple matters is rare to come by, we just don't know what the real motivation is and thus have to resort to speculation. I hope you got some value, in terms of how the industry works, out of my speculations even if they turn out to be wrong.</div>

After a lot of speculation about what changes the 2014 Indian budget would bring for gold import policies, we got zip. That now supports my speculation on why the Reserve Bank of India (RBI) announced, ahead of the budget, a combined quality and loco swap of its gold: it was a temporary political fi…

Allocated Gold at Bank of England declines 755 tonnes

<div dir="rtl" style="text-align: right;" trbidi="on">The Bank of England's just released 2014 Annual Report discloses that it was holding 5,485 tonnes of gold as a custodian, down 755 tonnes to around the level it was in 2011 and 2012. Below is a chart of the data against the average gold price over the Bank's financial year ending February, which shows that the amount of gold has basically followed the gold price, very much like the behaviour of the gold ETFs.<br /><div class="separator" style="clear: both; text-align: center;"><span style="margin-left: 1em; margin-right: 1em;"><img border="0" height="446" src="http://lh4.googleusercontent.com/-YnisdIFWxfk/U6EdLny4r-I/AAAAAAAAAPE/ucoJXoyUUPE/w426-h272/BoEGold.PNG" width="640" /></span></div><br /><br />The table below details the figures and calculations back to 2005, when the Bank first started reporting its custodial activities.<br /><br /><br /><table border="1"><tbody><tr> <td>As at Date</td> <td>Allocated Gold (GBP billions)</td> <td>London PM Fix (GBP)</td> <td>Allocated Gold (tonnes)</td> <td>Year on Year Change (tonnes)</td></tr><tr> <td>28/02/2005</td> <td>29</td> <td>226.514</td> <td>3,982</td> <td></td></tr><tr> <td>28/02/2006</td> <td>36</td> <td>318.078</td> <td>3,520</td> <td>-462</td></tr><tr> <td>28/02/2007</td> <td>43</td> <td>338.964</td> <td>3,946</td> <td>+425</td></tr><tr> <td>28/02/2008</td> <td>72</td> <td>488.854</td> <td>4,581</td> <td>+635</td></tr><tr> <td>28/02/2009</td> <td>102</td> <td>669.809</td> <td>4,737</td> <td>+155</td></tr><tr> <td>28/02/2010</td> <td>125</td> <td>746.149</td> <td>5,211</td> <td>+474</td></tr><tr> <td>28/02/2011</td> <td>156</td> <td>868.682</td> <td>5,586</td> <td>+375</td></tr><tr> <td>28/02/2012</td> <td>197</td> <td>1110.484</td> <td>5,518</td> <td>-68</td></tr><tr> <td>28/02/2013</td> <td>210</td> <td>1046.719</td> <td>6,240</td> <td>+722</td></tr><tr> <td>28/02/2014</td> <td>140</td> <td>793.931</td> <td>5,485</td> <td>-755</td></tr></tbody></table><br /><br />In this June 2014 Quarterly Bulletin, the Bank reports on page 134 that 72 central banks hold gold with them (which is 65% of the 113 central banks that the World Gold Council records as having gold reserves). It also noted that the <i>"Bank also acts as a bank to certain other financial institutions. One example is central counterparties"</i>. Included in that the latter group would be the six London bullion market clearing banks. As it is unlikely that the Bank runs allocated gold accounts for banks that are not central to the gold market, it would be fair to conclude that the majority of the allocated gold it holds is for central banks.<br /><br /><br />Given there was nowhere near 755 tonnes of central bank selling in the year ending February 2014 it would therefore be fair to conclude that this gold outflow was from the allocated accounts that bullion banks had with the Bank of England. This is not surprising considering that the major gold ETFs lost in excess of 600 tonnes over that same period.<br /><br /><br />Just one final observation from World Gold Council central bank holdings data: it wasn't until the year ending Q1 2010 that central banks were net buyers. Prior to that they were net sellers (1,011t for 4 years to March 2009), yet the table above shows customers of the Bank of England adding to their holdings (753t for 4 years to February 2009). Now if we remove central banks that most likely don't store with the Bank, this 1,011t net sell figure may change, but I doubt enough to turn it around to anywhere near 753t of net buying. Tentative conclusion is that bullion banks were accumulating a lot of allocated gold with the Bank of England.<br /><br /><br />Combining the above figures with detailed LBMA turnover figures, UK gold import/exports, London ETF flows, and central bank activity is more work than I have time for at the moment, but it certainly would give us a better picture of the London gold market.</div>

The Bank of England's just released 2014 Annual Report discloses that it was holding 5,485 tonnes of gold as a custodian, down 755 tonnes to around the level it was in 2011 and 2012. Below is a chart of the data against the average gold price over the Bank's financial year ending February, which sho…

Why no direct relationship between price and stocks

<div dir="rtl" style="text-align: right;" trbidi="on"><div style="text-align: justify;">A great article by Keith Weiner explaining why open interest in gold has fallen but in silver it has increased - hint: to do with profit from carrying gold. Apart from that, it is also useful for those who falsely think that if the price goes up (or down) then open interest should increase (or fall), and also that ETF holdings should increase (or decrease).</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">It does puzzle me why people think there should be a direct relationship between open interest or ETF stocks and price, given that they don't have any problem understanding that the price of a company's shares can go up and down while the number of shares on issues doesn't change.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">For a company ownership of shares is just transfered between buyer and seller and that doesn't drive price. Price is a function of there being more buying pressure resulting in buyers not being willing to sit around waiting for people to accept their bids and instead accepting seller's offers (and vice versa).</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">The same can happen with precious metal ETFs. ETFs shares are only created or redeemed if the person on the other side of the trade is someone with no interest in the ETF (ie a market maker). Where existing holders sell to new buyers no new shares need to be created, yet the price can still go up if the buyers are willing to accept the seller's offers (and the non-market maker sellers are adjusting their offers to match gold prices on Comex or the spot market.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Also, check out Warren's latest bullion bars project post, where he notes that 70% of bars added to GLD during 2013 where previously in the GLD list, demonstrating that <em>"there is a really large stock of gold in London and that it doesn't necessarily all vanish instantly to China".</em> He also predicts the return of <b>specific</b> bar numbers by July 30th - now that's a real forecast, no vague hedged cop out wording.</div></div>

A great article by Keith Weiner explaining why open interest in gold has fallen but in silver it has increased - hint: to do with profit from carrying gold. Apart from that, it is also useful for those who falsely think that if the price goes up (or down) then open interest should increase (or fall)…

Gold forecaster with 100% accuracy says gold to remain weak

<div dir="rtl" style="text-align: right;" trbidi="on"><div style="text-align: justify;">I have found a gold forecaster with a 100% accuracy rate. Below is a chart of two of his recent predictions.</div><br /><div class="separator" style="clear: both; text-align: center;"><span style="margin-left: 1em; margin-right: 1em;"><img border="0" height="400" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiyKiXcFS3mFiMmSyCLJ8GHDe-6VbqGw_QUp7vXlQVhKjT3d7aIrOVgLX-tcCPumXYPCtTQCsc2SU1CcBaP0DVxMblA52B7p4zYriA2NMl-R9B2_7c3RYqjo9b6daxMXYndxtRkR8Z7ppJL/s1600/forecast1.png" width="640" /></span></div><br /><div style="text-align: justify;">The first arrow marks the 15th of January when he said to <em>"use narratives, not just charts, to tell if gold's bottom may be near"</em>, noting that mainstream commentary was a <em>"precursor to more bullish narratives. It also gives confidence to smart money to start to get into the market"</em></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">The second arrow marks the 15th of March when he said that he <em>"would not be surprised to see it correct down"</em> and that <em>"there will be corrections on the climb back up"</em> during the rest of 2014.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Of course the forecaster is me, and the 100% accuracy rate is misleading as I've only made these two calls in the entire time I've blogged (here and here), but hey, since when does the full truth matter in click baiting headlines?</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Now given that my sample size is only two forecasts, you can probably bet <strong>against</strong> my next call as there is no way I can maintain a 100% accuracy rate. I'm not ready to make a call for a bottom in this correction so at this time will just expand on the March 15 comments I made in an interview with Al Korelin.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">In that interview I noted negative premiums on the SGE were possibly indicative of bullion banks having overestimated Chinese New Year demand (BBs stockpile ahead of these high demand periods, see here for some evidence of this). Perth Mint has seen some on and off weakness in kilobar premiums recently and this was confirmed by Ed Steer noting that JP Morgan received exactly 160,750.000oz of eligible gold into their Comex warehouse on March 20. This is exactly 5 tonnes, which readers of this blog know is indicative of kilobars. If the Chinese are so hot for gold right now, why is JPM putting kilobars into a NY warehouse?</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">For a current read on the market I think you have to take a narrative approach I discussed in that January 15 article - and that is mainstream financial markets narratives, not goldbug narratives, as that is where the big money is. Where is that narrative now? First this Business Insider article quoting Goldman:</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><em>"we see potential for a meaningful decline in gold prices towards the level implied by 10-year TIPS yields, which our rates strategists expect to rise further this year, and reiterate our year-end $US1,050/toz gold price forecast. More broadly, we believe that with tapering of the Fed’s QE, US economic releases are back to being a key driving force behind gold prices"</em></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">And this from the Australian Financial Review via Macro Business, quoting some nobody and SocGen:</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><em>"Gold is going to be somewhat problematic from an investment standpoint over the next six to 12 months. We’re probably looking to a relatively higher and quicker increase on rates, which is a headwind for precious metals."</em></div><div style="text-align: justify;"><em></em><br /></div><div style="text-align: justify;"><em>"We continue to believe that the economic momentum in the US shows further improvement, we reiterate our very bearish outlook for this year. Prices could drop below $US1,000. I would not rule that out."</em></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">The important thing is these people believe this stuff, that the US is "improving" and they will trade gold accordingly. I think it is also worth noting Dan Norcini's repeated comments that this price run up was more about short covering than new longs, and he is representative of the Comex floor "narrative".</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">I also note the Zero Hedge article on China Commodity Funding Deals regarding gold, which has some potential to be negative for gold, despite what some may say. Most likely their "don't worry, it is bullish for gold" interpretation comes from a lack of understanding of the deals as they probably haven't got access to the professional market commentary on that topic. That is for another post, but I will note I brought this issue to your attention in September 2012 and ZH and others who are now jumping on it could have found out a lot earlier from these articles (good background reading if you're keen) June 2013, August 2013, September 2013, December 2013 and finally from Koos Jansen, who you'd think gold bloggers would read, with this quote indicating the risk: <em>"some enterprises in China use gold leasing from banks to solve their short-term funding problems in the hope of buying back the gold at lower levels to repay the lease. However they can be short-squeezed when gold moves higher"</em></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">So at this stage I think the risk is to the downside but will hold off on a bottom call until I can see some shift in the mainstream narrative.</div></div>

I have found a gold forecaster with a 100% accuracy rate. Below is a chart of two of his recent predictions.The first arrow marks the 15th of January when he said to "use narratives, not just charts, to tell if gold's bottom may be near", noting that mainstream commentary was a "precursor to more bu…