The Battle Lines are Drawn for 2014

by Carlos Andres on January 20, 2014

On The Street

Well, Wall Street bets on the gold price for 2014 are in, and the table below shows where they stand.  It appears that as a group, the big banks are hedging their bets because they are not overly bearish or bullish.

Goldman Sachs is the most bearish with their forecast of a US$1,050 gold price by the end of the year, which would represent a decline of -12.8%.  Morgan Stanley is the most bullish with a forecast of $1,313, which would represent a rise of +9% on the year.

The average forecast from the list of 8 major banks is $1,202, which would pretty much end gold’s year where it started.  To quote distinguished gold market expert Ross Norman of Sharps Pixley, who sums it up nicely in a recent interview with Times TV, “This year will be something of a Goldilocks year – not too hot and not too cold.”

Table of Wall Street Gold Forecasts for 2014

The financial press has spun these forecasts in decisively bearish terms, which doesn’t bode well for gold ETF’s (e.g. GLD), since these investors tend to take their cue from the Wall Street analysts at the above listed banks.  We’ll have more to say about this below.

For their part, the gold price and the gold mining shares are showing signs of life. The chart below summarizes the current gains of the yellow metal and the mining shares since their interim bottom on or near December 19th.

As you can see, gold is up roughly 5.6% over the last 20 trading days, while the mining shares have strongly leveraged gold’s gains.  They are up between 14% and 27% on average.  Although this short-term performance doesn’t tell us much about how the year will end, it’s a healthy start to the New Year.

Gold & Gold Shares Performance Chart Dec 2013 to Jan 2014

By comparison, the gold sector is outpacing the major US stock indexes significantly. Despite setting all-time records recently, the Dow, S&P 500, and Nasdaq are up only 1.6% to 3.4% over the same 20 trading days.  It will be interesting to see how this battle unfolds during the remainder of the year.

The Gold Picture from China

News out of China continues to confirm the theme that they are working aggressively to develop the world’s most prominent gold market.  The country ended 2013 as the world’s largest gold importer having taken over the number one spot from India.

Net gold imports to the Mainland from Hong Kong alone will likely be over 1,100 metric tonnes.  To get a sense of the trajectory of gold demand, that’s a 97% increase over 2012 net imports of 557.5 tonnes and a 190% increase over 2011 net imports of 379.6 tonnes.

However, this understates the physical demand for gold from China significantly.  Hong Kong is typically treated as though it is not part of China by writers covering the gold market.  Therefore, the focus tends to be on gold exports from Hong Kong to the Mainland rather than net gold imports into Hong Kong.

Nevertheless, we can assure you that although Hong Kong is considered a Special Administrative Region, it is still very much a part of China.   Thus, if we step back and take a look at the big picture, as shown in the chart below, it is evident that the 2013 gold import profile for China is very much larger than 1,100 tonnes.

Total Hong Kong Gold Imports through Nov 2013

The red in the above chart represents the 1,100 tonnes that has been imported into the Mainland from Hong Kong.  However, the gold portion of the bars represents the amount of gold that was imported into Hong Kong from the rest of the world and remained in Hong Kong.

The small dark blue band represents the tiny fraction of gold imports into Hong Kong that were subsequently exported to other countries.  Thus net gold imports into Hong Kong for 2013, including the amount subsequently exported to Mainland China, will likely be in excess of 1,750 tonne once the December numbers are published.

To put this in perspective, total mined supply from the rest of the world, excluding production from China itself, is roughly 2,400 tonnes.  This means that Hong Kong effectively took delivery of physical gold equivalent to roughly 73% of the world’s 2013 gold production!  It’s important for investors to let this little nugget of truth sink in.

It is peculiar how this is rarely, if ever, discussed by the western financial press as a demand factor that just might impact the price of gold, but that’s another story.

China itself is the world’s largest gold producer by a very large margin, and when the final numbers come in for 2013 they will likely be close to 440 tonnes.  For context, Australia is in a distant second with production in the vicinity of 250 tonnes.  As far as we can tell, China does not export any of this domestic gold production.

The total gold import picture is probably even larger still.  As we discussed in our November 22nd article entitled “Just When You Thought It Couldn’t Get Any Bigger”, China is reported to be importing gold directly into Shanghai as well.

Central Bank Reserves

According to Bloomberg, the Chinese central bank (aka the People’s Bank of China) has been the recipient of a sizeable chunk of China’s gold imports over the last several years.  Chinese authorities last reported official reserves of 1,054 tonnes in April 2009.

Now a Bloomberg analyst has suggested that these reserves have grown to 2,710 tonnes.  If true, this would represent a 76% increase in official gold reserves and place China in 3rd place behind only the US (8,133t) and Germany (3,391t).  China has not confirmed this figure but we suspect the true total is much higher.

Additionally, current reports out of China suggest that consumer gold demand remains robust as the Chinese New Year approaches on January 31st.  The bottom line is that Chinese gold demand will play a significant role in how gold performs in 2014.

In a further sign that their gold market development initiatives remain on track, it was reported last week that the government has granted import licenses to two foreign banks for the first time ever.

The banks are ANZ and HSBC who have long been major foreign banks in China.  This step serves to expand domestic gold distribution and more such licenses are expected in the future.

India: The X Factor

India is the big question mark on the demand side of the gold market for 2014.  As readers are probably aware, India and China are in a category all their own when it comes to the sheer size of their gold appetites.

In the early part of 2013, India was on track to reach record gold import numbers right along with China.  By the end of May, they had imported an unprecedented 520 tonnes of gold.  Had this pace continued, they would have surpassed record levels above 1,000 tonnes in lockstep with China.

However, Indian imports fell off sharply in the latter half of the year, after the Indian government implemented draconian import duties and other restrictions on the yellow metal.  As a result, between June and November, gold imports fell to roughly 140 tonnes for the period, and December figures will likely only add another 20 tonnes to that figure.

India 2013 Monthly Gold Imports

Domestic demand remains robust as reflected by high premiums being paid over the international spot price of gold.  These conditions have breathed life into the age-old practice of gold smuggling on a large scale.  Exact numbers are impossible to track but estimates place the figure at between 100 to 200 tonnes for the year.

Although the government hasn’t reduced the 10% tariff on gold imports, it has begun reducing some import restrictions.  They continue to float the idea of rolling back the restrictive regulations as soon as possible, depending on the outcome of efforts to stabilize a faltering Rupee and shrink the size of a negative balance of trade.

It is also an election year in India and Narendra Modi, the head of India’s leading opposition party, appears to be the frontrunner.  He has a strong reputation of sound governance and above average economic growth in Gujarat state where he has governed for the past 13 years.  He also has a business background and is known to be pro-gold.

The elections will be held mid-year and should he win, it is possible his government would take quick action to remove the shackles that have been placed on gold imports.

The restoration of gargantuan Indian demand would put them in direct competition with China to secure the relatively limited supply available on world markets, given China’s greatly expanded import profile outlined above. For gold investors, this is a story worth keeping tabs on as the year unfolds.

The Wall Street and Gold ETF Conundrum

Much like now, in early 2013, Wall Street analysts and journalists were uniformly bearish on gold. They wrote about it in the press and talked about it on news programs.  This begs the question; did the gold price collapse because of underlying supply and demand fundamentals or because of consistently bearish sentiment from Wall Street?

The question is especially relevant when talking about ETF investors.  It is very conspicuous that ETF investors in the west were the only gold market participants selling gold in 2013.  All other categories of demand were net buyers, including central banks and consumers.

When 2013 began, Chinese physical demand was surging to record levels.  In January, February, and March, net imports into Hong Kong were 47, 73, and 157 tonnes respectively (see Hong Kong gold imports chart above).

In other words, gold imports tripled in just 3 months ending March at an unprecedented level of 157 tonnes.  If you projected the same level of imports for the remainder of the year you would have arrived at an eye-watering figure of 1,691 tonnes.

At the same time, India was continuing its trend of historic levels of gold demand from the prior year.  In 2012, they imported 800 tonnes of gold. As of the end of March 2013, it was averaging 70 tonnes per month over the first 3 months of the year.  Annualizing this figure at the time would have yielded a forecast of 840 tonnes or a 5% increase over 2011.

This begs the question, in light of robust and historic demand coming out of Asia during the 1st quarter of 2013, why would ETF investors suddenly decide to sell-off in historic fashion on two unforgettable trading days in the following April?

The event that started the stampede was no less peculiar.  As was reported at the time, on April 12th a Wall Street bank, rumored to be Morgan Stanley, sold a gargantuan amount of gold futures contracts within a 30 minute timespan in the early morning hours on the Comex.

The size of the trade represented 300 tonnes of gold or 15% of global mined supply.

This began a stampede out of the gold ETF’s over the course of 2 days that would cause a 13% swan dive in the gold price.  Of course, the Wall Street explanation of these events was, and continues to be, that investors have abandoned gold due to the improving economic conditions in the US specifically and around the world in general.

However, this explanation simply does not square with the facts just cited.  ETF investors appear hopelessly out of touch with supply and demand fundamentals in the physical gold market.  In our opinion, the narrative coming out of Wall Street plays a major role in this confusion.

Nevertheless, ETF activity has a major impact on the price of gold.  Therefore, gold investors must take their performance into consideration.  According to Bloomberg, ETF inventories reached an all-time high of 2,620 tonnes in late 2012.

Since that time, they have hemorrhaged an astonishing 33.4% (874t) of their gold holdings, leaving a greatly reduced inventory of 1,746 tonnes as of January 10th.

In this context, it bears repeating.  Why would gold ETF investors, who presumably were looking to profit from owning ETF shares, sell a massive 874t of gold at a time when demand from Asia was surging to historic levels and thus likely to provide them with the profit they sought?  We will leave it for you to ponder.

ETF inventories continue to decline, although at a greatly reduced pace than during the epic waterfall moments of 2013.  Thus the major question for 2014 is whether ETF investors will make any significant moves in a bullish or bearish direction during the year?  The answer to this question could well be the key to gold’s performance in 2014.

A Brief Note on Central Banks

As a final note, we expect central banks around the world to remain bullish and thus net buyers in 2014. The final numbers for 2013 will likely be somewhere between 350 and 450 tonnes.

The reason for their continued bullish posture is due to uncertainty hanging over the international monetary system fueled by continuing QE experiments primarily by the US and Japan.  As a result, central banks around the world are mitigating the risk to their foreign exchange reserves by stocking up on gold.

Closing Thoughts

Our discussion above should help provide readers with some perspective on the significant issues in play for the gold in 2014.  It could easily be an explosive year if Indian demand reenters the global market and ETF investors turn bullish, or at least cease to be bearish.

There are many catalysts that could potentially turn ETF investors bullish. These include things like revelations on Thursday by Germany’s top financial regulator that possible manipulation of the gold price by the big banks is worse than the recent Libor-rigging scandal.

In terms of the downside, it is interesting to note that even the neutral Wall Street prognostications mentioned earlier suggest we are at or near the bottom.  In sharp contrast, gold and the gold mining shares are up sharply to start the year.

In the meantime, difficulties in the gold mining industry, made manifest by the low gold price environment, continue to discourage investors.  As a result, valuations remain at extreme lows.

From our perspective this represents a rare, and potentially brief, window of opportunity to buy the stronger miners that are poised for growth at historically undervalued levels.  We are persuaded that this is the case for two fundamental reasons.

The first is because we believe that supply and demand fundamentals remain wildly bullish for gold over the medium to long-term.

Secondly, we are convinced that the gold mining industry is undergoing a much needed transformation. This will leave it leaner and meaner over the course of the next 18 to 24 months, just in time to leverage a rising gold price.

We may have to hold our shares awhile but you can’t beat the current price.  And buying the strongest companies at extreme lows is one of the best ways to mitigate the high-risk inherent in mining.

Our Comparative Analysis Table below represents an abbreviated version of some of the metrics we use to identify those miners that will likely outperform in a rising gold price environment on behalf of our subscribers.

(Click the image to enlarge)

Gold Miners Comparative Analysis Table (Jan 17 2014)

That’s it for this week and thanks for reading!


Carlos Andres

Managing Editor & Chief Analyst


Who’s the Sucker?

by RJ Wilcox on December 20, 2013


You Have to Start Somewhere?

On Wednesday the Federal Reserve reduced (aka tapered) its monthly bond buying purchases by $10 billion from $85 billion to $75 billion. After the Federal Open Market Committee meeting outgoing Chairman, Ben Bernanke, said:

“Reflecting cumulative progress and an improved outlook for the job market, the committee decided today to modestly reduce the monthly pace at which it is adding to the longer-term securities on its balance sheet.” 

He also commented that the Federal Reserve is committed “to doing what is necessary to get inflation back to target [increased back to 2%]” and “the action today [tapering] is intended to keep the level of accommodation the same overall.” [Emphasis ours]

To put into context the significance of what the mainstream media would have you believe is a meaningful change in Fed monetary policy, we present the following chart of the Federal Reserve’s Balance Sheet, courtesy of David Franklin at Sprott.

(Click on image to enlarge)


Source: Bloomberg and Sprott Asset Management

This chart shows two things. The first, and not so important, is how insignificant a $10 billion reduction in bond purchases really is. The second, and more important is, the colossal expansion of the Federal Reserve Balance Sheet since 2008.

Before introducing QE, the Fed’s balance sheet was only $940 billion. Currently, it sits at just under $4 trillion. And, a projection by Sprott places it at $5 trillion by the end of 2014.

If their forecast is correct, which is perfectly reasonable given the current rate of expansion, it would mean that between 2008 and the end of 2014, the Fed will have increased its balance sheet by 5 times!  Keep in mind that it took the Fed 95 years, between 1913 and 2008 to grow its balance sheet to just under $1 trillion.

This is a massive amount of money printing. And, wherever this money goes, it’s going to raise the prices of whatever it touches.

We can already see the impact it’s having on U.S. stock markets as they bounce around in record territory on relatively low volume. The impact is also evident in bond markets where interest rates have reached historic lows.

For now, inflation is showing up in asset prices rather than ordinary goods and services. The Fed, based on their comments we quoted above, are not concerned about inflation showing up in goods and services, but they ought to be.

The Fed maintains that the purpose of its QE program is to stimulate economic growth and in the process create jobs.  However, as we explained in our September 20th Weekly entitled “Ben Bernanke is just Stringing you Along”, the Fed is more concerned about suppressing interest rates and funding massive U.S. budget deficits than economic growth.

That’s not to say that they are not interested in economic growth. The Fed is trying to stimulate the economy, but not in the manner often reported (i.e. by providing liquidity to banks to spur lending).

In actuality, they are hoping that the effect of printing an unprecedented amount of new currency will debase the dollar and make U.S. exports cheaper, thereby stimulating the economy.

This explanation, however, is not palatable for U.S. trading partners, Treasury debt holders, or the general population so the alternate explanation is given.

A Sure Bet

Ben Bernanke is famous for saying that the Fed could “raise interest rates in 15 minutes if he had to.” It didn’t take 15 minutes on Wednesday!

Julia Coronado, the chief economist at BNP Paribus in New York and a former Fed economist commented in regard to the Fed’s tapering announcement, “as soon as they [the Fed] started talking about tapering, they raised interest rates.” [Context added]

In a previous Weekly, we presented the chart below which illustrates the affect comments made by Ben Bernanke, regarding tapering bond purchases, had on interest rates. The rise between the two red lines indicates roughly a 25% increase in borrowing costs for the 10 Year Treasury.

(Click on image to enlarge)


Now that the QE program will reportedly be tapered in January, interest rates have responded in a similar fashion. On Wednesday, the UST 10Y opened at 2.86% and closed at 2.89%, an increase of 1.48%. This trend continued for the rest of the week with the UST 10Y at 2.94%, reflecting a rise of 2.72% as of this writing.

Taking into consideration the time period when tapering was first hinted at, May 22 to today, Treasury rates have risen 31%.

Rising interest rates are a big problem for the Fed for a couple of reasons. The thousand words reflected in the chart below shows the first reason.

(Click on image to enlarge)


The approximate U.S. National Debt is currently a mind boggling US$17,252,995,875,875.  The interest paid on this debt so far in 2013 is US$254,199,540,000 (i.e. $254 billion).  If you haven’t seen the astonishing speed at which these two numbers are escalating check out:

The above amount of interest represents 7.3% of the current U.S. budget of $3.49 trillion.  Thus, any significant rise in interest rates on $17.3 trillion dollars spells t-r-o-u-b-l-e!

The second problem the Fed has with rising interest rates is the inverse relationship between interest rates and bond prices. The Fed holds just over $2 trillion in Treasury bonds, so when rates rise, their (and everyone else’s) Treasury holdings lose value.

The bottom line is, when you consider the real reasons for QE, the Fed can’t taper. It’s trapped.  Therefore, interest rates must stay low.  And in relative terms, given the almost imperceptible impact a monthly reduction of $10 billion has, as shown in the earlier Sprott chart, they haven’t done much in the way of tapering.

What they have done is more of the same posturing tactic, which we have talked about before, to try and sell the fiction that the economy is improving.


“Here’s the thing. If you can’t spot the sucker in the first half hour at the [poker] table, then YOU are the sucker” [Emphasis ours] – From the movie, Rounders

In our recent Weekly “The Game is over…” we presented the chart below, which shows the U.S. Debt, the Debt Ceiling, and the gold price over the last 14 years.

(Click on image to enlarge)


The chart clearly shows that the increase in U.S. debt has been matched by an increase in the price of gold, with of course, the exception of 2013.

With the continued trend of historic U.S. budget deficits resulting in rising debt levels and the likelihood of rising interest rates, the money printing party will have to continue. It’s already manifesting itself in the form of higher asset prices and it’s only a matter of time before it shows up in consumer prices.

On the international front, the tide of U.S. money printing has put enormous downward pressure on the dollar.  This serves current U.S. policy well, as it makes exports cheaper and undermines the value of U.S. government debt.  The trouble with this beggar-thy-neighbor policy is that other countries usually start doing the same in self-defense.

This is also known as the proverbial race to the bottom, in which countries engage in competitive devaluations in order to maintain an exchange rate beneficial to their own exports.  As a result, tsunamis of international currencies flow all over the globe.

This is what explains the high inflation rates that have emerged in various countries (e.g. Brazil, Russia, and India).  In economic terms, this process is known as importing inflation, in this case from the U.S.

Within this backdrop, it is intriguing to note which countries in the world hold the largest percentage of their foreign exchange reserves in gold.

(Click on image to enlarge)

Gold As a Percentage of Forex Reserves Table

In July, current Fed chairman Ben Bernanke told the Senate Banking Committee that “nobody really understands gold prices and I don’t pretend to really understand them either.”

In a similar committee meeting in July of 2011, he responded to a question from Congressman Ron Paul who asked the reason that central banks hold gold? Bernanke simply replied, “long-term tradition”.

These are odd things for a Fed Chairman to say, given the Federal Reserve is responsible for setting U.S. foreign exchange rate policy for which 72% of these reserves are held in gold.

Would you hire someone to manage the foreign exchange reserves of the U.S., of which 72% consists of gold, who publicly confesses to his bosses that they only own it for purposes of tradition and further that he does not understand the price trends of the asset?

Of course we don’t really believe Ben Bernanke when he says such things.  We think this is simply an exercise in obfuscation and misdirection (aka Fed Speak).  In fact, we know monetary officials value gold highly as a monetary reserve asset.

When Brett Arends, of the Wall Street Journal, asked the U.S. Treasury if it would consider selling some of the country’s gold reserves to pay the bills, their response was:

“Selling gold would undercut confidence in the U.S. both here and abroad…it would also be destabilizing to the world financial system.”

 The curious part of all this is that the U.S. is devaluing the dollar, which everyone in the world must use to trade for major commodities, but will not officially sell an ounce of gold to fund historic budget deficits or pay down debt. Does that tell you anything?

Who are the real suckers?

Closing Thoughts

We have written extensively about China’s likely rapid accumulation of official gold reserves by their central bank, the People’s Bank of China (PBOC).  Additionally, central banks around the world turned net buyers of gold in early 2009 for the first time in 20 years, in the aftermath of the Global Financial Crisis (GFC).

Although, the U.S. is reportedly not adding to its gold reserves, it is officially not selling them either, notwithstanding the likelihood that they have leased a significant amount of these holdings to major bullion banks.

This should tell investors a great deal about what central banks are expecting in the future and gold’s importance as a hedge against inflation and the potential loss in value of their other currency and sovereign debt holdings.

These risks have been heightened since the onset of the GFC as a result of the Fed’s unprecedented QE program and the subsequent competitive devaluation that has followed. It explains why central banks, especially from Eastern countries, have made gold a central pillar of their strategic monetary objectives over the last few years.

If the world’s central banks are preparing for a rainy day by accumulating and preserving their gold reserves, maybe you should own a little too.

Further, because the value of the yellow metal has been temporarily depressed, the publicly traded shares of gold producers are historically undervalued at the moment.

This makes it an opportune time to accumulate the shares of the most promising gold miners in anticipation of gold’s favorable supply and demand fundamentals reasserting themselves over the medium to long term.  These shares will offer strong leverage to a rising gold price.

If you are looking to take advantage of this rare window of opportunity to buy low for the purpose of selling high, click on our Gold Miners Comparative Analysis Table below, which has a multitude of critical metrics to use in evaluating and comparing gold mining companies.

Additionally, our Model Portfolio, available to paying subscribers, identifies the gold miners most likely to outperform as the price of gold rises.

(Click the image to enlarge)

Gold Miners Comparative Analysis Table

That’s it for this week. Happy Holidays from all of us at Gold Miners!


RJ Wilcox


Math, The Monetary System’s Buzz Kill…

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“If You Believe in Math, Buy Gold” This quote, taken from a CNBC interview with Brent Johnson, CEO of Santiago Capital, made its way into several commentaries this week. Most notably, it was the title of a follow-up interview published in Sprott’s Thoughts, which we featured in our News Corner. In the interview, Mr. Johnson […]

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China finds Secret Door leading out of Dollar Trap

December 6, 2013

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Just When You Thought It Couldn’t Get Any Bigger

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Shh! Don’t Tell Anyone; China’s Central Bank Gold Reserves are Growing Rapidly!

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Hiding in the Gold Demand Shadows

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From Russia With Gold

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China’s Tentacles Grip World

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The Octopus… Its long tentacles can reach out in any direction, grasping its prey in an inescapable vice-like grip.  It can be found in all of the world’s oceans, is highly intelligent and has a varied arsenal of survival strategies that include a diverse palate, deft abilities to move quickly and quietly, use camouflage, and […]

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The Game is over, but there’s still Time left on the Clock

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Crystal Ball We put the finishing touches on our October newsletter earlier this week and within it forwarded the following prediction regarding the debt ceiling. “We can expect a last minute agreement to be struck to avert disaster…” Well, there you have it, proof our crystal ball works! Now, if we can only get it […]

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