How Could It Happen?
“How could this have happened when everything was normal?”
“I was walking along the road with two friends – the sun was setting – suddenly the sky turned blood red – I paused, feeling exhausted, and leaned on the fence – there was blood and tongues of fire above the blue-black fjord and the city – my friends walked on, and I stood there trembling with anxiety – and I sensed an infinite scream passing through nature.”
“ ‘What’s happened to me,’ he thought. It was no dream.”
“Well, this is basically the end, so the answers should be in these next few pages. I doubt they will surprise you, but you never know. I don’t know how smart or thick you are. You could be Albert Einstein for all I know, or some literary prizewinner, or maybe you’re just middle of the road like me.”
Xi Puts the Willies Up China’s Super-Wealthy .....................................................21
The Signal in Silver ....................................................................................23
Switzerland May Give Every Citizen $2,600 a Month .............................................25
Oil Industry Risks Trillions of “Stranded Assets” on US-China Climate Deal ..................26
The Right Call ..........................................................................................28
Japan’s Stimulus Plan Is Not Courageous But Foolhardy ........................................29
Mario Draghi: ECB Must Now Raise Inflation “As Fast As Possible” .............................30
Unusual Gold Moves in Asian Hours Puzzle Jittery Traders ......................................32
The Low Official Found with Towering Pile of Cash, Gold and Properties ....................34
Do We Achieve World Order through Chaos or Insight? ..........................................35
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“How could it happen, Grandad?”
The old man’s eyes misted over as he looked down at his grandson, who sat at his feet, his young eyes alive with questions as he turned the heavy gold bar over in his hands.
”I’ve told you the story too many times to count,” said the man, half-pleading, but knowing full-well he’d soon be deep into the umpteenth retelling of a story he’d lived through once in reality and a thousand times more through the eager questioning of the young man now tugging at his trouser leg. “Why don’t I tell you the story of how I met your Grandma instead?”
“Because that’s boring.” The reply was borne of the honesty only a ten-year-old could possibly still possess.
“OK, OK,” said the old man, a smile creeping into the corners of his mouth, “you win.”
“It began in early November of 2014, when a man called Alasdair Macleod published a report on how the Chinese had been secretly buying gold for 30 years.
“Most people believed what the Chinese Central Bank had been telling the world — that they owned just 1,054 tonnes. That number, first published in 2009, had remained unchanged for over five years; but there was a group of people who refused to accept that the People’s Bank of China were telling the truth, and those people set about diligently doing their own analysis to try to determine what the real number might be.
“In early November of 2014, Macleod’s report — which went largely unnoticed because most people were busy celebrating new highs in the stock market and the fact that a newly strengthening dollar was forcing down the price of gold — laid out the case for there having been an astounding amount of gold bought by the Chinese over the previous three decades.
“According to Macleod, China saw an opportunity at a crucial time and, with a view on the longer term, they took it.”
Grandad dipped his thumb and forefinger into his vPad, which hovered just above the table, and pinched and cast a paragraph into the air before them. At the same time, they heard the voice of Alasdair Macleod himself read the words aloud:
(Alasdair Macleod): China first delegated the management of gold policy to the People’s Bank by regulations in 1983. This development was central to China’s emergence as a free-market economy following the post-Mao reforms in 1979/82. At that time the west was doing its best to suppress gold to enhance confidence in paper currencies, releasing large quantities of bullion for others to buy. This is why the timing is important: it was an opportunity for China, a one-billion population country in the throes of rapid economic modernisation, to diversify growing trade surpluses from the dollar.
“Macleod explained why what he was about to explain to the world was going to come as something of a surprise to most people.” Grandad dipped his fingers and cast again:
To my knowledge this subject has not been properly addressed by any private-sector analysts, which might explain why it is commonly thought that China’s gold policy is a more recent development, and why even industry specialists show so little understanding of the true position. But in the thirty-one years since China’s gold regulations were enacted, global mine production has increased above-ground stocks from an estimated 92,000 tonnes to 163,000 tonnes today, or by 71,000 tonnes; and while the west was also reducing its stocks in a prolonged bear market all that gold was hoarded somewhere.
“But Grandad, why was the West selling its gold? That’s just stupid!” the young boy interjected, right on cue.
Again the old man smiled. Every time he told the story, his grandson would pepper him with the same questions, with a regularity that brought a familiar rhythm to this very private dance the two of them had performed so many times.
He paused, as he always did, to create just the right amount of dramatic tension before answering.
“I know it seems stupid NOW, but don’t forget, you know what you know. Back then, the people in charge in the West weren’t really all that smart; and, besides, when the Golden Domino finally fell, it became obvious that they had been...” — the old man paused, choosing his words carefully, almost theatrically; but when they came, they were the same carefully chosen words he used every time — “... a little less than honest about a few things.
“Now,” he continued with mock indignation, “if you’ll allow me to get back to the story...”
The boy smiled, and his grandfather pushed on.
“Macleod’s report concentrated on the period between 1983 and 2002, because in 2002 two important things happened: the Chinese people became free to own gold, and the Shanghai Gold Exchange was established. He wrote that the reason they allowed these two events to take place was that they’d already accumulated ‘enough gold’ for what he called ‘strategic and monetary purposes,’ and they were happy to keep adding to their stockpile from their domestic mine production and scrap, rather than buy more in the market...”
The old man held up a hand to head off the question he knew was coming — “I know, I know... you want to know how much the Chinese would have had to accumulate in order to be able to do this, don’t you? Well, Mr. Macleod told us, remember?” He reached once more into vPad space, waggled his fingers a bit, and cast the following:
(Alasdair Macleod) Between 1983 and 2002, mine production, scrap supplies, portfolio sales and central bank leasing absorbed by new Asian and Middle Eastern buyers probably exceeded 75,000 tonnes. It is easy to be blasé about such large amounts, but at today’s prices this is the equivalent of $3 trillion. The Arabs had surplus dollars and Asia was rapidly industrialising. Both camps were not much influenced by Western central bank propaganda aimed at side-lining gold in the new era of floating exchange rates, though Arab enthusiasm will have been diminished somewhat by the severe bear market as the 1980s progressed. The table and chart below summarise the likely distribution of this gold:
SIMPLIFIED GOLD SUPPLY 1983-2002
Official Sales by Central Banks
Estimated Leasing (Veneroso)
Net Western divestment (bullion, jewelry & scrap (est.)
The old man clipped his last sentence short to allow his young audience to make the (quite grown-up, the man thought) point that he always did at this juncture:
“But Grandad, you can’t just say things like ‘probable’ and make assumings like that. We always get told at school that you have to show your workings-out.”
His grandfather let the grammatical error slide — one more time.
“Ah yes, but THAT was the problem, wasn’t it? Everybody wanted proof that numbers like Macleod’s were accurate, but NOBODY wanted proof that the official figures were true, and THAT turned out to be the key lesson that the world learned from this whole sorry debacle.”
“But Grandad, YOU didn’t get hurt, did you?”
The old man looked through the window and out at the snowflakes settling on the tall pines that surrounded the ski field not 40 yards from where he sat, and smiled.
“That’s true,” he said, “but only because I was willing to think for myself and allow for possibilities that most people wouldn’t believe for a moment could actually happen. It wasn’t easy, and it wasn’t fun for many years, believe me. Now, where was I?”
“You were at the part where Mr. Macleod explained where all that gold had gone and...”
“Might have gone,” the man interrupted. “Remember, back then we didn’t know for sure.”
He smiled again and went on with the story.
“Macleod’s work suggested that, while a huge amount of gold had gone flooding into the Middle East during the oil boom of the 1970s (much of it ending up in Switzerland, which, back then at least, was famous around the world as being a safe haven for financial assets), in the mid-’90s, after the gold price had languished for many years, sentiment had changed.”
(Alasdair Macleod): In the 1990s, a new generation of Swiss portfolio managers less committed to gold was advising clients, including those in the Middle East, to sell. At the same time, discouraged by gold’s bear market, a Western-educated generation of Arabs started to diversify into equities, infrastructure spending and other investment media. Gold stocks owned by Arab investors remain a well-kept secret to this day, but probably still represent the largest quantity of vaulted gold, given the scale of petro-dollar surpluses in the 1980s. However, because of the change in the Arabs’ financial culture, from the 1990s onwards the pace of their acquisition waned.
By elimination this leaves China as the only other significant buyer during that era. Given that Arab enthusiasm for gold diminished for over half the 1983-2002 period, the Chinese government being price-insensitive to a Western-generated bear market could have easily accumulated in excess of 20,000 tonnes by the end of 2002.
“Now, I know this is all back-of-the-envelope stuff — assumings, as you call them — but remember, back then, in 2014, none of the other stuff had been exposed.”
“But, Grandad, why were the Chinese buying all that gold? And why did the Westerns let them have it? I mean, it’s worth so much. Why didn’t they just keep it?”
This was always the old man’s favourite part, and he leaned forward in his seat as his enthusiasm for the story returned. With a twinkle in his eyes, he beckoned the boy closer.
(WSJ, Oct 13, 2014): Russia and China have opened a currency-swap line, paving the way for further trade and investment between the neighboring countries, Russia’s central bank said on Monday.
The Bank of Russia and the People’s Bank of China agreed to open a yuan-ruble swap line worth 150 billion yuan ($24.47 billion or 984 billion rubles) for three years. This will offer both countries access to each other’s currencies without the need to purchase them on the currency markets, Russia’s central bank said.
(WSJ, Jul 21, 2014): The Swiss National Bank and People’s Bank of China have agreed to set up a currency swap line designed to boost trade and investment between the two countries, joining a parade of countries hoping to become offshore hubs for trading the yuan.
The Swiss and Chinese central banks said Monday that the three-year agreement will allow them to buy and sell their currencies up to a limit of 150 billion yuan, also known as renminbi, or 21 billion Swiss francs ($23.4 billion).
(BBC, Oct 11, 2013): China and the ECB have signed a currency swap agreement worth 350bn yuan ($57bn; £36bn), state-owned Xinhua news agency has said.
Such agreements mean the central banks can exchange currencies and firms can settle trade in local currencies rather than in US dollars.
The deal is one of the largest for China as it looks to build a more international role for the yuan. It will last for three years and can be extended if both parties agree.
“Strategy,” he said, then, after a pause (and with what even he felt was a little more relish than usual) “... and STUPIDITY!
“The Chinese had become very rich during those years, but most of that wealth had come in the form of dollars...”
“What, US dollars?” the boy asked, incredulously. “But why would they ever have wanted lots of those?”
“Because,” the old man chuckled, “there was a time — long before you were born — when everybody wanted US dollars. I know that’s hard to believe NOW, but it was true. If I may...?”
“So-rry Gran-dad,” the boy answered rhythmically and with mock apology.
“Anyway, the Chinese were great students of history and knew that, over thousands of years, what used to be called ‘fiat currency’ had always ended up worthless; and so they planned for the day when that fate would befall the dollar. They began accumulating euros instead of dollars — not because the euro was better but because they didn’t want to own too much of any one currency.”
“Whatever happened to the euro, Grandad?” inquired the boy.
“One story at a time, little fella!” replied the old man. “Now, where was I? Oh yes, then, in the mid-2010s, China began signing all sorts of agreements with other countries, like Iran, Turkey, Russia...”
“And Switzerland!” the boy eagerly interjected.
“... and Switzerland,” his grandfather agreed.
“Those agreements enabled them to swap goods and services for currencies other than the US dollar — all so they could eventually break their ties to what they saw as a doomed currency. And all the while, quietly, in the background, they were swapping as much of that paper money as they could for...?”
“GOLD!!!” Right on cue the boy blurted out the answer, raising both hands in triumph.
“Gold,” the old man said, softly. “Remember what Mr. Macleod wrote?” He cast it up:
(Alasdair Macleod): Following Russia’s recovery from its 1998 financial crisis, China set about developing an Asian trading bloc in partnership with Russia as an eventual replacement for Western export markets, and in 2001 the Shanghai Cooperation Organisation was born. In the following year, her gold policy also changed radically, when Chinese citizens were allowed for the first time to buy gold and the Shanghai Gold Exchange was set up to satisfy anticipated demand.
The fact that China permitted its citizens to buy physical gold suggests that it had already acquired a satisfactory holding.
Since 2002, it will have continued to add to gold through mine and scrap supplies, which is confirmed by the apparent absence of Chinese-refined 1 kilo bars in the global vaulting system. Furthermore China takes in gold doré from Asian and African mines, which it also refines and probably adds to government stockpiles.
Since 2002, the Chinese state has almost certainly acquired by these means a further 5,000 tonnes or more. Allowing the public to buy gold, as well as satisfying the public’s desire for owning it, also reduces the need for currency intervention to stop the renminbi rising. Therefore the Chinese state has probably accumulated between 20,000 and 30,000 tonnes since 1983, and has no need to acquire any more through market purchases, given her own refineries are supplying over 500 tonnes per annum.
“A man called Simon Hunt, who had extremely good connections in China and, more importantly perhaps, a willingness to entertain possibilities most people couldn’t, told a fascinating story once about a visit paid by a friend of his to an army base in China...”
(Simon Hunt, Nov 14, 2014): China is in the process of making the RMB acceptable as an international currency. It wants its trading partners and others to see the RMB as a stable currency that does not play the game of devaluation when difficulties arise. It is the long-game in which Beijing hopes that their currency not only becomes acceptable in financing trade but that central banks can feel secure in adding the RMB to their reserves, as some are now doing.
As we have discussed in earlier reports, China, not just the PBOC, holds far more gold than the market has been assuming, probably in the region of 30,000 tonnes, compared with the USA holding very little of its reported 8,300 tonnes.
Whilst in Japan we were told an interesting if not amusing story that supports this contention. A friend of ours has several factories in China and thus knows many senior people in different disciplines, one of which is a senior PLA officer. He was invited down to their HQ for drinks. After a few hours, his friend suggested they take a walk around the compound ending up at the entrance of a large warehouse. The door was opened and to my friend’s astonishment the warehouse was stacked from floor to ceiling with gold bars.
One day, when the timing suits Beijing best, the PBOC will link the RMB to gold. The West may dislike gold, or at least some of their central banks [do], preferring to operate with fiat currencies, but Eastern governments have a history of seeing gold as a store of value.
“NOW, of course, it seems that what Simon said should have been completely obvious; but all the way back in 2014, believe it or not, the idea that the Chinese would peg their currency to gold was something that most people here in the West just couldn’t even comprehend. I can’t even begin to tell you the number of times I talked to people about this stuff. For years it was obvious how things would end, but only a small group of people listened. Mostly, people just laughed and told me I was a fool. They said I should be buying shares and that a return to ANY kind of gold standard was a ridiculous idea. Do you know what I did?”
“Bought more gold?” The boy phrased it like a question even though he knew the answer. He just liked to let his grandfather have his moment.
“Bought more gold,” the old man said matter of factly. He threw up a chart they both knew well:
“But, but, you’ve jumped ahead, Grandad! The part where the Chinese link their currency to gold isn’t for ages yet. You skipped the bit about the Swiss gold! AND you left out the best part — the missing gold?”
“Sheesh!” the old man said in mock exasperation, “I’m coming to that part now! You are one impatient little fella, aren’t you?”
“But this is the best bit!” the boy replied excitedly.
“Well, if you’ll just stop interrupting...? Thank you! So... in November of 2014, the Swiss people had a referendum to decide whether the citizens of that once monetarily sound country wanted to take the first step towards returning to their historical position as a place where money actually meant something. Prior to the vote, some folks had warned of dirty tricks being used in the media to try to ensure the vote was a ‘No.’”
(Smaulgold): If Save Our Swiss Gold passes, the SNB would have to sell billions worth of Euro assets that they bought in recent years to support the 1.2 Swiss Franc to Euro peg in order to buy gold. Such an action would have a negative impact on the Euro.
As such … expect statements from central banks regarding the “danger” that Save Our Swiss Gold presents to the entire global monetary system... Expect the propaganda to be ratcheted up as November 30th approaches and to hear the terms “right-wing,” “far right” and “racist” bandied about in the mainstream media when discussing Save Our Swiss Gold, its sponsors and supporters... expect the SVP to be labelled “financial terrorists”...
“Well, this warning proved to be well-founded. This Reuters article (one of a number of such articles) ticked all the boxes...” The old man dipped again and again into v-space.
(Reuters): The “Save our Swiss gold” proposal, spearheaded by the right-wing Swiss People’s Party (SVP), aims to ban the central bank from offloading its reserves and oblige it to hold at least 20 percent of its assets in gold.... The SVP argues it would secure a stable Swiss franc....
The chairman of the SNB, which had already expressed its opposition to the proposal, said it would make it harder for the central bank to do its job.
“The initiative is not in Switzerland’s interest because it wants to fundamentally change the rules of our monetary policy,” Thomas Jordan was quoted as saying in Swiss newspaper Neue Zuercher Zeitung.
“It would be disastrous if Switzerland limited its own capabilities to react to disorder and maintain the stability of its currency.”The SNB also argues that Save our Swiss Gold could reduce the SNB’s annual profits that it distributes to Switzerland’s cantonal governments.
Fritz Zurbruegg, SNB board member warns “The higher the gold content, the smaller the income from interest or dividends,” he said.
“But some people,” the old man said, his voice taking on a defiant edge, “were having none of these arguments...”
(Smaulgold): This is a disingenuous argument, since the misguided goal of European banks is to reduce interest rates to zero or have them negative if possible, in order to boost inflation and economic growth. If the Save our Swiss Gold initiative were to pass, the loss in interest payments to the Swiss cantons would almost certainly be de minimus.
“Anyway, as the vote got closer, the dire ‘warnings’ from the establishment picked up steam — even though technically they weren’t supposed to be able to campaign. In a development that surprised nobody who followed the gold market closely and understood the various forces at work, the gold price fell like a stone from precisely the day the first poll — which showed significant support for the initiative — was published (after all, who would want to vote to hold more of something that was making headlines for falling in price?); and a few weeks later another poll was published that showed a suspiciously large swing from ‘Yes’ to ‘No’...”
(Marketwatch): Gold retreated on reports Wednesday that support for a Swiss referendum to require the country’s central bank to hold 20% of its reserves in gold bullions is losing momentum.
Only about 38% of those polled plan to vote for the Swiss gold measure, according to the Daily Mail, while Bloomberg reported that about 47% are likely to vote against it. The referendum, scheduled for Nov. 30, must secure more than 50% support to pass.
“Strangely, at the time, the comments sections of most online news sites in Switzerland were awash with pro-SGI sentiment. Anyway, that didn’t matter because the referendum passed with a clear majority, surprising the establishment and causing a massive tremor in gold and currency markets. It was that day which led indirectly to what they call the Golden Domino falling.”
“Tell me about the Golden Domino, Grandad!!”, said the boy, now unable to contain his excitement as his favourite part of the story approached.
“Well,” said the old man, relishing the tale and milking the tension for all it was worth (if dramatic tension were still possible in a story he’d told the young man so many times), “despite all the attempts to derail the Swiss gold vote, it passed; and the market had to react to the sudden realization that, not only was there now a buyer of 1,700 tonnes of gold in the market, but that same buyer had to defend an unlimited currency peg against the euro.
“The signs had been there in the run-up to the referendum, of course, but only a few people had been paying attention. People like Koos Jansen, who had been following the amount of gold leaving London, Hong Kong, and finally Switzerland for other countries. Koos saw the writing on the wall, and here’s his writing for you in the air...”
(Koos Jansen, Nov 20, 2014): From looking at rising SGE withdrawals and Indian import in recent months, we knew demand was increasing consistently and huge amounts of physical gold had to be supplied from somewhere. As I’ve written in a previous post, this type of gold demand can’t be met by mine supply and so the metal has to be sourced from countries that have large stockpiles, the usual suspects: the UK, Hong Kong and Switzerland.
In 2013 the UK was severely drained (net 1424 tonnes), last week we learned Hong Kong became a net exporter since August 2014, the latest trade data from Switzerland shows the Swiss net exported 100 tonnes of fine gold in October. 75 tonnes net to India and 45 tonnes net to China.
“Koos even told people that this couldn’t go on forever, but unfortunately very few people listened to him.”
Customs data of the usual suspects (Switzerland, the UK and Hong Kong) is getting exciting; they can’t net export gold forever. We know there are often shortages in these trading hubs, it’s only the price of gold that tells us otherwise. The Financial Times reported there are currently shortages in London, from November 14:
As one refiner told me: “Over the past four weeks my cost of hedging has risen by 30 per cent. Not only that, but there is not enough liquidity in the physical market in London to settle my obligations as they come due. I have to fly gold from Zürich to London, because there just is not enough gold on offer in London. You never used to have to do that.”
“Everybody focused on the fact that the Swiss would have to buy 1,700 tonnes of gold and tried to jump in front of the price, but nobody really worried about the repatriation of the Swiss gold — after all, it was only 312 tonnes — 104 held in Canada and 208 held at the Bank of England.”
“Did you know I can read minds?” the old man asked mysteriously before the boy could finish his thought.
“No you can’t!” the boy exclaimed in the tone of a young child who’d heard similar outlandish claims from a grandparent one too many times.
“I can,” asserted his grandfather. “In fact, I know EXACTLY what you are thinking right NOW.”
The boy looked on, his wide eyes tinged with a favoured grandchild’s inherent skepticism.
“You are just about to say ‘But what about the German gold?’” said the old man casually, before settling back into his chair, enjoying the silence. It didn’t last long.
“No... I was... I was going to ask you about... something else,” the boy fumbled, “but you can tell me about that anyway. If you like.”
“Well the German Bundesbank, after getting just 5 of their 300 tonnes back from the Federal Reserve in 2013 and laying off their plans for repatriation, had a sudden change of heart. They decided they needed to get their hands on their gold as fast as they could. They knew the Swiss had no choice but to force repatriation, and they also knew that the more people they let in front of them in line, the smaller their chances were of ever getting their gold back.
“Nick Laird, the Australian Prime Minister, was an analyst back in those days who ran a website called . Like Koos, he was one of the few people paying close attention to what was going on. Nick published two charts right around the time of that Swiss referendum, showing that gold had once again begun to leave the Federal Reserve’s vault — something that had happened only twice in any size in the previous two decades: once right around the bursting of the NASDAQ bubble and the second time during what was then called the Great Recession, in 2008, but which we now know as...”
“The Great Head Fake!” Once more, the young man couldn’t help but interrupt, such was his excitement at the story as it unfolded
“The Great Head Fake, yes,” his grandfather patiently affirmed. “Nick’s charts showed that a few central bankers were maybe starting to get nervous and didn’t want to be the last ones looking for a chair — or in this case, their gold — when the music stopped.” He cast them up:
“Now, do you remember the difference between eligible gold and registered gold?” the old man asked his young charge, knowing the lad knew the answer but wanting to give him a chance to impress.
The boy sat bolt upright and recited, word for word, what he’d learned by rote at his grandfather’s knee: “Eligible gold is gold that meets exchange requirements but isn’t available for delivery, whilst registered gold is fully available to anybody who stands for delivery on the exchange,” he beamed.
“Bravo!” the old man said enthusiastically. “Well, on the COMEX the number of claims for every registered ounce had once again crept up to almost 60, whilst the mystery around why gold kept pouring out of one ETF as silver poured into another continued to baffle people.
“Anyway, right before the Swiss referendum, the Dutch, of all people, dropped another bombshell when they announced that they had, without making a fuss or telling ANYBODY, brought home 122.5 tonnes of gold from New York to Amsterdam.”
DNB Adjusts Gold Reserves Allocation Policy
Press release, date November 21, 2014.
De Nederlandsche Bank has adjusted its allocation policy for its gold reserves. To achieve a more balanced distribution of gold over the various locations, DNB has shipped gold from the US to the Netherlands.
In the old situation 11% of the gold reserves were located in the Netherlands, 51% in the US, with the remainder in Canada (20%) and the UK (18%). The location distribution according to the revised policy is as follows: 31% in Amsterdam, 31% in New York, while the percentages for Ottawa and London with 20 and 18% remain unchanged.
This adjustment of DNB joins other central banks that store a larger share of their gold reserves in their own country. Next to a more balanced distribution of the gold reserves over the different locations, this can also contribute to more trust towards the public.
“So, some people refer to that as the Golden Domino, while others point to 2016 when the EU broke apart after British Prime Minister Nigel Farage withdrew the UK and it was discovered that Greece and Spain had both been cooking the books again. That’s when Italy demanded their gold be repatriated, which of course led to a whole bunch of other countries doing the same thing.”
“Which one do you think was the Golden Domino, Grandad?” the boy asked.
“Me? Well personally I think the day Deputy Fed Chairman Jon Hilsenrath went before the cameras and announced that the Fed was refusing to repatriate any more gold and would settle in cash instead was the real Golden Domino. Some people said there were literally hundreds of claims on the gold supposedly held in safe custody, but we won’t know for sure how many there actually were until 2075, when the findings of the Krugman Commission are unsealed. I’ll be long gone by then, but at least you’ll get to find out — I hope.
“Of course, it was hardly a surprise that, with the gold price rising like a rocket, the Western central banks banned people from holding gold and capped the price; but that just played into China’s hands; and when the PBoC announced that they did, in fact, own not 25,000 tonnes of gold, as Mr. Macleod had estimated, but 38,000 tonnes, and that they were going to back the yuan with it, it was game over.”
“Dinner time, you two,” called a soft voice from across the expanse of the great room.
“But Grandma, we’re just getting to the bit where Grandad swaps one of his gold bars for this house!” the boy protested.
“Well I’m sure Grandad can tell you the rest of the story once you’re in bed. Goodness knows it’s the best way I can think of to put anybody to sleep.”
The boy’s grandmother winked at him as she put three steaming plates of stew on the table.
With mock indignation, the boy carefully put the gold bar back on his grandfather’s desk and headed towards the dining room. Behind him, his grandfather looked out of the window at the Chinese flag fluttering over the large gatehouse down the hill and smiled to himself as he hauled his weary body out of his comfortable but weathered armchair.
“How did it happen?” he mused to himself as he rose. “How could it not?”
So, what else do I have for you this week? Well, in China, not only did the PBoC blink and cut interest rates — something The Economist thinks is “the right call” — but President Xi Jinping is sending tremors through the upper echelons of society with his ongoing corruption purge, and we find out that even those the Chinese call “low officials” can end up with very nicely feathered nests if they’re prepared to hold out their hands and look the other way.
In Europe, Mario Draghi’s calm facade is clearly starting to crumble as deflationary concerns pick up; and in Switzerland, whilst the government battles against the honesty the Swiss Gold Initiative would impose upon them, there are plans afoot to start doling out cash — lots and lots of cash. Meanwhile, William White, former economist at the BIS, has a few choice words for Messrs. Abe & Kuroda; Henry Kissinger has a few thoughts on how to achieve what he calls “world order” (careful there, Hank...); and Ambrose Evans-Pritchard weighs in on the possible fallout from a US-China climate deal.
Asian traders see strange goings-on in the gold markets; the always-brilliant Charles Gave delivers a perspective on silver that makes for sobering reading; and we get an exclusive update from Egon von Greyerz on the progress being made in Switzerland as the Swiss approach the November 30 referendum.
Charts? Well we got those, of course — this week, money in politics, the good old Swiss Referendum (again — sorry but it’s important!), and my pal Greg Weldon shows us just how far off the beaten track the dollar’s recent strength is causing havoc.
Koos Jansen is interviewed on a Dutch TV show talking about you-know-what; ex-Goldman luminary Jim O’Neill explains why he’s far more concerned about Japan than China; and yours truly talks to Lars Schall about... well, let’s just say it isn’t the weather and leave it at that, shall we?
Until next time...
The Swiss Gold Initiative: An Update from Egon von Greyerz
The Swiss Gold Initiative now only has a few days to go to the final day on Nov 30.
A new opinion poll came out last week showing a lead for the No vote. See attached graph.
This swing is really not surprising because the government and the Swiss National Bank is conducting the most aggressive campaign in the history of Swiss Private Initiatives (as far as I know). And they are not even supposed to campaign but are so desperate that they ignore this.
Government ministers and especially Widmer-Schlumpf are in the media daily preaching what a disaster it would be for Swiss jobs and exporters with a Yes win.
SNB President Jordan has done the same thing with daily interviews on the importance of the independence of the SNB in order to continue to manage-manipulate monetary policy and the economy.
Same with the Cantons. Since they own the majority of the SNB and also are dependent on the dividend from the Bank, they are totally against the SGI. Same with industry who are worried about jobs and CHF strengthening. (Both you and I know all the arguments against this scaremongering).
Due to past success of the policy of the SNB, the public still has great confidence in them. The Swiss don’t understand that the SNB has changed from the a very conservative strategy backed by 40% gold to a speculative hedge fund with a leverage which is too big for the country. They are short CHF 470 billion and long mainly Euros but also dollars and other currencies of the same amount. They can never get out of this of course. This position is too big to trade and this is why they are so frightened of the SGI winning.
So with this massive propaganda campaign by the establishment, the swing to the NOs is not surprising.
But the ordinary Swiss has a great affinity with gold and a small swing of 5% or a few of the undecided voting in favour can still easily turn the Swiss Gold Initiative to a win.
Despite the closing of the SGI Paypal account 24 hours after I published the link to it a few weeks ago, it is still possible to donate to the initiative via bitcoin or bank transfer. You can find out more .
Chinese president Xi Jinping’s crackdown on corruption and excess is clearly worrying the country’s wealthy, especially if the latest Wealth-X and UBS report is anything to go by.
China ranks a lowly 14th among Asian nations in terms of the growth in number this year of so-called ultra high-net-worth individuals (UHNWIs) — people with $30 million or more in net assets. It is also an unimpressive 15th for wealth growth.
“Although Chinese UHNWIs are still seizing opportunities through their large domestic market, many are choosing to relocate outside of China, or at least diversify their business interests internationally,” according to the report, which was published on Wednesday.
China’s UHNWI population, the world’s youngest on average at 53, grew 3.7% to 11,070 in 2014, while their wealth grew 3.3% to $1.565 trillion. This doesn’t sound too bad but Asia’s overall respective growth numbers of 4.8% and 5.8% tell a different story.
Wealth flowing out of China is nothing new. According to US-based Global Financial Integrity Group, $1.08 trillion was taken illegally out of China from 2002 to 2011.
Of course, there is no suggestion UHNWIs take part in such chicanery, nor the “demi-UHNWIs” who make up the next tier down, but Xi’s crackdown has stirred up a hornet’s nest.
Tens of thousands of people — including politicians and businessmen — have so far been investigated. Many have fled and the ramifications have hit business, with sales of luxury goods in particular hit.
Add this purge to slowing economic growth at home and it is not difficult to see why some Chinese UHNWIs might want to look elsewhere. After all, what and who might Xi turn his attention to next?
According to a report by Barclays in September, almost half of China’s rich want to emigrate within five years. The desire for a better economic situation was cited as a main reason by 73% of respondents.
The theme of leaving home base is one that has hit Asia generally this year, according to the report.
Asia’s UHNWI population growth for 2014 is 4.8% compared with 6.2% in the US, 6.5% in Europe, 12.7% in the Middle East, 5.4% for Australia/New Zealand and 8.3% in Africa.
“There’s a trend of diversifying outside of home markets to developed markets such as the US,” Amy Lo, UBS country head for Hong Kong, said at the Wealth-X and UBS report’s launch.
No such problems for Hong Kong though, despite the debate sparked by pro-democracy protesters on the importance of the city to China, and vice versa.
According to the report, Hong Kong saw about four-times the growth of mainland China in terms of wealth generation in 2014 and the city’s figure was four times more than it posted last year.
The combined net worth of Hong Kong’s UHNWIs rose 12.3% to $595 billion this year, while the average net worth rose 7% to $178 million — almost $40 million more than the global average. The number of HNWIs rose 4.9%.
“Hong Kong is a very important hub. It is the gateway to China and investors are using the city to increase their exposure to the mainland market,” Lo said.
Hong Kong is the third densest location for UHNWIs globally, behind Luxembourg and Switzerland, according to Mykolas Rambus, chief executive of Wealth-X (pictured below with Lo).
As such, Lo said UBS had hired close to 100 frontline bankers in Hong Kong this year and will continue to invest in the city.
Interestingly, the gender gap appears less of a problem in Greater China, with the proportion of female UHNWIs in Hong Kong at 26%, double the global average of 13%. Meanwhile, China’s female UHNWI population is larger than South Korea’s entire UHNWI population.
“Patriarchs and matriarchs providing funds for children, including daughters. That’s a part of it but we also see the self-made numbers growing and we simply see more women building and growing businesses,” Rambus said.
And overall the trend remains upwards. The report estimates that in 2019 there will be 24% more UHNWIs globally and 29% more UHNWI wealth than now.
Indeed, Asia is expected to surpass Europe by 2027, the report estimates.
“We are at the beginning of a 150-year wealth creation cycle, and that is centred in Asia,” said Rambus.
That’s what I keep telling my bank manager.
Since mid-July the price of silver has slumped by -25%. These days silver is mostly an industrial metal. But down the decades it has retained some of its monetary characteristics. What’s more, for more than a century silver has traded freely in the market, unlike gold which only started to float in the 1970s. So the question I am trying to answer is very simple: Is there a relationship between variations in the price of silver and variations in the US inflation rate? In simple terms: does a big move in the price of silver foreshadow big moves in either the US consumer price index or producer price index? Even more simply: within the price of silver, are there any embedded ‘inflation expectations’?
To answer these questions, I looked at the 12 month rate of change of the price of an ounce of silver, smoothed over six months. Whenever the decline in this measure was greater than -20% YoY, the graph in the web version is shaded pink. In the last 100 years there have been nine such periods:
1) 1920: The US went into a nasty post-war depression between 1920 and 1922, with both the PPI and the CPI dropping into negative territory.
2) 1930: This was the start of the great depression. Both the PPI and the CPI fell year-on-year, and remained low.
3) 1937: The US economy, which had recovered nicely since 1934, relapsed into a deep double dip depression which only ended with the Second World War. Both PPI and CPI fell once again.
4) 1970: At no point between 1937 and 1970 did we see silver fall by more than 20%. After 1970, following heavy government spending on the ‘Great Society’ program and the Vietnam War, inflation started to rear its ugly head in the US. The government refused to tackle it and instead floated the US dollar. This led to the inflationary 1970s.
5) 1981: Paul Volcker at the Federal Reserve took the decision to stamp out inflation. CPI inflation fell by half from 12% to 6%, while the PPI turned negative year-on-year.
6) 1984: Silver fell again, but what broke downward initially was not the general price index, but one very important price, the price of oil, which in 1985 went from US$30 a barrel to US$10. The CPI halved again and the PPI turned negative.
7) 1991-1992: German reunification led to extraordinarily high real rates all over the world. The CPI declined, the PPI went negative.
8) Then came 2009... and both the CPI and PPI turned negative.
9) Finally we have 2014. Today both the CPI and PPI are still positive.
A few observations:
•Following every previous significant decline in the price of silver, the PPI fell steeply and on six occasions it turned negative for a time. Similarly, in every case the CPI at least saw its growth rate decelerate, and on four out the eight occasions, it turned negative (1920, 1930, 1937, and 2009).
•During or after every one of the previous eight declines, US long rates (10 year) declined.
•On every one of the previous eight occasions, the spreads between BAA-rated corporate bond yields and 10-year US government bond yields increased, sometimes markedly.
•As far as equities are concerned, following seven out of the previous eight slumps in the price of silver the US stock market went down. The only exception was 1985, when the market rallied in response to the fall in the oil price.
So, to cut a long story short, it seems logical to expect the US PPI to turn negative year on year, long rates to fall (even though they are down a lot already), and perhaps corporate spreads to widen (they have already started to widen for the most risky corporate bonds). As for the stock market, the hope is that oil prices will continue to fall fast enough to deliver an early effective tax cut, in which case we shall see a repeat of the 1985 scenario.
Switzerland could soon be the world’s first national case study in basic income. Instead of providing a traditional social net—unemployment payments, food stamps, or housing credits—the government would pay every citizen a fixed stipend.
The idea of a living wage has been brewing in the country for over a year and last month, supporters of the movement dumped a truckload of eight million coins outside the Parliament building in Bern. The publicity stunt, which included a five-cent coin for every citizen, came attached with 125,000 signatures. Only 100,000 are necessary for any constitutional amendment to be put to a national vote, since Switzerland is a direct democracy.
The proposed plan would guarantee a monthly income of CHF 2,500, or about $2,600 as of November 2014. That means that every family (consisting of two adults) can expect an unconditional yearly income of $62,400 without having to work, with no strings attached. While Switzerland’s cost of living is significantly higher than the US—a Big Mac there costs $6.72—it’s certainly not chump change. It’s reasonable income that could provide, at the minimum, a comfortable bare bones existence.
The benefits are obvious. Such policy would, in one fell swoop, wipe out poverty. By replacing existing government programs, it would reduce government bureaucracy. Lower skilled workers would also have more bargaining power against employers, eliminating the need for a minimum wage. Creative types would then have a platform to focus on the arts, without worrying about the bare necessities. And those fallen on hard times have a constant safety net to find their feet again.
Detractors of the divisive plan also have a point. The effects on potential productivity are nebulous at best. Will people still choose to work if they don’t have to? What if they spend their government checks on sneakers and drugs instead of food and education? Scrappy abusers of the system could take their spoils to spend in foreign countries where their money has more purchasing power, thus providing little to no benefit to Switzerland’s own economy. There’s also worries about the program’s cost and long term sustainability. It helps that Switzerland happens to be one of the richest countries in the world by per capita income.
The problem, as with many issues economic, is that there is no historical precedent for such a plan, especially at this scale, although there have been isolated incidents. In the 1970s, the Canadian town of Dauphin provided 1,000 families in need with a guaranteed income for a short period of time. Not only did the social experiment end poverty, high school completion went up and hospitalizations went down.
“If you have a social program like this, community values themselves start to change,” Evelyn Forget, a health economist at the University of Manitoba, told The New York Times.
Similar plans have been proposed in the past. In 1968, American economist Milton Friedman discussed the idea of a negative income tax, where those earning below a certain predetermined threshold would receive supplementary income instead of paying taxes. Friedman suggested his plan could eliminate the 72 percent of the welfare budget spent on administration. But nothing ever came to fruition.
It’s what makes the potential experiment in Switzerland so compelling. Developed countries around the world are struggling to address the issues of depressed wages for low-skilled workers under the dual weight of automation and globalization.
For German-born artist Enno Schmidt, one of the founders of the proposal, a living wage represents continued cultural progress along the lines of women’s suffrage or the civil rights movement by providing dignity and security to the poor, while unleashing creativity and entrepreneurial spirit.
“I tell people not to think about it for others, but think about it for themselves,” Schmidt told the Times. “What would you do if you had that income?
Brazil’s Petrobras is the most indebted company in the world, a perfect barometer of the crisis enveloping the global oil and fossil nexus on multiple fronts at once.
PwC has refused to sign off on the books of this state-controlled behemoth, now under sweeping police probes for alleged graft, and rapidly crashing from hero to zero in the Brazilian press. The state oil company says funding from the capital markets has dried up, at least until auditors send a “comfort letter”.
The stock price has dropped 87pc from the peak. Hopes of becoming the world’s first trillion dollar company have deflated brutally. What it still has is the debt.
Moody’s has cut its credit rating to Baa1. This is still above junk but not by much. Debt has jumped by $25bn in less than a year to $170bn, reaching 5.3 times earnings (EBITDA). Roughly $52bn of this has been raised on the global bond markets over the last five years from the likes of Fidelity, Pimco, and BlackRock.
Part of the debt is a gamble on ultra-deepwater projects so far out into the Atlantic that helicopters supplying the rigs must be refuelled in flight. The wells drill seven thousand feet through layers of salt, blind to seismic imaging.
The Carbon Tracker Initiative says the break-even price for these fields is likely to be $120 a barrel. It is much the same story — for different reasons — in the Arctic ‘High North’, off-shore West Africa, and the Alberta tar sands. The major oil companies are committing $1.1 trillion to projects that require prices of at least $95 to make a profit.
The International Energy Agency (IEA) says fossil fuel companies have spent $7.6 trillion on exploration and production since 2005, yet output from conventional oil fields has nevertheless fallen. No big project has come on stream over the last three years with a break-even cost below $80 a barrel.
“The oil majors could not even generate free cash flow when oil prices were averaging $100 ,” said Mark Lewis from Kepler Cheuvreux. They have picked the low-hanging fruit. New fields are ever less hospitable. Upstream costs have tripled since 2000.
“They have been able to disguise this by drawing down legacy barrels, but they won’t be able to get away with this over the next five years. We think the break-even price for the whole industry is now over $100,” he said.
A study by the US Energy Department found that the world’s leading oil and gas companies were sinking into a debt-trap even before the latest crash in oil prices. They increased net debt by $106bn in the year to March — and sold off a net $73bn of assets — to cover surging production costs.
The annual shortfall between cash earnings and spending has widened from $18bn to $110bn over the last three years. Yet these companies are still paying normal dividends, raiding the family silver to save face.
This edifice of leverage — all too like the pre-Lehman subprime bubble — will surely be tested after the 30pc plunge in Brent crude prices to $78 since June.
Prices could of course spike back up at any moment. Data from the US Commodity Futures Trading Commission show that speculators have taken out big bets on crude oil futures. NYMEX net long contracts have reached 276,000. This is a wager that the OPEC cartel will soon cut output.
Yet there is little sign so far that the Saudis are ready to do so on a big enough scale to make a difference....
China has cut interest rates for the first time in more than two years, a powerful signal that the government wants to step up support for the slowing economy. As fate should have it, a rate cut was the very thing we had called for in our leader on Chinese monetary policy this week. But we cannot claim to be clairvoyant. We had not expected the central bank to move so quickly. Nor, for that matter, had most analysts or investors — hence the big gains for stocks, commodities and currencies sensitive to Chinese demand in the hours following the announcement.
It is tempting to look at the rate cut through the simple lens of GDP: lower rates mean China is switching policy to a pro-growth footing, or so the conclusion would go. While there is undoubtedly some truth to that, two aspects of the decision show it is more complicated, and indeed more interesting.
First, the People’s Bank of China was at pains to stress that it was not, in fact, about growth. The economy is growing “within a reasonable range”, it said. Instead, it emphasised the need to reduce corporate financing costs to help struggling companies. A knee-jerk criticism of the rate cute is that debt in China is already too high and this will only encourage yet more borrowing. But over the past year, rates have been too lofty for companies to be able to deleverage. Because producer prices are in deflationary territory, the real financing cost for many has been above 8%. With lower rates and a little more inflation, companies will be able refinance more cheaply and, in time, lessen their debt burdens.
This is certainly not the first attempt by the Chinese government to reduce financing costs. Since September it has provided nearly 800 billion yuan ($131 billion) in medium-term loans to banks on the condition that they lower borrowing rates for small businesses. Just this week the State Council, or cabinet, promised to loosen a rule that limits banks’ loans as a proportion of their deposit base, freeing up more cash for them to lend. The central bank has also been quick to make short-term cash injections whenever the money market has been gummed up. But as we wrote in this week’s article, these efforts have come up short. They have been far too narrowly focused and the PBOC’s lack of transparency has caused confusion about its real aims. Friday’s announcement is a welcome change in tack. It would now be surprising if China did not follow up with more rate cuts and more cash injections.
Second, this is an important step on the path towards interest rate liberalisation in China. Previously, banks were allowed to set deposit rates 10% above the benchmark level; that has now been raised to 20%. Competition among banks to attract savers should ensure that banks offer the highest-possible rates. One-year deposit rates were effectively 3.3% before the rate cut (10% above the 3% benchmark). They are likely to remain 3.3% (20% above the new 2.75% benchmark). At the same time, the benchmark one-year lending rate has been cut to 5.6%. Theoretically, lending rates have already been liberalised, with no floor on them; in reality, bankers say they still price loans off the benchmark....
*** economist / link
In a world of unprecedented expansionary actions by central banks, the Bank of Japan is set to outdo them all. Its plans to expand significantly the scale of its asset purchases imply that the size of its balance sheet relative to gross domestic product will far outstrip that of others.
Some suggest such courage is to be emulated, not least by the European Central Bank. Others — rightly — suggest the plan is not so much courageous as foolhardy. It is not needed and it will not succeed in stimulating growth. Moreover, it carries risks that could seriously affect the global economy.
First, the reason it is not needed. Japan’s recent slow growth has been largely driven by demographic trends. Since 2000 growth in GDP per person of working age has been significantly above that in the US. As for anxieties over persistent deflation, the level of Japanese consumer prices has fallen less than 4 per cent in the past 15 years. There is no evidence of an accelerating deflationary trend, nor of consumers delaying spending in anticipation of lower prices. Indeed, the household saving rate has fallen since the 1990s from a traditionally high level to zero.
Second, why it will not work. The underlying intention is to induce businesses to invest and export. Neither seems likely to happen. Japan’s smaller companies export little and face higher costs of imported goods and services as a result of a weaker yen. Its bigger ones have long had the advantage of favourable financing conditions and large cash balances. They have not responded with more domestic investment. Why should they do so now in the absence of the significant structural reforms promised by Shinzo Abe, the prime minister?
The weaker yen has increased corporate profits but exports have responded sluggishly. All this suggests policies aimed at raising consumer spending would have been more effective.
The BoJ’s policy of announcing a higher inflation target assumes expectations will ratchet up accordingly. Even if it works, the policy could easily backfire. Indeed, recent weakness in the economy might partially reflect this. Consumers have long faced falling nominal wages. If they expect this to continue, while believing that inflation will rise, it implies lower real wages and likely lower consumption. This likelihood will be increased, given terms of trade losses because of a weaker yen and fears of higher sales taxes.
As for capital markets, expectations of faster inflation should normally result in higher nominal interest rates on government debt. However, holders of government bonds might believe this effect will be offset by central bank purchases of government bonds. Unfortunately, this belief also points to the associated risks. Rates on government bonds have been very low for a long time but things might be changing. Low bond rates and a relatively strong yen — which, taken together, equate to a low-risk premium — were initially supported by high household saving, a strong bias to investing in yen-denominated assets and a large current account surplus.
All three of these supports have disappeared. With the yen markedly weaker, any rise in the risk premium for yen-denominated assets could push bond rates higher. This could trigger a sequence of events leading to higher inflation rates.
Japan’s fiscal deficit is about 8 per cent of GDP and its stock of gross debt about 230 per cent of GDP. Were the average rate on government bonds to increase to 2 per cent, and should potential nominal growth fail to rise, the deficit would rise above 10 per cent of GDP. The pace of government bond purchases announced by the BoJ, almost twice the size of the general government deficit, would then have to rise further. Fears of still more monetisation and sharp price rises would put more upward pressure on bond rates, and downward pressure on the yen, in a self-fulfilling spiral that could quickly take inflation to very high levels. Such processes have been seen often in the past 100 years, not least in Latin America....
A prolonged period of low growth and weak inflation in the eurozone must now be reversed, the chief of the European Central Bank (ECB) has warned.
Eurozone inflation rose to 0.4pc in the year to October, up from 0.3pc in the preceding month. At that level, price growth remained stuck well below the ECB’s medium-term target of close to 2pc.
“It is essential to bring back inflation to target and without delay”, Mario Draghi, president of the ECB, said in a speech in Frankfurt on Friday.
The central bank official made reference to the quantitative easing schemes launched by the Federal Reserve and the Bank of Japan, noting that they had reduced the strength of the country’s respective currencies.
Traders sold the euro on Mr Draghi’s dovish comments, as the currency fell by more than three-quarters of a percentage point to less than 1.25 against the dollar.
Crisis in the eurozone is hitting small companies’ confidence and cash flow, experts have warned, with European suppliers demanding cash up front for orders while exporters are being caught by customers delaying payment.
Mr Draghi stressed that while there had been improvements in the financial sphere, these had “not transferred fully into the economic sphere”, where the situation “remains difficult”.
The currency bloc has an eye-wateringly high unemployment rate of 11.5pc, while economic growth has ground to a near-halt .
The eurozone managed to dodge a third technical recession since the financial crisis, but it now appears that the euro area economy is unlikely to pick up speed by the end of the year.
The ECB has made a number of interest rate cuts across the year in an attempt to boost the economy, consequently bringing one of its three main rates — the deposit facility rate — into negative territory.
The rate is currently maintained at -0.2pc, meaning that banks that park their money with the ECB overnight have to pay the central bank for the privilege.
Mr Draghi has also announced a number of additional stimulus measures, some of which are yet to be fully deployed — including a scheme to purchase asset-backed securities.
“If on its current trajectory our policy is not effective enough to achieve this [increase in inflation], or further risks to the inflation outlook materialise, we would step up the pressure and broaden even more the channels through which we intervene”, the central bank chief said.
Gizem Kara, an economist at French bank BNP Paribas, said that the speech was “clearly a step up in rhetoric from Mr Draghi”, signalling that he was willing to take further steps to boost the economy.
The central bank’s credibility is likely to be challenged further by its own updates to forecasts for growth and inflation, Ms Kara said, which “should pave the way for additional easing, possibly as early as the December policy meeting”.
Financial markets have consistently predicted below target inflation in the eurozone since early September, suggesting that price growth would be lower than 2pc in the period five to 10 years away.
Mr Draghi suggested that “longer-term indicators are on the whole within a range that we consider consistent with price stability”, while over shorter horizons these forecasts have declined to levels he “would deem excessively low”.
Some of the biggest price moves in gold since late October have, unusually, occurred in Asian hours and traders more accustomed to following the lead of their Western counterparts suspect a big increase in algorithmic trading may be to blame.
Sensitivity to the dollar-yen exchange rate may also help explain the moves, although some traders speculated that the timing looked suspiciously like attempts to catch Chinese traders off-guard during their lunch break.
Liquidity in Asia tends to be thin until Europe wakes up but recent weeks have been different: COMEX gold futures, the busiest gold contract in the world, have suffered sharp sell-offs in Asia, sometimes sparked by the news flow or currency moves but often for no identifiable reason.
“It is unusual for Asia to be seeing these busy trading sessions,” said David Govett, head of precious metals at broker Marex Spectron in London.
“I have spoken to a lot of people about it and the general consensus seems to be that there is a big increase in algorithmic and high-frequency trading in this time zone nowadays as it can be quite easy to push about,” he said.
The trend began on Oct. 31, when U.S. gold futures fell through a major technical level of $1,180 an ounce at around 3 p.m. Singapore time.
They fell $11 in a minute and nearly 9,000 lots were traded in five minutes, compared with just 535 lots in the five minutes preceding the drop.
Some of the dips in price have tracked dollar-yen movements, including that one on Oct. 31, when the Bank of Japan announced a surprise increase in monetary stimulus and the yen tumbled.
The breach of $1,180 — the lowest level hit by gold during last year’s 28 percent slide — sparked a huge sell-off in the precious metal over the next two weeks.
In the days following the first dip, gold tumbled 1 percent or hit new lows almost every other day around the same time, between 12:45 p.m. and 1:45 p.m. Singapore time.
The slide took gold all the way down to $1,130.40 an ounce, its lowest since March 2010, reached in Asian hours on Nov. 7, when nearly 4,000 lots changed hands in just one minute.
It has since recovered and is back trading near $1,180.
The price lurches that took the market lower often happened when traders in top gold consumer China, which usually provides support for the metal, were out for lunch.
“Someone is utilising these thin trading volumes to get a turbo steroid move,” said a precious metals trader in Hong Kong.
Traders in Tokyo have also noticed that the falls tend to happen a few minutes before their markets are set to close.
Gold has seen a flurry of trading activity since the first break below $1,180 and its volatility is currently at its highest in 2014.
A growing awareness of the new Asian trend may have served to intensify it.
“At one point in the last two weeks, there was huge selling at around the same time every other day,” said a trader in Tokyo. “Some people noticed that and went short just before that particular hour.”
This trader and others speculated that the selling could be coming from hedge funds.
The simplest explanation for the volatility in Asia remains the rise in the dollar to a seven-year high against the yen. A stronger greenback makes dollar-denominated bullion more expensive for holders of other currencies.
“There is definitely more Japanese participation. Gold could be sold off along with the yen so that Japanese investors could put money into the Nikkei,” said Tan Tien Leong, chief investment officer of Singapore-based hedge fund AN Commodity.
“We are taking much smaller positions in gold and keeping it very simple because there is lots of uncertainty out there.”
The Communist Party’s anti-graft watchdog recently found 37 kilograms of gold, documents showing ownership of 68 properties and 120 million yuan in cash at the home of an official in the northern province of Hebei who is facing a graft inquiry.
Ma Chaoqun, a deputy researcher in the Qinhuangdao City urban management bureau and general manager of the water supply company in the city’s Beidaihe district, is facing charges related to taking bribes, embezzlement and misappropriating public funds, the official Xinhua News Agency reported.
The Chinese public has become used to seeing high officials fall from grace amid a party crackdown on graft that started in late 2012. The public witnessed a soap opera-like saga engulf Bo Xilai, the former boss of the southwestern municipality of Chongqing who aspired to hold even greater power.
It has also seen the party announce it is investigating Zhou Yongkang, a former member of the party’s highest decision-making body, the Politburo Standing Committee, and been amazed by reports that an official in the National Energy Administration stashed 100 million yuan — a figure later raised to 200 million yuan — at a home in Beijing.
But Ma’s case is different. He is among a number of low-ranking Hebei officials accused of corruption after a recent central government inspection uncovered irregularities. He is receiving a great amount of public attention not just because of the huge amounts of assets involved, but also because he is such a minor official. Graft busters have perhaps summed the situation up best, describing the episodes involving people like Ma as “little official, giant corruption.”
People in Qinhuangdao — a major coal-importing port city that is also home to the Shanhaiguan tourist area where the Great Wall meets the sea — say the investigation into Ma was triggered by a report from a hotel that said he was using his power over water supplies to ask for a bribe. Ma wanted millions of yuan from a new luxury hotel in exchange for a secure water supply, Xinhua said. A representative of the hotel recorded Ma making the request and sent a copy of the recording to the authorities.
The hotel is the Huamao Sheraton in Beidaihe, local source says. The hotel, which is owned by Beijing Guohua Real Estate Co., opened in 2013.
Employees of the Huamao Sheraton Hotel denied any link to Ma when contacted by Caixin in mid-November.
Ma has for years used his power as head of Beidaihe Water Supply Co. to enrich himself, a local source said. The employee of a local hotel said that Ma once threatened to cut off the water supply if he was not paid.
The Beidaihe Water Supply Co. was established in 2011 under the Qinhuangdao Urban Management Bureau. It is responsible for supplying tourist resorts in the Beidaihe and Nandaihe districts, as well as in new urban areas. The Beidaihe District is home to a summer resort for central government leaders.
A source in Xigucheng Village on the outskirts of Beidaihe said Ma owns a hostel there on land he got almost free from village heads. An employee of the village’s party committee confirmed that Ma owns the building and said the land was rented to him for a “relatively low price.”
Ma’s family has denied he is corrupt. His mother, Zhang Guiying, said at a press conference on November 13 that Ma was being framed by his supervisor, Ma Zhuang, the chief of the city’s urban management bureau. She said Ma Zhuang joined the bureau in May 2013 and has not gotten along with Ma Chaoqun. The two had even had physical confrontations, she said.
On November 14, Ma Chaoqun’s sister-in-law, Meng Qiuhong, publicly accused Ma Zhuang of corruption and said he framed their relative to prevent his own graft from being exposed.
Zhang and Meng also said that Ma Chaoqun did not own any of the assets.
“All of this money and property was seized from the home of Ma’s parents and accumulated in a legitimate way by Ma Chaoqun’s late father, Ma Bingzhong,” Zhang said. She said Ma Bingzhong died more than a year ago.
Caixin contacted prosecutors in Qinhuangdao and in the Beidaihe district, but they refused to comment on the case, saying the investigation is still underway.
Zhang and Meng said that prosecutors raided apartments owned by Ma’s parents in February. Ma’s younger brother and sister were also taken away by investigators and had many of their assets seized. The authorities have not told them where Ma is....
SPIEGEL: Dr. Kissinger, when we look at the world today, it seems to be messier than ever — with wars, catastrophes and chaos everywhere. Is the world really in greater disorder than ever before?
Kissinger: It seems that it is. There is chaos threatening us, through the spread of weapons of mass destruction and cross-border terrorism. There is now a phenomenon of ungoverned territories, and we have seen in Libya, for example, that an ungoverned territory can have an enormous impact on disorder in the world. The state as a unit is under attack, not in every part of the world, but in many parts of it. But at the same time, and this seems to be a paradox, this is the first time one can talk about a world order at all.
SPIEGEL: What do you mean by that?
Kissinger: For the greatest part of history until really the very recent time, world order was regional order. This is the first time that different parts of the world can interact with every part of the world. This makes a new order for the globalized world necessary. But there are no universally accepted rules. There is the Chinese view, the Islamic view, the Western view and, to some extent, the Russian view. And they really are not always compatible.
SPIEGEL: In your new book, you frequently point to the Westphalian Peace Treaty of 1648 as a reference system for world order, as a result of the Thirty Years’ War. Why should a treaty dating back more than 350 years still be relevant today?
Kissinger: The Westphalian Peace was made after almost a quarter of the Central European population perished because of wars, disease and hunger. The treaty was based on the necessity to come to an arrangement with each other, not on some sort of superior morality. Independent nations decided not to interfere in the affairs of other states. They created a balance of power which we are missing today.
SPIEGEL: Do we need another Thirty Years’ War to create a new world order?
Kissinger: Well, that’s a very good question. Do we achieve a world order through chaos or through insight? One would think that the proliferation of nuclear weapons, the dangers of climate change and terrorism should create enough of a common agenda. So I would hope that we can be wise enough not to have a Thirty Years’ War.
SPIEGEL: So let’s talk about a concrete example: How should the West react to the Russian annexation of Crimea? Do you fear this might mean that borders in the future are no longer incontrovertible?
Kissinger: Crimea is a symptom, not a cause. Furthermore, Crimea is a special case. Ukraine was part of Russia for a long time. You can’t accept the principle that any country can just change the borders and take a province of another country. But if the West is honest with itself, it has to admit that there were mistakes on its side. The annexation of Crimea was not a move toward global conquest. It was not Hitler moving into Czechoslovakia.
SPIEGEL: What was it then?
Kissinger: One has to ask one’s self this question: Putin spent tens of billions of dollars on the Winter Olympics in Sochi. The theme of the Olympics was that Russia is a progressive state tied to the West through its culture and, therefore, it presumably wants to be part of it. So it doesn’t make any sense that a week after the close of the Olympics, Putin would take Crimea and start a war over Ukraine. So one has to ask one’s self why did it happen?
SPIEGEL: What you’re saying is that the West has at least a kind of responsibility for the escalation?
Kissinger: Yes, I am saying that. Europe and America did not understand the impact of these events, starting with the negotiations about Ukraine’s economic relations with the European Union and culminating in the demonstrations in Kiev. All these, and their impact, should have been the subject of a dialogue with Russia. This does not mean the Russian response was appropriate.
SPIEGEL: It seems you have a lot of understanding for Putin. But isn’t he doing exactly what you are warning of — creating chaos in eastern Ukraine and threatening sovereignty?
Kissinger: Certainly. But Ukraine has always had a special significance for Russia. It was a mistake not to realize that.
SPIEGEL: Relations between the West and Russia are tenser now than they have been in decades. Should we be concerned about the prospects of a new Cold War?
Kissinger: There clearly is this danger, and we must not ignore it. I think a resumption of the Cold War would be a historic tragedy. If a conflict is avoidable, on a basis reflecting morality and security, one should try to avoid it....
Money suffuses our [US] political system. Candidates must spend huge sums to get elected, and once they do, well-funded interests spend huge sums to influence how they vote. Campaign finance laws are being struck down, and money is rushing into outside groups that don’t have to disclose their donors. Some studies have found companies can get as much as a 22,000 percent return on their lobbying dollars, while a recent poll from the Global Strategy Group found that more than 90 percent of Americans wants to reduce the role of money in politics. Here’s what’s going on — in charts, of course.
The [Swiss gold] referendum, if passed, will mean that (1) The SNB must hold 20% of all assets as gold, (2) Switzerland will repatriate the 30% of their gold held abroad by England and Canada, and (3) Switzerland may no longer sell any gold they accumulate.
In the most recent polling, 38% of respondents supported the initiative, 47% were against, and 15% were undecided. The poll has a 3% margin of error as well. While support is down from the previous poll, anything is still possible on November 30th.
Switzerland currently holds 1,040 tonnes, or 7.7% of its reserves in gold. The country actually holds the highest amount of gold per capita (4.09 oz per citizen). However, it used to be an even bigger holder of the yellow metal. In 2000, the SNB held 2,500 tonnes of gold and it has also been the biggest national seller since.
The implications of the vote are huge. With a “yes”, the SNB would have to purchase at least 1,500 tonnes of gold to meet the 20% threshold for 2019. That’s about half the world’s annual production. It would also put Switzerland back in the top three for most gold holdings worldwide.
Greg Weldon is not only a great guy, but he’s whip-smart, and his technical analysis is amongst the best you’ll find anywhere. Where else can you dig this deep into the knock-on effects and the stresses being created by a wildly strengthening US dollar? Check out Greg’s service at — you’ll be glad you did.
Dutch TV this week took a look at the SGI. On the plus side, they had the good sense to interview Superhero Koos Jansen (and though they revealed his true identity, the location of the Kooscave is still a secret). On the minus side, they dug up an economist who explains why the Swiss have always “been perceived as a weird country.” Throw in a little cuckoo-clock ompah music and some ’70s-throwback-lookin’ dudes and you have some classic European TV...
Jim O’Neill, formerly of Goldman Sachs...
Lars Schall is one of the rising stars of the precious metals space, and I was delighted to chat to him this past week about the Swiss Gold Initiative.
Don’t call me Nick...
On the right, sporting the moustache, is Nikola Tesla. On the left, a group of Silicon Valley VCs.
Never the twain shall meet — but if they did...
(Thanks Kevin & Mark)
Grant Williams is the portfolio and strategy advisor to Vulpes Investment Management in Singapore — a hedge fund running over $280 million of largely partners’ capital across multiple strategies.
The high level of capital committed by the Vulpes partners ensures the strongest possible alignment between the firm and its investors.
Grant has 28 years of experience in finance on the Asian, Australian, European, and US markets and has held senior positions at several international investment houses.
Grant has been writing Things That Make You Go Hmmm... since 2009.
As a result of my role at Vulpes Investment Management, it falls upon me to disclose that, from time to time, the views I express and/or the commentary I write in the pages of Things That Make You Go Hmmm... may reflect the positioning of one or all of the Vulpes funds—though I will not be making any specific recommendations in this publication.
A walk around the fringes of finance
THINGS THAT MAKE YOU GO
By Grant Williams
25 November 2014
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