PublishedonZeroHedge(http://www.zerohedge.

com)

Home>AnInsideLookAtTheShockingRoleOfGoldInThe"NewNormal"

AnInsideLookAtTheShockingRoleOfGold
InThe"NewNormal"
ByTylerDurden
Created12/04/201420:01

[1]
SubmittedbyTylerDurden[1] on12/04/201420:010500
Abenomics[2] AlgorithmicTrading[3] B+[4] Backwardation[5] BankofJapan[6] Bear
Stearns[7] Bond[8] BorrowingCosts[9] CapitalMarkets[10] CentralBanks[11] China[12]
CommercialPaper[13] CoreCPI[14] CPI[15] Creditors[16] Crude[17] CrudeOil[18] default
[19] EquityMarkets[20] ETC[21] Eurozone[22] FederalReserve[23] FederalReserveBank
[24] fixed[25] Futuresmarket[26] GlobalEconomy[27] GoldmanSachs[28] goldmansachs[29]
HongKong[30] India[31] Japan[32] Lehman[33] Meltdown[34] MonetaryBase[35]
MonetaryPolicy[36] NewNormal[37] NewYorkFed[38] Nikkei[39] NominalGDP[40] OTC
[41] PreciousMetals[42] QuantitativeEasing[43] Realestate[44] Reality[45] Recession[46]
REITs[47] RepoMarket[48] Reuters[49] RomanEmpire[50] ShadowBanking[51]
SpeculativeTrading[52] TreasuryBorrowingAdvisoryCommittee[53] TylerDurden[54]
Unemployment[55] Volatility[56] WallStreetJournal[57] WorldGoldCouncil[58] Yen[59]
Tweet
Like

31
0

Share

FromPaulMylchreestofADMInvestorServiceInternational[60] [60]
LongNikkei/ShortGold:Profitable,dangerousandmissedbyeverybody?
Hasthemarketcompletelymissedahugelong/shorttradewhichhashelpedtodriveuptheNikkei
anddrivedownthegoldpriceformorethan2years?Onethatputsrisktakingandleveraged
speculationbyourindustryinanunfavourablelightagain.

[61]

***
ExecutiveSummary
Inthereportweoutlineathesiswhichdrawstogetheracomplexwebofinteractionsbetween
Japaneseequities,thegoldmarket,repofinancing,BoJmonetarypolicymeetingsandanomaliesin
thesilvermarket.
Theseinteractionsbeganforminginlate2012,specificallyaroundSeptember,asfaraswecantell.
Withhindsight,thiswasapivotalperiodinrecentfinancialhistory,whencentralbanksembarkedon
anewphaseofaggressivecreditcreation.Wefoundnoevidenceoftheseinteractionsbeforehand
andthinkitisfairlyunlikelythattheyaremerelytheresultofcoincidence.
Atthecentreofthis,itlookstouslikealarge,leveragedlong/shorttradehasbeenbuiltupwhichis
longtheNikkeiindexandshortgold.ThemoretheNikkeihasrisen,themorethegoldpricehas
beenpusheddown.
Itsaclevertradefromacynicalperspective,aswellexplain.However,italsoraisesconcerns
regardingrisktakingandthemeasurementofriskwhichhavemadespeculativeabusesbysome
entitiesinourindustry(especiallybanks)onlytooinfamousinrecentyears.
Ifwearecorrectaboutthistrade,ashockaffectingeitherthelongorshortsidecouldroilfinancial
marketsifitwasunwoundinadisorderlyfashion.Potentialthreatsinclude:
GrowingcriticismofAbenomicsandweakeconomicperformanceinJapan
Increasingsignsofschismingoldandsilvermarketsbetweenstrongphysicaldemandand
pricediscoverywhichisdominatedbypaperinstrumentsandwhichhasalmostreached
nonsensicallevelsand
InterestratesintherepomarkethavestartedtorisewiththeFedwindingdownQE3.
Goingintoabitmoredetail
Wesuspectedthatgoldmightbetheshortinalong/shorttradewhenwenoticedareasonablyclose
correlationbetweengoldandinterestratesintherepomarket.Themorethecostofrepofunding
declined,themorethepriceofgolddeclined.
Therepomarketisamajorpartoftheaptlynamedshadowbankingsector.Itisalsothenexusfor
investmentstrategiesinvolvingleverageandshortselling.Ifgoldwastheshortinalong/shorttrade,
thenextquestionwaswhethertherewasacorrespondinglong?Wethinkthattheanswerisyes,the
Nikkei.
IfwecastourmindsbacktoSeptember2012,wehadtheannouncementsofQE3bytheFedand
theEnhancementofMonetaryEasingbytheBankofJapan(BoJ).Theinitialreactionofthegold
pricewaspositive,whichwashardlysurprising,althoughitturnedouttobeshortlived.
Thesubsequentcollapseingoldhasbeencounterintuitive,especiallywhenthedemandforphysical
goldbullionhasremainedstrongasweshow.Ithasalsogiventheimpressionthattheimpactof
monetarypolicieswhichareloose,toadegreewhichisunprecedented,isbenign.Itismuchtoo
earlytoreachthatconclusion.
MajorupwardmovesintheNikkeiandcoincidentweaknessinthegoldpricecan,inmostcases,be
closelytiedtoBoJpolicymeetingsforthepastmorethantwoyears.Thisisespeciallytruewhen
BoJmeetingshaveincludedannouncementsofmoreaggressivemonetarypolicyinsupportof
Abenomics.WecoverexamplesofsuchpricemoveswhichfollowedBoJmeetingsinJanuary
2013,April2013,October2013,May2014,August2014andOctober2014.

Anumberofunpleasantironiesareimmediatelyapparent:
Itishelpingtodriveupequitypricesinthecountrywiththemostrapidlyexpanding
creditbubbleandcreditbubblesdonttendtohavehappyendings
Itissimultaneouslydrivingdownthepriceoftheultimatesafehavenassetandthereby
silencingpricesignalsrelatingtomarketandfinancialsystemrisk
Itappearstobealeveragedtrade,obtainingtheleverageviaultralowratesintherepo
market.Thelatterisasourceofsystemicriskwhichisknowntoregulatorsbutremains
unaddressedand
Thelogicalconclusionisthatriskacrosstheworldsfinancialsystemisevenmore
underpricedthanmarketparticipantsrealiseandmanybelieveitiswoefullyunder
priced.
Weareinaglobalcreditbubbleinwhichthemultitrilliondollarexpansionofcentralbankbalance
sheets,theirimpositionofnearzero(orevennegative)interestratesandcontrolofentireyield
curves(directlyorindirectly)areatthecuttingedge.
Thishasencouragedmoreandmorespeculationinriskassetswhich,inmanycases,isbeing
enhancedbyleverageandwithoutacommensuratesenseofheightenedrisk.
Japanisthecuttingedgeofthecuttingedgeofthisexpandingglobalcreditbubble.
TheLongNikkeisideofthetradeisprofitingfromwhatisstartingtolooklikearecklessandfailing
Japanesemonetarypolicywhich,ratherthanendingtheeconomicstagnation,haspushedthe
economybackintorecession.Perhapsthemostimportantindicatortomonitorisgrowthinreal
householdincome,whichhasbeennegativeforthepastthirteenmonths.
AssetsontheBoJsbalancesheetarealreadyequivalentto60%ofJapaneseGDP.Theyaresetto
growatanannualrateof17%ofcurrentGDPaftertheBoJslatestincreaseinitsassetpurchase
programme.OnecouldarguethatthemorethattheBoJspolicydoesntwork,themore
aggressivelyitsapplied,themoretheYenfallsandthemoretheNikkeirises.PrimeMinisterShinzo
Abesspecialadviser,KoichiHamada,washonestenoughtocallitamildPonzigameinarecent
interviewwiththeDailyTelegraph.
Inthemeantime,theShortgoldsideofthetradeisprofitinginacynicalwayfromstructuralflaws
whicharespecifictogoldandsilvermarkets.Ingold,pricediscoveryisoverwhelminglydominated
byanextremeratioofpapergoldinstrumentstophysicalbullion,estimatedbyofficialsourcesat
about90:1.Thisflawinpricediscoveryisbeingstretchedtoalmostnonsensicallevelsinthefaceof
strongphysicaldemand.
Ifwearecorrect,theliquidityinthegoldmarket,withwelloverUS$100.0bnofgoldinstruments
tradeddaily,impliesthatsubstantialfinancialfirepowerhasbeenrequiredtomaintaintheintense
pressureontheshortsideofthetradeduringthelasttwoyears.Anumberofbanksandhedge
fundsarelikelytobeinvolved,althoughithasundoubtedlyattractedlargenumbersoftrend
followers.
Gold,andwearespecificallyreferringtophysicalbullion,isalsotheonlyfinancialassetwhichhas
nocounterpartyrisk.Thataloneshouldmakeitincreasinglysoughtasahedgeinacreditbubble
drivenbymonetarystimulusundertakenonarollingbasisbycentralbanks.
Inanormallyfunctioningmarket,i.e.onewheresupplyanddemandforthephysicalgoodholds
sway,thehugemovementofgoldbulliontoChina,theworldslargestcreditornation,shouldhave
dominatedgoldmarketnewsflow,seenwesterninvestorscompetingwithAsiaforscarcephysical
bullionandmaybeevenraisedquestionsabouttheexistingmonetaryorder.Asthingsstand,most
investorscouldnotcarelessaboutgold.

Wheredowegofromhere?
Whilewehaveastrongpreferenceforequitiesovernearlyallformsofcreditinaninflationary
endgame,theroadwearetravellingbasicallyanevertriedbeforemonetaryexperimenttoavoid
debtdeflationistreacherous.
Thequestioniswhetherdeflationcomesbeforeinflation,asoneofthesetwounpalatableoutcomes
willberequiredtoextinguishtheexcessivedebtburdencarriedbyJapanandtheglobaleconomy.
Itsalsoironicthattheonlyassetwhichhashistoricallyoutperformedineitherinflationaryor
deflationaryconditions,withatrackrecordstretchingbackmorethan400years,isgold(cfThe
GoldenConstantbyRoyJastram).
InJapan,AbenomicscouldleadtofurthersubstantialdevaluationoftheYen.Inextremis,thelong
sideofthetradehasalmostinfiniteupside,especiallyifthearchitectsofAbenomicsrefusetoletup
andsimplydestroytheYen.Thisisanotherreasonwhy,beingcynical,itsaclevertrade.
WhiletheNikkeicouldtheoreticallygotoinfinity,thegoldprice(atleastintermsofphysicalmetal)
doesnothaveunlimiteddownside.Consequently,theinherentriskinthetradeisasymmetric.
Ifthegoldpricekeepsfalling,offersofphysicalmetalwillbewithdrawnatsomepoint.Thatwould
causeaschismintherespectivepricingofphysicalbullionversusinferiorpapersubstitutes.The
potentialforsuchaschismisalreadybeingforeshadowed,periodically,bynegativeGOFOrates
andbackwardationinthegoldfuturesmarket.
Wehavealsolookedagainatanomaliesinthesilvermarketwhichhaveleftusscratchingourheads
formonths.Incontrasttogold,ETFsilverholdingsandopeninterestinthefuturesmarketremain
elevatedinspiteoftheevenbiggerdeclineinthesilverprice.
Wequestionwhetherentitieswhichhaveputonthislong/shorttradehaveacknowledgedthata
rapidexitfromalargeshortpositioningoldcouldbeproblematic.Ifso,wewonderwhetherashort
positioningoldisbeingpartiallyhedgedbyaccumulatinglongpositionsin(highbeta)silver.
Themuchsmallersizeofthesilvermarket,limitedabovegroundsilverinventory,andstretched
levelofthegold/silverratio,meansthatasustainedreversalinthegoldpricewouldhavea
disproportionateimpactonthesilverprice.
Fromacynicalperspective,thatwouldmakethistradereallyclever.
***
Cluesintherepomarket
Therepomarketisamajorpartofwhatisaptlynamedtheshadowbankingsystem.
Fromtheperspectiveofthisreport,thekeyaspectoftherepomarketisthatitisthenexusfor
leverageandshortsellingforbanks,brokerdealersandhedgefundsoperatinginthefinancial
markets.
InJuly2013,theTreasuryBorrowingAdvisoryCommitteedescribedrepoasnothinglessthan.
Thesilentlybeatingheartofthemarket
ThiswasTylerDurdenofZeroHedgecommentingonthesignificanceoftherepomarketin2013:
Mostmarketparticipantswillgothroughtheirtradinglifeignorantofthefactthatthe
leverageinthismarketiswhatdrivestheirassetsupordowninmostcases

Therepomarketisverylarge.
TheFederalReserveestimatedthatthesizeoftheUSrepomarketinJanuary2014wasUS$3.1
trllion.TheEuropeanrepomarketisevenbigger,estimatedtobeEur5.8trninJune2014byICMA
(InternationalCapitalMarketsAssociation).
InthewordsofMaryFrickerfromtheRepowatchwebsite.
Therepurchase(repo)marketiswherelargefinancialinstitutionsborrowtrillionsofdollars
fromeachotherandfromcentralbankseveryday,usingsecuritiesascollateral.
HereisaschematicoftheUSrepomarket,showinghowsecuritiesdealers(includingbanks)and
hedgefundscanborrowcashagainsttheprovisionofcollateral.

[62]
Source:NewYorkFed
Thefirsttimewesuspectedthatthegoldpricemightbecaughtontheshortsideofalarge,
leveragedlong/shorttradewasinearlyOctoberthisyear.Thiswaswhenwenoticedareasonably
closecorrelationbetweenafallinggoldpriceandthefallingcostoffundinginwholesalemoney
(repo)markets.
Oncheckingback,thecorrelationseemedtokickinfromaboutSeptember2012onwards.The
summerof2012wasacriticalperiodwhencentralbanksrampeduptheuseofunconventional
monetarypolicy,bothactual(FedandBoJ)andthreatened(ECB).

[63]
Source:Bloomberg,ADMISI
Onewaytointerpretthechartisthatasreporatesfellfromaround30bp(0.30%)inlate2012toas
littleas45bp(0.040.05%)attimesduring201314,shortsellersofgoldusedtheincreased
financingcapacitytointensifythedownwardpressureonthegoldprice,i.e.byborrowingmore
papergoldinstrumentstosellshort.
WhydidreporatesfallsosharplyaftertheannouncementofQE3?
ItbecameapparentthatthedownsideofverylargeQEprogrammesisthattheysilohighquality
collateral,i.e.TreasuriesandMBS,onthebalancesheetofthecentralbank.Thisconstrainsthe
flowofcollateralwhichisavailabletoprovideliquidity/leverageintherepomarket.
AconsequenceofthissqueezeintheavailabilityofhighqualitycollateralpostQE3isthattraders
whowereinpossessionofhighqualitycollateralwereabletoincreaseleverageatincreasingly
lowerinterestrates.
Iftherepomarketisbeingusedtofinanceshortpositionstopushdownthepriceofgold,thereisan
ironysincetherepomarketisasourceofsystemicrisktothefinancialsystemwhilegoldisthe
ultimatesafehavenasset.
Themajorityofrepofundingisovernightandcansuddenlyevaporate,asBearStearnsandLehman
discovered,whencounterpartyriskisrecalibrated.Repowasgroundzerointhe2008financial
crisisasDavidWeidneroutlinedintheWallStreetJournalon29May2013.
Therepomarketwasntjustpartofthemeltdown.Itwasthemeltdown.
Systemicriskintherepomarkethasstillnotbeenaddressedbyregulators,despitetheirfull
knowledge.
ThiscommentcomesfromtheFederalReserveBankofDallasinaNovember2012report
UnderstandingtheRisksInherentinShadowBanking.

Currently,thedriversofsystemicriskremainlargelyintact,andshadowbankingappearspoisedto
growconsiderably,anddangerously,ifitdoesnotacquirethenecessarymarketdisciplinetoshape
risktakingactivities.
Whilewecantofferanopiniononwhatcollateralisbeingprovidedinordertoborrowfundstoshort
gold,itsworthnotingthatthemajorbanksandsecuritiesdealersroutinelyuserehypothecationin
expandingtheirrepoactivities.
Investopediadefinesrehypothecationthus.
Thepracticebybanksandbrokersofusing,fortheirownpurposes,assetsthathavebeen
postedascollateralbytheirclients.Clientswhopermitrehypothecationoftheircollateral
maybecompensatedeitherthroughalowercostofborrowingorarebateonfees.
Thepracticeofrehypothecationincreasesriskintherepomarketitself,addingriskontopofrisk.
HavingshowntherelationshipbetweenthegoldpriceandreporatesafterSeptember2012,what
wasthesituationbeforethen?
Thechartbelowsuggeststhattherewasnoevidenceofanycorrelationintheprioryear,i.e.from
September2011toAugust2012.

[64]
Source:Bloomberg,ADMISI
Goingfurtherback,hereisthechartfromJanuary2009toAugust2011,whichshowsnocorrelation
either.

[65]
Source:Bloomberg,ADMISI
Summerof2012
ItsworthcastingourmindsbacktorecapthemajoreventsinfinancialmarketsaroundSeptember
2012whenthisrepo/goldrelationshipwasestablished.
Summer2012wasaverysignificantperiodfortheimplementationofcentralbankpolicy.
TheEurozonewasinamajor(almostterminal)crisis,whichwasrelievedbyDraghisWhateverit
takesspeechon26July2012.ThelatterincludedaverbalthreattousetheECBsbalancesheetin
apotentiallyunlimitedfashion.
TheECBmovewasfollowedbyconcreteactionintermsofmoneyprintingfromtheFedandBoJ
withtheirmajorQEannouncementsbeginninginSeptember2012.
TheFedsannouncementofQE3on13September2012and
TheBankofJapansEnhancementofMonetaryEasingannouncementon19September
2012.
Summarisingthesebriefly
TheFedsQE3wasanopenendedcommitmenttopurchaseUS$40bn/monthofMBSandmaintain
theFederalFundsratenearzeroatleastthrough2015.InDecember2012,theFedincreasedits
openendedpurchaseprogrammebyanadditionalUS$45bn/monthofTreasurysecurities,making
US$85bn/monthintotal.
ItwasaroundthistimethatmarketparticipantsbeganreferringtotheFedspolicyasQEtoinfinity
toexpressthelargeandpotentiallyunlimitednatureofFederalReservemoneycreation.
InSeptember2012,theBoJinitiallyincreasedthesizeofitsthenexistingAssetPurchaseProgram
fromYen70trilliontoYen80trillion,whichitexpectedtoreachbyend2013.Theincreased
purchaseswouldbeachievedona50/50basisintermsofTBillsandJGBs.

On30October2012,theBoJincreasedthesizeofitsAssetPurchaseProgramonceagainthis
timefromYen80trilliontoYen91trillionbyend2013.BesidesTBillsandJGB,theincreased
purchasesincludedCommercialPaper,CorporateBonds,REITsandETFs.
SofromSummer,throughtheAutumnandintotheWinterof2012,theworldsthreelargestcentral
bankswererampingupmonetarylargesse(actualorthreatened).
Whatwastheinitialreactioninthegoldmarket?
ItwashardlysurprisingthattheinitialreactiontothesemovesfrommidJulytoearlyOctoberwas
positive.

[66]
Source:Bloomberg,ADMISI
ItsalsoworthemphasisingthatfinancialmarketswereexpectingtheFedtoannounceQE3inthe
runuptotheFOMCmeetinginSeptember.Forexample,thiswasfromaGoldmanSachsreporton
7September2012.
WithtodaysAugustemploymentreportshowinganonfarmpayrollgainof96,000andan
unemploymentrateof8.1%becauseofadropintheparticipationrate,weexpectareturnto
unsterilizedandprobablyopenendedassetpurchasesattheSeptember1213FOMC
meetingWepreviouslyforecastedQE3inDecemberorearly2013.
ItwasthepeakinthegoldpriceshortlyaftertheinitialFed/BoJannouncementswhichlogic
suggestswascounterintuitiveespeciallyinlightofthechartbelowcomparingthegoldpricewith
thegrowthincentralbankbalancesheetssince2009.
Therewasabigtrendchangeinlate2012/early2013

Source:Bloomberg,ADMISI
ThepeakinthegoldpricewasfollowedafewdayslaterbyalowintheNikkei.Thismadesense
whenJapaneseequitieswerebombedoutandinvestorsrealisedthattheBoJwasseriousabout
turningontheliquiditytap(evenifithadyettogonuclear).

Source:Bloomberg,ADMISI
Shortingthegoldmarket
Ifourthesisaboutalong/shorttradeiscorrect,ourcontentionisthatitwouldtakesubstantial

financialfirepowertomaintainintensedownwardpressureonthegoldpricegiventheliquidityinthe
goldmarket.
Letsconsidergoldmarketliquidity,beginningwiththeLBMA.
SinceSeptember2012,theAVERAGEDAILYNUMBEROFOUNCESTRANSFERREDviathe
LBMAsclearingprocessis20.4moz.Thatisequivalenttoabout656tonnes,some20%ofannual
mineproductionworldwideand,indollarterms,$24.5bn.
However,thereisanimportantdifferencebetweentheamountofgoldwhichisTRANSFERREDon
theLBMAandtheamountTRADED.Whilethe656tonnesmightsoundlikealargeamountofgold,
itsubstantiallyunderstatesthetrueamountofgoldTRADED.
LBMAmembersnetouttheirownandthirdpartytradessothatonlythelevelofaccounttransfers
betweenLBMAclearingmembersisreported.
FromanarticleinJanuary1997whentheLBMAfirstpublishedclearingdata:
tradersinsistedtheassociationsstatisticswereonlypartofthepictureMrJeffrey
Rhodes,ofStandardBank,London,saidthe30mouncesshouldbemultipliedbythree,and
possiblyfive,togivethefullscopeoftheglobalmarket.
InalettertotheEuropeanCommissionfromtheLBMAsChiefExecutive,StewartMurray,on2
March2007,hestatedthat:
PreviousestimatesofthedailyvolumestradedintheLondonmarkethavesuggestedthat
thequantitiesareapositivemultipleoftheclearingvolumeswithamultiplierofbetween5
and9.
Letsbeconservativeanduseamultipleof4,whichmeansthattheaveragedailyamountofgold
tradedwas80.8moz.or2,600tonnessinceSeptember2012.Onthatbasis,roughly80%ofthe
entireannualproductionoftheworldsgoldminesistradedonanOTCbasiseachday.
Indollarterms,theaveragedailyturnoveringoldisaboutUS$93.0bnandthatsjustOTCgold.It
excludesexchangessuchasCOMEX,TOCOM(Tokyo),SingaporeandShanghai.
Thedailyaveragenumberofgoldcontracts(100oz.percontract)tradedontheCOMEXinNew
Yorkrecentlyhasbeenapproximately130,000.Thisisequivalenttoanotionalgoldvalueof
approximatelyUS$15.0bn.
Inaggregate,theaveragedailyturnoveringoldiswelloverUS$100.0bn.
Mostcommentatorsunderestimatethesizeofthegoldmarket.
Ifweassumethatsufficientfinancialfirepower(includingleverage)canbemusteredtofinancea
largeshortpositioningold,thespecificcharacteristicsofthegoldmarketcanworktotheadvantage
ofthistradeatleastovertheshort/mediumterm.
Why?
Becausethegoldmarket,ascurrentlystructured,isafractionalreservesystem,witha
comparativelysmallamountofbullionsupportingahugeamountofspeculativetrading.
Aswevesaidbefore,oneofthebiggestmisunderstandingsinthehistoryoffinanceisthe
mechanismofpricediscoveryintodaysgoldandsilvermarkets
Thevast,andwereallymeanvast,majorityoftradinginthegoldmarketisinwhatarenothingmore

thanpaperfacsimilespurportingtorepresentgoldbullion,ratherthanactualgoldbullion.
Whenwesaypaperfacsimiles,weincludethingslike:
UnallocatedgoldaccountsontheLBMA
FuturesandoptionscontractsonCOMEX
UnbackedETFsand
OTCderivatives.
Thisisaperversionoftheinvestmentcaseforgoldanditstrueroleinthefinancialsystem.Thishas
beenobvioustoforwardthinkingpeople,likemonetaryscientist,ProfessorAntalFekete,formore
thanfourdecades.
TheworldsfirstgoldfuturesmarketopenedintheWinnipegCommodityExchangein
1970...In1971IwenttoWinnipegtobewitnesstohistory.Ipurchasedaseatonthe
exchangeBuyorderscameinasteadystreamfromallcornersoftheworld.Intheabsence
ofgoldfuturesthisdemandwouldhaveshownupasdemandforcashgold
ThereisevenawidespreadbeliefamongnonspecialiststhattheLBMAisprimarilyamarketfor
physicalgold.
Thatisonlytruetoalimitedextent.
Therealityisthatlessthan5%ofgoldtradedontheLBMAissettledbythedeliveryofphysical
metalintowhatareknownasallocatedgoldaccounts.Inanallocatedgoldaccount,specificgold
barsareheldinclientsnameswithfulltitle.Thebankisnotpermittedtousethegoldforitsown
purposes.
Instead,morethan95%ofgoldtradedontheLBMAisofunallocatedgold,whichissettledvia
nothingmorethandebits/creditsinmetalaccountswithbullionbanks.Theholdersofthese
accountsaremerelyunsecuredcreditorsofthebankwithgeneralclaimsonanunspecifiedvolume
ofgoldinthebanksvault.Anygoldbackingunallocatedgoldwhichisactuallyinthevaultispartof
thebanksworkingcapital,todowithitasitwishes.
Givethemostrudimentaryunderstandingoftheinvestmentcaseforgold,thisisanotherironyinthe
goldmarket.Whywouldanybodytradeunallocatedgoldonthelongsidewhentheyarenothing
morethanthemostjuniorofcreditorsinthebankingsystem?Financialsystemriskisoftenoneof
theriskswhichgoldinvestorsaretryingtoinsureagainst.
InitsJanuary2013reportReportoftheWorkingGrouptoStudytheIssuesRelatedtoGoldImports
andGoldLoansbyNBFCs,theReserveBankofIndiaestimatedtheratioofpapergoldtradingto
physicalgoldtradingat92:1.
Onpage58oftheRBIsreportisthefollowingdatasourcedfromtheCPMGoldYearbook2011:

Source:Bloomberg,ADMISI

AccordingtotheRBI(withouremphasis):
thetradedamountofpaperlinkedtogoldexceedsbyfartheactualsupplyofphysical
gold:thevolumeontheLondonBullionMarketAssociation(LBMA)OTCmarketandthe
majorFuturesandOptionsExchangeswasOVER92TIMESthatoftheunderlyingPhysical
Market.
AsidefromfuturestradingonCOMEX,thereisverylittlerealtime,orevenclosetorealtime,data
regardingpositioninginthegoldmarket.
Inspiteofthat,whenyoulookbackatthegoldbullmarketduring200111,onethingstandsoutvery
clearlyregardingtherelationshipbetweenthegoldpriceandthenetpositioningoftheCommercials
(primarilythebullionbanks).
OnthethreeoccasionswhentheNetCommercialsstoppedincreasingtheirnetshortpositionintoa
risingmarket,thegoldpricewentparabolic.

Source:Bloomberg,ADMISI
Thepricediscoverymechanisminthegoldmarketisdominatedbythetradingofpapertokens
whicharenothingmorethangoldinfacsimileform
Givensufficientfinancialfirepower,thetradingofpapergoldinstrumentscanoverride
underlyingsupplyanddemandtrendsforactualphysicalbullion,unlessoruntilthereisa
limitationinthesupplyofpapergoldORaproblememergesindeliveringsufficientphysical
bullionand
Inthisscenario,vitalpricesignalswhichcouldbeprovidedbythegoldmarketregarding
financialmarketrisk,canbeeffectivelyhijackedandnullified
***
Whatisthelongsideofthelong/shorttrade?
Ifwearecorrectaboutgoldbeingtheshortsideofalarge,leveragedlong/shorttrade,thekey

questioniswhatisonthelongsideofthistrade?
Itwasalmostcertainlyalarge,liquidmarkettoo.Butwhichone?
HereisthechartofGoldversustheNikkeisinceSeptember2012.Thereisnotmuchtosee...

Source:Bloomberg,ADMISI
...untilyouinverttheNikkeiaxisandtheremarkablyclosecorrelationbecomesobvious.

Source:Bloomberg,ADMISI

Wedoubtthatthisismerelycoincidence.
Hereisthesamechartfortheprioryear,i.e.fromSeptember2011toAugust2012.Asyoucansee,
thereisnosignofcorrelation.

Source:Bloomberg,ADMISI
HereisthesamechartforGoldversustheNikkei(Inverted)fromthebeginningofthecurrentgold
bullmarketin2001toAugust2012.

Source:Bloomberg,ADMISI

SincetheriseintheNikkeibroadlymirrorsthefallintheYensinceShinzoAbewaselectedPrime
MinisterinDecember2012

Source:Bloomberg,ADMISI
WhilethelongsideofthetradecouldbeYen...
wethinkthatitismorelikelytobetheNikkeiwherethecorrelationisarguablysuperiorshown
againforcomparison.

Source:Bloomberg,ADMISI

BoJmeetingstyingtogetherthetwosidesofthetrade
WhenwelookedbackandexaminedmajormovesintheNikkeiindexandthegoldpricesince
September2012,wefoundthatmostofthemwerecloselytiedtoBoJmonetarypolicymeetings,
especiallyannouncementsofincreasedmonetarystimulus.
WhilegoldhadpeakedandtheNikkeibottomedwithinafewdaysofeachotherinearlyOctober
2012,thelong/shortNikkeiversusgoldtradereallygotgoingafterShinzoAbesgovernmenttook
officeinDecember2012.
ThefirstmajormovefromtheBoJ,bowingtopressurefromthenewpoliticalleadership,was
announcedwiththeunusualstepofajointBoJ/Japanesegovernmentstatementon22January
2013.
TheBoJdoubleditsinflationtargetto2%attheearliestpossibletimeandcommittedtoanopen
endedprogrammeofassetpurchasesbeginningin2014,whichwouldfollowthecompletionofits
existingprogramme.
Notsurprisingly,theNikkeirespondedpositivelytotheBoJsannouncement.

Source:Bloomberg,ADMISI
The22January2013BoJ/governmentannouncementmarkedthepeakinthegoldpricetotheday.
Afterthat,itfellbyUS$121.7/oz.duringthenextsixweeks.

Source:Bloomberg,ADMISI
ButtheshockandawefromtheBoJwasstilltocome.
ThenextmajorenhancementtoAbenomicsintermsofmonetarypolicywasunleashedwiththe
BoJs4April2014policymeeting.
Thiswasabiggerone.
TheBoJsnewplanwasforassetpurchasesatanannualrateofYen6070trillionwhichaimedto
DOUBLETHEMONETARYBASEintwoyearsfromtheend2012levelofYen138trillion,toYen
200trillionbyend2013andYen270trillionbyend2014.
ThesamedayReuterscommented.
TheBankofJapanunleashedtheworld'smostintenseburstofmonetarystimuluson
Thursday,promisingtoinjectabout$1.4trillionintotheeconomyinlessthantwoyears,a
radicalgamblethatsenttheyenreelingandbondyieldstorecordlows.NewGovernor
HaruhikoKurodacommittedtheBOJtoopenendedassetbuyingandsaidthemonetary
basewouldnearlydoubleto270trillionyen($2.9trillion)bytheendof2014,adoseofshock
therapyofficialshopewillendtwodecadesofstagnation.Thepolicywasviewedasaradical
gambletoboostgrowthandliftinflationexpectationsandisunmatchedinscopeevenbythe
U.S.FederalReserve'sownquantitativeeasingprogram.
TheBoJsmoreaggressiveeasingsawtheNikkeisurgebymorethan3,000points,oramassive
23.7%,inonlysevenweeksbetween4April2013and22May2013.

Source:Bloomberg,ADMISI
TheshockandawefromtheBoJwasquicklyseeninthegoldmarketexceptinreverse.
ThehugeupwardmoveintheNikkeiwasthemirrorimageofthecollapseinthegoldpricewhich
beganshortlyafterwards.

Source:Bloomberg,ADMISI
Thevastmajorityofgoldscollapsetookplaceinwhatisnowviewedasaninfamoustwoday
tradingperiodinthegoldmarketFriday12April2013andMonday15April2013duringwhich

thepricefellmorethan12%.
ThiswashowRossNormanatthe230yearoldbullionbrokingfirm,SharpsPixley,described
eventsontheFriday.
ThegoldfuturesmarketsopenedinNewYorkonFriday12thApriltoamonumental3.4million
ounces(100tonnes)ofgoldsellingoftheJunefuturescontractinwhatprovedtobeonlyan
openingshot.Thesellingtookgoldtothetechnicallyveryimportantlevelof$1540whichwasnot
onlythelowof2012,itwasalsoseenbymanyasthelevelwhichconfirmedtheongoingbullrun
whichdatesbackto2000.Inmanytradersmindsitstoodasaformidablesupportlevel...thelinein
thesand.
Twohourslatertheinitialselling(wasfollowed)byarathermoresignificantblastwhenthefloor
washitbyafurther10millionouncesofselling(300tonnes)overthefollowing30minutesof
trading.Thiswasclearlynotacaseofdisappointedlongsleavingthemarketithadthehallmarksof
aconcerted'shortsale',whichbydrivingpricessharplylowerinadisplayof'shock&awe'would
seektogainfurthermomentumbypromptingotherstoalsoselltheirpositionsastheyhittheir
maximumacceptablelossesThesellingwastimedforoptimalimpactwithNewYorkatitsmost
liquid,whilekeyoverseasgoldmarketsincludingLondonwereopenandabletofeeltheimpact.The
estimated400tonnesofgoldfuturessellingintotalequatesto15%ofannualgoldmineproduction
toomuchforthemarkettoreadilyabsorb
Futurestradingisperformedonamarginedbasisthatistosayyouhavetostumpupabout5%of
theactualcostofthegolditselfmakingfuturestradesahighlygeared'opportunity'ofabout20:1
easyprofitandalsoloss!Futurestradingisnotaproductforwidowsandorphans.TheCME's10%
reductionintherequiredgoldmarginsinNovember2012from$9133/contracttojust$7425/contract
madethemarketmoreaccessibletothosewishingbothtogolongor,asittranspired,togoshort
Wehopethatyounotedthatthesellingwasspecificallygoldfuturescontracts,notphysicalgold.
Hereisanintradaychartshowingtheonetwohittothegoldpriceon12April2013.

Source:Bloomberg,ADMISI

AndletsremindourselvesthatthefinancialsystemwasntexactlyfallingapartinApril2013,soif
youhappenedtohave400tonnesofgold,evenpaperratherthanactualgold,whichatthetime
wasworth$20.0bn,youdhavetobeinsanetosellitinsuchfashion.
Unless
youwereactingforacentralbank(lackingtheprofitmotive),ORyouraimwastocausethe
maximumdownwardpressureonthepricebecause,letsspeculateforamoment
...itwastheshortsideofalong/shorttrade?
Insuchascenario,eventsinthegoldmarketstartmakingsense.
Despiteitsferocity,anotherinterestingaspectofthecollapseinthegoldpriceinmidApril2013was
thatitcontradictedfreemarketsignalsoftightnessinphysicalgoldsupplyatthetime.
ThiswasclearfromtheGOFOrate.GOFOistheGoldForwardOfferedRateontheLBMAandis
thecost,intermsoftheinterestrate,ofborrowingdollarsusinggoldascollateral.GOFOmoving
closetozeroimpliesthatthemarkethasagreaterneedtoborrowphysicalgold,i.e.toswapitfor
dollars.
GOFOhadbeenonadecliningtrendsincethegoldpricepeakedon4October2012,suggesting
thatinvestors(whetherofficial,institutionalorretail)hadbeentakingadvantageofthefallingpriceto
accumulatephysicalgold.
Bythetimethegoldpricecollapsedon12April2013,theGOFOratehadfallentoonly17basis
pointsandbrieflywentnegativethefollowingmonth.

Source:Bloomberg,ADMISI
GOFOshouldnotgonegativeinanefficientlyfunctioninggoldmarketwithadequatephysical
supply.NegativeGOFOimpliedthatthemarketwassoshortofphysicalthatitwouldpayaninterest
ratetoholdersofbulliontoborrowtheirgold(whocouldalsoputtheirswappeddollarsondeposit).

Thefuturesmarketwastellingasimilarstoryviathegoldbasis.Thegoldbasisisthedifference
betweenthespotpriceofgoldanditspriceinthenearmonthfuturescontract.Thegoldmarket
shouldnevermoveintobackwardation(negativebasis),i.e.wheretheofferpriceofthenearmonth
futureislowerthanthebidpriceofspotgold,sinceitimpliesariskfreeprofit.Thatis,unlessthe
marketisconcernedabouttheavailabilityofphysicalgoldwhenthefuturescontractexpires.
SandeepJaitlyandhismentor,ProfessorAntalFekete,aretheworldexpertsonthegoldbasis.
BelowisachartfromSandeepJaitlysGoldBasisServiceon1May2013.

Source:Bloomberg,ADMISI
Thegoldbasis(blueline)crossedintonegativeterritoryon5April2013andthebackwardationwas
intensifyinguntilthepricewassmashed(lightgreenarrow).Asthepricefell,goldalmostmovedout
ofbackwardationbeforethelatterintensifiedessentiallytellingthesamestoryoftightsupplyas
GOFO.
Wellreturntophysicalgoldsupplyanddemandagainbelow.
AftersurgingfromearlyApriltolateMay2013,theNikkeiexperiencedasharpcorrectionfrom21
May2013throughtomidJune2013.ThiscorrectionstemmedfromtheBernanketapertantrumas
itbecameknown,whichhitequitymarketsaroundtheworld.
Thecorrectionwasshortlived.ThebottomintheNikkeiat12,445occurredon13June2013,which
wastwodaysaftertheBoJsMonetaryPolicyMeeting(andelevendaysbeforethebottominthe
S&P500).Inlittlemorethanamonth,theNikkeirecoveredmorethan2,000pointsto14,809on18
July2013.

Source:Bloomberg,ADMISI
AstheNikkeirecoveredduringthesecondhalfofJune2013,thegoldpricecollapsedagainduring
2027June2013.ThisincludedafallofUS$82/oz.on20June2013.

Source:Bloomberg,ADMISI
HavingbrieflygonenegativeinMay2013,thereneweddownwardpressureonthegoldprice
pushedGOFObackbelowzeroinearlyJuly2013.Itoscillatedbetweenslightlynegativeandslightly
positivefortheremainderof2013,suggestingacontradictionbetweenthecollapsinggoldpriceand

underlyingdemandforphysicalbullion.

Source:Bloomberg,ADMISI
ThesamecontradictionwasevidentinCOMEXgoldinventorieswhichdeclinedbyalmost40%
duringJanuaryJuly2013.

Source:Bloomberg,ADMISI
HavingtradedsidewaysthroughAugust2013,theNikkeibeganitsnextascentinearlySeptember,
whichlastedthroughtotheendoftheyear.

WhilemaintainingitsstimulusprogrammeattheMonetaryPolicyMeetingon5September2013,the
BoJupgradeditsviewontheJapaneseeconomy,statingthatitwasrecoveringmoderately.Here
istheNikkeichartfromSeptemberDecember2013.

Source:Bloomberg,ADMISI
TheBoJmaintainedassetpurchasesatanannualrateofYen6070trillionon31October2013,but
upgradedtheirforecastfor2013inflationfrom0.6%to0.7%.However,atleasttwooftheninePolicy
BoardmemberswereknowntohaveexpresseddoubtastowhethertheBoJcouldmeetitsinflation
targetof2%by2015.Thisledtomarketparticipantsanticipatingafurtherlooseningofmonetary
policyinearly2014.
TheprospectofmoreaggressiveBoJpolicymarkedrenewedheavysellinginthegoldmarket.Here
isthecorrespondingchartofthegoldpriceforSeptemberDecember2013.Thepricemadeanintra
daylowofUS$1182/oz.inDecember2013.

Source:Bloomberg,ADMISI
On18February2014,theBoJmaintaineditsannualrateofassetpurchasesatYen6070trillionbut
doubledthescaleofmeasurestostimulatebanklending,measureswhichhadbeenduetoexpire.
Forexample,financialinstiuationswerepermittedtoborrowfundsuptoanamountequivalentto
twiceasmuchastheincreaseintheirnetlending.Afterthistherewasnochangetopolicyduring
theMarch,AprilandMay2014meetings.
TheNikkeitradeddownwards/flatduringJanuarytomidMay2014.Thiswasarelativelygood
periodforgold.Thegoldpricerecoveredfromc.US$1,200/oz.atthebeginningoftheyearandcame
closetotestingUS$1,400/oz.inMarch2014,beforeeasingbacktotheUS$1,300/oz.level.
Afterbottomingon19May2014,theNikkeiembarkedonamajorupwardmovefrom14,006toan
intermediatetopof16,374on25September2014.Thiswasintandemwithmanyotherequity
markets,notablytheS&P500.
The19May2014wasthedaybeforethetwodayBoJMonetaryPolicyMeetingon2021May2015.

Source:Bloomberg,ADMISI
On20May2014,ZeroHedgehadanintriguingreportwhichconnectedanattackongoldwitha
movementinJapaneseassetprices.
AninitialdumpingoldhappenedwhenEuropewasgettinggoinglatelastnightbutastheUS
wakesupandmarketsgetactive,someone(panicseller)decideditwasanentirelyoptimaltimeto
sell$520millionnotionalgoldfuturessendingthepriceofthepreciousmetaldown$7.Intriguingly,
thoughthenotionalsizewaslarge,theactualmoveisnotaslargeaswehavebecomeusedtowith
theubiquitousslamdowns(andit'saTuesday).Atthesametime,USDJPYwasramped...

Source:Bloomberg,ADMISI

ThatrelativelymodestattackongoldintensifiedtowardstheendofMay2014astheupwardmove
intheNikkeiaccelerated.
AswemovedthroughJune/earlyJuly2014,theNikkeicontinuedtorise.Meanwhile,thegoldprice
wasthreateningtobreakoutoftheLongNikkei/ShortGoldstranglehold.Itreboundedfrom
US$1,244/oz.inearlyJune2014toanintermediatehighofUS$1,339/oz.on11July2014.
Thenbang

Source:Bloomberg,ADMISI
Thepeakinthegoldpriceon11July2014wasaFriday.Goldwasattackedonthefollowing
Mondaythe14July2014,which(coincidentally)wasthefirstdayoftheBoJstwodayJuly
MonetaryPolicyMeeting.
ZeroHedgedescribedeventsinthegoldmarketon14July2014inanarticleGoldSlumpsMostin
2014AsSomeoneDumps$1.37BillionInFuturesAtUSOpen.
UPDATE:Goldisdown2.5%thebiggestdailydropsinceearlyDec2013.Inastatusquo
reinforcingsmackdown,goldandsilverpriceshavebeenclubbedlowerthismorningtoonemonth
lowswiththebiggestdropinalmost2months.ThecustomaryUSDJPYsurge(andriskassetspike)
hasaccompaniedthishighvolumedump
TheZeroHedgechartshowedhowthesellingbeganatthemarketopeninEurope.

Source:Bloomberg,ADMISI
Anotheronetwohit.
MovingintoAugust2014andtherewasnochangetoBoJpolicyatitsmeetingwhichendedon8
August2014.Ifyoureferbacktothechartsabove,youwillnoticethatthiscoincidedpreciselywith
anintermediatelowintheNikkeiandwasonlytwodaysbeforeanotherintermediatehighingold
TherewasnochangetoBoJpolicyatitsmeetingwhichendedon4September2014.Meanwhile,
theNikkeicontinuedrisingwhilethegoldpriceproceededtofallUS$51/oz.in11tradingdays.
Nowmoving(almost)uptodate.
AfteranothernochangemeetinginearlyOctober,theBoJwentnuclearon31October2014
whenitannouncedtheExpansionoftheQuantitativeandQualitativeMonetaryEasing.
Inbrief,theBoJcommittedtoincreasingitsannualrateofassetpurchasesbyanadditionalYen10
20trillionfromYen6070trilliontoYen80trillion(US$724bn).
Besidestheweaknessintheeconomyandslippageversusthe2%inflationtarget,therealsoseems
tohavebeenaneedtocoordinateincreasedQEwiththeGPIF(governmentpensionfund)
rebalancingitsassetallocation.Kurodadeniedthelink,butsomeofthenumbersarealmost
perfectlyaligned.TakingitsendJune2014assetallocation,GPIFwasalreadydownto55.4%JGBs
sotheadditionalselloffindomesticbondstocuttheallocationto35%isapproximatelyYen28trn.
ThisdovetailedneatlywiththeincreasedJGBpurchasesbytheBoJ.
TheBankwillpurchaseJGBssothattheiramountoutstandingwillincreaseatanannualpaceof
about80trillionyen(anadditionofabout30trillionyencomparedwiththepast).
TheJGBmarket,partsofwhichhavenoteventradedonsomedays,nolongerfunctionsasatrue
market.SoonehastoaskwhatwouldhavehappenediftheGPIFhadsoldYen28trillionintoan
illiquidmarketandraisedborrowingcostsinoneoftheworldsmostindebtedcountries?
Instead,theBoJisreadyandwaitingwithanenlargedbidandtherelationshipbetweenthe

JapaneseMoF,theBoJandnowtheGPIFis,toborrowthedescriptionfromourcolleague,Andy
Ash.
akintoswappingsoccerstickersintheplayground.
TheBoJslatestmoveisamajorsteptowardsliquefyingJapanesefinancialmarkets,andeffectively
muchoftheeconomy,sincepurchasesofequityandrealestateETFsarealsobeingrampedup.
BeforeweconsiderthedesperationofthismoveonthepartoftheBoJ,includingAbesdecisionto
postponethesecondsalestaxincreaseandcallageneralelection,letslookatitsimpactonthe
Long/ShortNikkeiversusGoldtrade.
Firstly,theNikkei.

Source:Bloomberg,ADMISI
Itseemsthatsometradersmighthavegotwindofthelikelihoodofmoreaggressivepolicybefore
the31October2014meeting.JamesAitkenofAitkenAdvisorsissomeoneweadmireintermsof
hisdeepknowledgeofcreditmarketsandcentralbankpolicy.Writingon4November2014,he
explainedthatJapaneseinsidershadbeenhintingtomarketparticipantsthattheendOctoberpolicy
meetingcouldbelive.Soitturnedout.
SpeculationhadalsobeengrowingintheJapanesemedia,e.g.thisfromNikkeion23October
2014.
TheBankofJapannowseesamuchbiggerpossibilityofinflationslippingbelow1%,pusheddown
byfallingcrudeoilprices,accordingtopeoplefamiliarwiththecentralbanksthinking,a
developmentthatcouldrekindlemarketspeculationforadditionaleasing.
Thegoldpricehadpeakedon21October2014andstartedtofallsharplyon30October2014
duringAsianhours(29October2014inLondon/NYterms).
Thepricecollapsedduringthenexttwodays

Source:Bloomberg,ADMISI
takingitthroughthecriticaltechnicallevelofUS$1,180/oz.whichwasthelowin2013.
Thislatestattackongold,coordinatedwithaggressiveBoJstimulusandasurgingNikkei(again),
lastedfivedaysasZeroHedgehighlightedinanarticleBecauseNothingSaysBestExecution
LikeDumping$1.5BillionInGoldFuturesAt0030ET.
Forthe5thdayinarow,"someone"hasdecidedthat0030ETwouldbeanappropriatetime
(assumingthe'seller'isaninvestorwhoprefersbestexecutionratherthanthestandardnon
economicallyrationalsharerepurchaserinAmerica)tobedumpinglargeamountsofprecious
metalspositionsviathefuturesmarket.Tonight,withover13,000contractsbeingflushedthrough
Goldamountingtoover$1.5billionnotional,goldpricestumbled$20to$1151(itslowestlevel
sinceApril2010).

Source:Bloomberg,ADMISI
ThesuspicioustradingactivitywasnoticedbyReuterswhocommentedon20November2014.
SomeofthebiggestpricemovesingoldsincelateOctoberhave,unusually,occurredinAsian
hoursandtradersmoreaccustomedtofollowingtheleadoftheirWesterncounterpartssuspecta
bigincreaseinalgorithmictradingmaybetoblame.Sensitivitytothedollaryenexchangeratemay
alsohelpexplainthemoves,althoughsometradersspeculatedthatthetiminglookedsuspiciously
likeattemptstocatchChinesetradersoffguardduringtheirlunchbreak.LiquidityinAsiatendstobe
thinuntilEuropewakesupbutrecentweekshavebeendifferent:COMEXgoldfutures,thebusiest
goldcontractintheworld,havesufferedsharpselloffsinAsia,sometimessparkedbythenewsflow
orcurrencymovesbutoftenfornoidentifiablereason.ItisunusualforAsiatobeseeingthesebusy
tradingsessions,saidDavidGovett,headofpreciousmetalsatbrokerMarexSpectroninLondon.I
havespokentoalotofpeopleaboutitandthegeneralconsensusseemstobethatthereisabig
increaseinalgorithmicandhighfrequencytradinginthistimezonenowadaysasitcanbequite
easytopushabout,hesaid.
ItsnotourintentiontopublishadetailedcritiqueonAbenomicsinthisreport.However,the
evidencethatitsnotworkingwasbroughtintosharperfocuswiththe3Q2014GDPdeclineof1.6%.
Thisfollowedthe7.3%reductionthepreviousquarterandconfirmedthattheeconomyhadreturned
totechnicalrecession.
DesperationonthepartofAbeisbehindhisdecisiontodelaytheriseinthesalestaxandhiscalling
ofasnapgeneralelection.
Commonsensesuggeststhatthelastthingthatasocietywithanageingdemographicneedsisthe
Abenomicsprescriptionofzerointerestratescoupledwithrisinginflation.Nonetheless,ifweexclude
theApril2014taxhike,JapanscoreCPIismovinginthewrongdirection,1.0%versusthe2.0%
target.

TherecentfallintheoilpricewilltakeCPIevenfurtherawayfromtarget
PerhapsafurtherdeclineinJapaneseinflationinthecomingmonthswillbemetwithevengreater
monetarystimulus.Indeed,Kurodastatedon5November2014thatthereispotentiallynolimitto
theBoJsattemptstomeetitsinflationtarget.
Itsnaturaltoactshoulddownsideriskstopricesbecomesubstantiallastweekseasingwasa
truedisplayoftheBanksunwaveringcommitmentAsformeasuresforadditionaleasing,Idont
thinkthereisalimit,includingonbondpurchases.
AsapercentageofGDP,theBoJsbalancesheetisnowalmost60%,whichevenleavestheFeda
longwaybehindinitswake.

Source:Bloomberg,ADMISI
AtthecurrentrateofassetpurchasesandassuminggrowthinJapanesenominalGDPof2.0%p.a.,
theBoJsbalancesheetwillbealmost75%ofGDPinayearstime.
Theoretically,thereisnolimittotheweaknessintheYen.TotheextentthattheNikkeikeeps
repricingitselfinweakerYen,whichhelpstoobscurethesin,thereisnolimittotheupsidein
nominalterms.
Thisisthebeautyofthelongsideofthelong/shortNikkeiversusGoldtrade,atleastinYenterms.
Ofcourse,Abenomicsmightstillworkandtheneedformonetarystimuluscouldrecede.
Alternatively,risingoppositioneitherfromtheJapanesepoliticalestablishmentorpublicopinion
couldyethaltAbespolicy.
Physicalgolddemand
TheshortGoldpartofthetradeisobviouslyverydifferenttobeinglongNikkeiinthesensethatthe
downside,inthiscase,isnotinfinite.

Whilepricediscoveryinthegoldmarketisalmostentirelydependentonsupplyanddemandfor
papergoldinstruments,thepricecannotgotozerosince,atsomepoint,offersofphysicalgoldwill
dryup.
Adefaultonsomeformofpapergoldinstrumentwouldleadtoafundamentalchangeofthecurrent
marketstructureandsupportarepricingofphysicalgold.
Followingthemostrecentselloff,thegoldmarketisshowingrenewedsignsoftightnessinphysical
supply.The1monthGOFOrateis0.298%.

Source:Bloomberg,ADMISI
Thisisthelowestitsbeensince2001,whichmarkedthelowinthegoldpricepriortothe200111
bullmarket.

Source:Bloomberg,ADMISI

ThegoldbasisisalsonegativeagainwhichyoucanseefromyourBloombergorReutersterminal,
i.e.thebidonspotgoldisabovetheofferontheDecember2014goldfuture.
NegativeGOFOandanegativegoldbasisareearlywarningsignsthatoffersofphysicalgoldatthe
currentpricearebeginningtodryup.
Forgettingpapergoldinstrumentsforamoment,whatelsecanwegleanaboutthemarketfor
physicalgold?
Despitewhatyoumayhaveread,itisimpossibletomodelsupplyanddemandforphysicalgold.
Thereasonforthisistheextremestocktoflowratioofmonetarymetalssuchasgold(especially)
andsilver,i.e.thestockofavailablegoldismanymultiplesofannualsupply.Unlikeother
commoditieswhichareproducedforconsumption,thevastmajorityofallthegoldevermined
remainsinaform,e.g.bars,coins,jewellery,etc,whichmakesiteitherveryeasyorrelativelyeasy
toturnitbackintosupply.
TheWGCestimatesthatthereare177,200tonnesofgoldonthesurfaceoftheplanet(actuallytoo
low)comparedwith3,054tonnesofgoldminedin2013.Incontrast,knownstocksofother
commoditiessuchasindustrialmetals,bulkslikeironoreandagriculturalcommoditieslikegrains
areafractionofannualproduction.Thesituationiscompletelyinvertedcomparedtogold.
DatafromtheWorldGoldCouncilandindustryconsultantsisnothingmorethantheirbestguesses
forincrementalsupplyintermsofnewlyminedgold,togetherwithscrapsupplyandofficialsales,
andwheretheythinkthatincrementalsupplygoes.Thereisnowaytocalculatethesupplyand
demandwithintheexistinginventoryof,forexample,goldbarsandcoins.
Ifmodellingsupplyanddemandisimpossiblewhatcanwedo?

Besidesmarketindicators,suchasGOFOandthegoldbasis,welookatthenetimpactoffour
quantitativeindicatorswhicharemajorswingfactorsinphysicalgolddemand.
GoldwithdrawalsontheShanghaiGoldExchange(datafromtheSGE)
GrossgoldimportsintoIndia
NetchangeingoldholdingsofallknownETFs(Bloomberg)and
Netchangeincentralbankgoldholdings(WGC,quarterlydataweightedonamonthly
basisaccordingtotheWGCsincompletedataforthelatter).
ThechartbelowshowsthenetchangesingolddemandfromthesefoursourcesfromJanuary2010
toOctober2014.

Source:Bloomberg,ADMISI
Thereareseveralpointstonote.
Golddemandfromthesesourcescanberelativelyvolatileonamonthtomonthbasis,
anythingfromunder150tonnestomorethan300tonnes
Despitethemonthtomonthvolatility,therehasbeennosignificantchangeinthenetdemand
fromthesefoursourcesduringthisperiod
ThechartunderstatesthestrengthofdemandsincetheraisingofimportdutiesbyIndia(the
worldslargestgoldmarketin201012)hasledtoawelldocumentedsurgeingoldsmuggled
intothecountrysinceearly2013
ItalsolikelyunderstatesthedemandsinceitEXCLUDESPBoCpurchases,asthelatteronly
publishesitsholdingseverysixyears.ChinaspolicyofdiversifyingitsmorethanUS$3.9
trillionofforeignexchangereservesanditsdesiretobecomeagoldmarkethubputsthe
probabilitythatithasntusedthefallinthegoldpricetoaccumulateadditionalgoldreservesat
almostzeroand
Themostrecentaggregatenetdemandfromthesesourceshasbeensomeofthestrongest
duringalmostfouryears.Thissupportsmarketindicators,suchasGOFOandthegoldbasis,
whicharealsoindicatingtightsupplyofphysicalbullion.
WeshouldtakeamomenttoexplainthesignificanceofwithdrawalsontheShanghaiGold

Exchange.
UnderChineselaw,allgoldeithermineddomesticallyorimportedhastobesoldthroughtheSGE,
whichallowstheChineseauthoritiestomonitornongovernmentgoldreserves.Oncebarsare
withdrawnfromtheSGE,theyarenotallowedtoberedeposited(Article23oftheSGErulebook).
WithdrawnSGEbarswhichareresoldhavetoberecastandassayedasnewbars.Thisgoldis
countedasscrapsupply.
Consequently,SGEwithdrawalsareacloseproxyforincrementalChinesedemand.
TheaggregateofSGEwithdrawalsin2013was2,197tonnes,whichwasequivalentto72%ofthe
worldsnewlyminedgoldandthatwasjustChinesedemand(anditexcludedPBoCpurchases
seebelow).Chinesedemandofc.2,000tonneslastyearwashigherthantheWGCsfigurebutcan
alsobecorroboratedbyaddingnetimportsintoChinafromHongKong(only)todomesticmine
production.
ItwasalsoconfrimedbyofficialChinesesources.TheChinaGoldNetworkreportedaspeechbythe
ChairmanoftheShanghaiGoldExchange(SGE),XuLuode,on15May2014inwhichhestated.
Xupointedoutthatthecurrentgoldmarket,especiallythephysicalgoldmarket,isactuallyinthe
East,mainlyinChina.LastyearChinasowngoldenterprisesproduced428tonsatthesametime
Chinaimported1,540tonsofgold,addinguptonearly2,000tons.
TorgnyPersson,CEOofBullionStar.comattendedtheLBMAforuminSingaporeinJuly2014.He
reportedoncommentsmadebyXuLuodeinanotherspeechwhichKoosJansenpublishedonthe
InGoldWeTrustwebsite.
InthespeechMrXumentionedandIquotefromtheofficialtranslationintheheadphonesasthe
Chineseconsumptiondemandofgoldhit2,000tonnesin2013.
KoosJansenisnowpublishingontheBullionStar.comwebsiteandhaskeptatallyofgold
withdrawalsontheSGEsofarin2014.Thesehaveamountedto1,761tonnesduringthefirst46
weeks,puttingChinesedemandonafullyear2014runrateofabout2,000tonnes.

Source:Bloomberg,ADMISI
RegardingthePBoC,inaSeptember2014reportwrittenbyNaLiuofCNCAssetManagement,and

publishedbyScotiaBank,NaLiurecountedthecommentmadeduringameetingwiththePresident
oftheSGETransactionDepartment.
ThePBoCdoesnotbuygoldthroughtheSGE.
WhichmeansthatthePBoCspurchasesofphysicalgoldoninternationalmarketsareadditionalto
thec.2000tonnesp.a.ofdomesticChinesedemandweveseenduring201314.Thelastupdateto
ChinesegoldreserveswasinApril2009whenitwasrevealedthatChinahadincreaseditsgold
reservesby76%from600to1,054tonnes.Weawaittheforthcomingupdatein2015withinterest.
Anomaliesinthesilvermarket
Hasthegoldshortbeenpartiallyhedgedinsilver?
Duringthewritingofthisreport,wehappenedtothinkabouttwoanomaliesbetweenthegoldand
silvermarketswhichwedbeenwrestlingwithforalongtime.
ThefirstoneisthedivergencebetweenholdingsofgoldandsilverinETFs.
ThevolumeofgoldheldinallknownETFspeakedinDecember2012.Thebigdeclinesingold
duringthefirsthalfof2013helpedtoshakeoutmanyweakholders.Despitethefactthatthesilver
pricehasfallenfarmorethanthegoldpricesinceitspostQE3peakinearlyOctober2012(53%
versus33%),thevolumeofsilverheldinallknownETFsisveryclosetoanalltimehigh.

Source:Bloomberg,ADMISI
Whyohwhy?
Noticehowthedivergencekickedinattheendof2012,shortlyafterwebelievethatthelong/short
NikkeiversusGoldtradewasinitiated.
Anothercoincidence?
ThesecondanomalyisthedivergencebetweentheopeninterestingoldandsilverontheCOMEX

futuresmarketinNewYork.

Source:Bloomberg,ADMISI
Thatdivergence,dependinghowyoulookatit,eitherbeganinFebruary2012orOctober2012.The
latterisobviouslyveryclose(herewegoagain)towhenwethinkthelong/shorttradewasinitiated.
Westartedtoquestionwhethertheentitieswhichwebelieveareshortgoldhadconcludedthata
rapidexitoftheshortpositioncouldbeproblematic?
Ifso,mighttheyhaveconsideredhedgingpartofthatpositioninthesilvermarket?
ThatmightaccountforthecounterintuitivedivergencesinETFholdingsandCOMEXopeninterest.
Alternatively,whatifsomebodyknewthatthegoldpricewasbeingpusheddownonthebackofa
leveragedshorttraderatherthanonfundamentals?Mighttheygraduallybuildupalongpositionin
silveronthebasisthattheweaknessinthegoldpricewasnotsustainable?
Wedontknowbut
Themuchsmallersizeofthesilvermarket,limitedabovegroundsilverinventory,andstretched
levelofthegold/silverratio,meansthatamajorreversalinthegoldpricewouldhavea
disproportionateimpactonthesilverprice.
Silverisuniqueasitisbothamonetarymetalandanindustrialmetal.Unlikegold,therearelimited
abovegroundstocksofsilverbecausesomuchhasbeenconsumedinindustrialapplications.As
statedearlier,theofficialestimatefortheworldgoldstockis177,200tonnes,or5.7billionoz.
Nobodyknowsthelevelofabovegroundsilverstocks,althoughthemajorityofestimatesareinthe
1.02.0bnoz.range,i.e.between1735%ofthecomparablefigureforgold.
Oftheestimated177,200tonnesofabovegroundgoldstocks,approximately31,500tonnesare
reportedlyheldbythecentralbanks.Theseinstitutionsareabletoleasethisgoldintothemarketto
affecttheprice.Centralbanks,asfarasweareaware,havedivestedtheirsilverreserves.

Thegold/silverratioiscurrently73.0havingaveraged1516xforseveralthousandyears.Attimes,it
hasevenbeenconsiderablylower.Forexample,theratiowas12.5timesduringtheeraof
AlexandertheGreatinthefourthcenturyB.C.andwasfixedat12.0duringtheRomanEmpire.The
ratiostartedtorisewiththeprogressivedemonetisationacrossEuropeandtheUSinthelate
nineteenthcenturywhichculminatedinChinajettisoningthesilverstandardin1935.
Duringthelast20years,theratiohasgenerallytradedwithinthe5070range.Havingsaidthat,
therewasonly8.3timesmoresilverminedthangoldin2013,sosomereversiontothemean(15
16x)mightbejustifiedinthecomingyears.

advertisements

SponsoredContentbynRelate

FromAroundTheWeb

Falling(Back)InLoveWith
SocialMedia

HowShouldYouRespondto
ForexTradingLosses?

6InsanelySimpleEasyWaysto
DoubleYour...

SpecialCounsel

Babypips.com

1CareerTipaDay

FiveTemporaryWorkBenefits
ToConsider

Bangladeshsselfstyled
secularistsareno...

Top10:MasculinityMyths

Ajilon

WorldObserverOnline

10Things

http://pubads.g.doubleclick.net/pagead/adview?
Abenomics AlgorithmicTrading B+ Backwardation BankofJapan BearStearns
Bond BorrowingCosts CapitalMarkets CentralBanks China CommercialPaper Core
CPI CPI Creditors Crude CrudeOil default EquityMarkets ETC Eurozone
FederalReserve FederalReserveBank fixed Futuresmarket GlobalEconomy Goldman
Sachs goldmansachs HongKong India Japan Lehman Meltdown MonetaryBase
MonetaryPolicy NewNormal NewYorkFed Nikkei NominalGDP OTC Precious
Metals QuantitativeEasing Realestate Reality Recession REITs RepoMarket
Reuters RomanEmpire ShadowBanking SpeculativeTrading TreasuryBorrowing
AdvisoryCommittee TylerDurden Unemployment Volatility WallStreetJournal World
GoldCouncil Yen
SourceURL:http://www.zerohedge.com/news/20141204/insidelookshockingrolegoldnewnormal
Links:
[1]http://www.zerohedge.com/users/tylerdurden
[2]http://www.zerohedge.com/taxonomy_vtn/term/12432
[3]http://www.zerohedge.com/taxonomy_vtn/term/9664
[4]http://www.zerohedge.com/taxonomy_vtn/term/10413
[5]http://www.zerohedge.com/taxonomy_vtn/term/7832
[6]http://www.zerohedge.com/taxonomy_vtn/term/9733
[7]http://www.zerohedge.com/taxonomy_vtn/term/9657
[8]http://www.zerohedge.com/taxonomy_vtn/term/10414
[9]http://www.zerohedge.com/taxonomy_vtn/term/10176
[10]http://www.zerohedge.com/taxonomy_vtn/term/10348
[11]http://www.zerohedge.com/taxonomy_vtn/term/10130
[12]http://www.zerohedge.com/taxonomy_vtn/term/139
[13]http://www.zerohedge.com/taxonomy_vtn/term/7994
[14]http://www.zerohedge.com/taxonomy_vtn/term/12187
[15]http://www.zerohedge.com/taxonomy_vtn/term/10831
[16]http://www.zerohedge.com/taxonomy_vtn/term/9885
[17]http://www.zerohedge.com/taxonomy_vtn/term/10861
[18]http://www.zerohedge.com/taxonomy_vtn/term/9127
[19]http://www.zerohedge.com/taxonomy_vtn/term/7
[20]http://www.zerohedge.com/taxonomy_vtn/term/10035
[21]http://www.zerohedge.com/taxonomy_vtn/term/10405
[22]http://www.zerohedge.com/taxonomy_vtn/term/12167
[23]http://www.zerohedge.com/taxonomy_vtn/term/9244
[24]http://www.zerohedge.com/taxonomy_vtn/term/12403
[25]http://www.zerohedge.com/taxonomy_vtn/term/10417
[26]http://www.zerohedge.com/taxonomy_vtn/term/12159
[27]http://www.zerohedge.com/taxonomy_vtn/term/10655
[28]http://www.zerohedge.com/taxonomy_vtn/term/197
[29]http://www.zerohedge.com/taxonomy_vtn/term/126
[30]http://www.zerohedge.com/taxonomy_vtn/term/10856
[31]http://www.zerohedge.com/taxonomy_vtn/term/10673
[32]http://www.zerohedge.com/taxonomy_vtn/term/8436
[33]http://www.zerohedge.com/taxonomy_vtn/term/10959
[34]http://www.zerohedge.com/taxonomy_vtn/term/10338
[35]http://www.zerohedge.com/taxonomy_vtn/term/9537
[36]http://www.zerohedge.com/taxonomy_vtn/term/10014
[37]http://www.zerohedge.com/taxonomy_vtn/term/11402
[38]http://www.zerohedge.com/taxonomy_vtn/term/9112
[39]http://www.zerohedge.com/taxonomy_vtn/term/12285
[40]http://www.zerohedge.com/taxonomy_vtn/term/11670
[41]http://www.zerohedge.com/taxonomy_vtn/term/8683

[42]http://www.zerohedge.com/taxonomy_vtn/term/11344
[43]http://www.zerohedge.com/taxonomy_vtn/term/11185
[44]http://www.zerohedge.com/taxonomy_vtn/term/12115
[45]http://www.zerohedge.com/taxonomy_vtn/term/12218
[46]http://www.zerohedge.com/taxonomy_vtn/term/10912
[47]http://www.zerohedge.com/taxonomy_vtn/term/145
[48]http://www.zerohedge.com/taxonomy_vtn/term/190
[49]http://www.zerohedge.com/taxonomy_vtn/term/9184
[50]http://www.zerohedge.com/taxonomy_vtn/term/11843
[51]http://www.zerohedge.com/taxonomy_vtn/term/11731
[52]http://www.zerohedge.com/taxonomy_vtn/term/10193
[53]http://www.zerohedge.com/taxonomy_vtn/term/8980
[54]http://www.zerohedge.com/taxonomy_vtn/term/9936
[55]http://www.zerohedge.com/taxonomy_vtn/term/10938
[56]http://www.zerohedge.com/taxonomy_vtn/term/9281
[57]http://www.zerohedge.com/taxonomy_vtn/term/10139
[58]http://www.zerohedge.com/taxonomy_vtn/term/11703
[59]http://www.zerohedge.com/taxonomy_vtn/term/10118
[60]http://admis.com/home
[61]http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2014/12/gold%20teaser.jpg
[62]http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2014/12/PM%201.jpg
[63]http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2014/12/PM%202.jpg
[64]http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2014/12/PM%203.jpg
[65]http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2014/12/PM%204.jpg
[66]http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2014/12/PM%205.jpg