Nonsensical gold commentary

A bit of nonsense here – ‘Of shoes and ships and sealing wax, of cabbages and kings’ – a line from a perhaps allegorical poem – The Walrus and the Carpenter – by Lewis Carroll from Alice Through the Looking Glass for which a number of interpretations have been put forward by erstwhile scholars trying to seek a meaning. More likely, though, it was probably just a bit of nonsense designed to amuse the child for whom the book was written.

But it also reminds me of some of the nonsense spouted by economists and the mainstream media attempting to put their sometimes irrational interpretations on economic events – and particularly these days on the likely path of the gold price.

Perhaps the media can be forgiven – the writers probably have a brief to write commentary on something for which they only have a superficial understanding. They thus pick up on any claptrap spouted by self-important economists or analysts. These frequently gloss over any inconvenient factors, which may not fit their theories, before coming up with some didactic statement of so-called economic fact, which appears to support their own agenda…whatever that may be. This can be equally true of those who look for precious metals price movements up or down.

Where we would differ from much of the economic analysis by the mainstream media is by trying to piece together some of the facts out there, which are often ignored by those who may be discounting them for the sake of a good story, or headline. These may both point to rises or falls in the gold price as being likely, but mostly the former – a position which the media and the economists seem to be in total denial regarding.

For example, we have pointed out in these columns quite frequently in the recent past that Hong Kong gold exports to China can no longer be considered a proxy for total Chinese imports. We assume the Hong Kong figures are themselves accurate, but China has moved the goalposts and we do now know that a significant proportion of Chinese gold imports are entering the country directly, bypassing Hong Kong altogether, but China itself does not publish these figures so we don’t know for sure exactly how much is going in this way.

But other countries, like Switzerland and the USA do publish what we assume to be accurate export statistics which do give a breakdown of what is going to Hong Kong and what is going directly to China – and the proportion going directly to the mainland from these two nations at least is nowadays between 30 and 50%. And Switzerland in particular is known to be by far the biggest exporter of gold bullion to both China and Hong Kong. Thus we suggest that perhaps 40% of China’s gold imports are now coming in directly, rather than via Hong Kong which makes any reliance on rises and falls in Hong Kong gold exports to the mainland as fairly meaningless in assessing total Chinese imports. Yet still much of the heavily read major media, and some lazy commentators, publish assessments suggesting that the Hong Kong figures are just as relevant today as they were a couple of years ago before China eased its import restrictions. (See: China’s SGE gold withdrawals on track for record).

It also seems to be a given in media reports and analyses by bank economists that any rise in US interest rates will immediately mean a sharp decline in the price of gold on the markets. Indeed so strongly held is this ‘truism’ that any hint that the US Fed may be bringing forward the first interest rate rise for a number of years immediately knocks the gold price backwards as the theory is that because gold is a non-interest earning asset, people may switch to assets which give a greater rate of return. Well, true in concept but no-one seems to take account that any rise in interest rates will almost certainly be extremely small and still leave them in real negative territory.

But even more important is that in any case US demand for gold bullion nowadays is tiny in relation to demand elsewhere in the world where interest rates may still be falling and which should in reality be the true price setters. But this significant fact seems to be totally ignored and, unfortunately for the pro-gold lobby the prime gold commodity market is largely being driven by what we see as the plethora of what could be regarded as basically misleading information emanating from the media – reporting the views of the bank economists who, in any case may have their own hidden agenda. However, in recent months, any such consequent gold price dips have been remarkably short-lived as investors in parts of the world, which understand this, bring the price back to its previous levels, but aren’t yet prepared to chase prices upwards. (See: Gold: The US sets the price but Asia does the buying).

We have also touched on seasonality of demand. Both India and China, by far the largest gold consumers, see a sharp fall-off in demand through the late spring and summer months so to headline falls in imports between April, May or June and earlier months when demand is particularly strong is also very misleading.

On the other side of things, the gold bulls are often fixated on what they see as the basic law of pricing meaning that lower gold prices will lead to a sharp decline in newly mined gold output. This does not follow in the short to medium term and in any case gold supply moving into deficit may actually have little impact on the price. Above ground stocks in ETFs and, dare we say, potentially available for leasing from central banks, can ensure there remains ample supply (at a price) should production dip significantly. The initial impact, though, of lower gold prices is that production actually rises as the gold miners seek to keep their mines open by mining to higher grades, but at an unchanged mill throughput level, notwithstanding the adverse effects this may have on a mine’s life and long term profitability. The miners will be hoping that longer term prices will rise again enabling them to get back and mine the lower grades again – so here you have the great gold mine production anomaly. Lower gold prices may actually lead to higher gold output and vice versa.

Trying to predict the gold price is thus a somewhat invidious task. Things, which would seem to militate against rises, may have the opposite effect in reality. The pro-gold lobby sees what appears to them to be a concerted media campaign against possible price rises. They could well be right as there are politico economic factors at play here which might see gold price control as being in the best interests of maintaining currency, and economic, confidence. The big financial players – hedge funds and the bullion banks – may also have a hidden agenda in moving prices one way or another in their own best interests, and in the interests of their shareholders and clients, and again the pro-gold sector sees this as always being to gold’s disadvantage, but perhaps ignores times when gold moves the other way. So could things switch around in gold’s favour? Yes, but we don’t know when.

Most of the big Western Central Banks are loath to sell their gold, although many pay lip service to gold being unimportant as a monetary asset. If so why hang on to it? Others like the Russians and (as most believe) the Chinese are busy accumulating substantial additional holdings, perhaps as protection against a foreseen collapse of the value of the US dollar in which most foreign currency reserves are held.

So don’t take everything you read in the media on gold as necessarily being accurate. Or in providing good advice. As we mentioned earlier much is put out by reporters who really have little basic knowledge of the intricacies of the precious metals markets. The reporting is often based on views of those who feed them sometimes dubious facts, but have their own agendas and may make big profits for themselves and their clients by putting forward viewpoints which suit their own book and ensuring that these ideas are promulgated by often all too willing media outlets

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