Izabella Kaminska makes the point that central banks have turned net gold buyers:
Kaminska seems to believe that gold’s price is not just central-bank supported, but its trajectory is downward:
If not for the gold bar/coin frenzy and ETF demand (now substituted by official buying), one might speculate that the collapse in conventional demand (i.e. for industrial and jewelery purposes) may have led to a very different price path for gold post 2008.
Now that ETF demand is waning, however, marginal support for the gold price is actually being provided by the official sector more than ever.
Though, given the gold price reaction of late, clearly even this is not so effective so, either gold and coin buying has started to wane as well – and there is evidencethat this is the case – or it’s taking ever more buying (by official sources) to keep prices supported at the current level.
The recent plateauing of the gold price thus either suggest that today’s spot supply is increasingly catering to tomorrow’s demand expectations, or in the context of more gold being produced all the time, it is taking ever more buying by the official sector to keep prices from falling.
In other words, sans the intervention of central banks on a major level: case bearish.
The obvious thing, though — even if we take central bank buying out of the equation altogether — is that total demand for gold is still increasing. And the price of gold has increased faster than sales, illustrating that the market has struggled and continues to struggle to keep pace with underlying demand.
And it’s not just demand for gold-denominated paper (i.e. ETFs or other such as-risky-as-anything-you’ll-get-from-MF Global assets) — it’s recently manifested as demand for hard physical gold:
It’s true that central banks are presently supporting the gold price — after years of selling off national wealth at pennies-on-the-dollar into a bear market and thus suppressing prices. Yet it’s not the Western central banks that are pushing demand for gold. It’s the BRICs. As PBOC official Zhang Jianhua noted:
No asset is safe now. The only choice to hedge risks is to hold hard currency — gold.
And as I noted yesterday, BRICs have founded and legitimate fears of buying even deeper into an increasingly ponzified, over-leveraged, rehypothecated and interconnective paper financial system. The PBOC (and other American creditors) already faces the risk of the US Treasury inflating much of their holdings away; the entire point is to get out of such assets into something much harder to duplicate, and impossible to inflate away.
According to China’s State Council’s Xia Bing:
China must make fuller use of the non-financial assets in its foreign reserves, as well as speed up the diversification of investing channels to resist a possible long-term weakening of the dollar.
No; I don’t think it’s particularly wise to announce to the world that you’re going to get elbow-deep into gold bullion either, but this isn’t just a bluff. China is importing hard-to-fathom quantities of gold:
Ultimately, the surge in demand for gold reflects one thing alone: distrust of the increasingly messy, interconnected, over-leveraged and fraudulent financial system. Whether it is China — fearful of dollar debasement — loading up on bullion, or retail investors in the United States or Europe — fearful of another MF Global (or PFG, or Lehman Brothers) — stacking Krugerrands in their basement, demand for gold reflects distrust in finance, distrust in the financial establishment, distrust in banks, distrust in regulators, distrust in government and distrust in the financial media. And it is that distrust — not (by any stretch of the imagination) central bank interventionism — that is the force moving demand for gold.
The distrust is not going anywhere because the system is still rotten. We all know — even Business Insider readers know deep down, I think — that there is something exceedingly rotten at the heart of the global financial system. We don’t know quite how rotten, how deep the rabbit hole goes, who will be implicated, or how fast. But with every LIBOR-rigging scandal (which the Fed, of course, was aware of), every raided segregated account, every devalued pension fund, every failed speculative “hedge”, every Facebook or Zynga pump-and-dump, we get closer to the truth.
There will be no bear market for physical gold until trust in the financial system and regulators is fixed, until markets trade fundamentals instead of the possibility of the NEW QE, until governments represent the interests of their people instead of the interests of tiny financial elites.
azizonomics 
I’ve always found gold to be a really interesting topic because I believe it clearly shows that how desperate people are to hang onto that idea which offers them salvation, that is, the best chance to rely on something outside of themselves.
Gold may indeed be a better form of money, but it still is twice removed from what people need, which is control over their labor-value created. It’s sort of like being happy because your new grocer only puts his pinky on the scale instead of his thumb.
It’s amazing to see the frenzy of people “investing” in gold, always, always, always seeking, “something for nothing,” the great scourge of humanity.
Gold buyers are not looking for something for nothing — unless they are central banks doing it with newly-created fiat (China). In the ordinary market, money always has some form of labour value behind it. People are looking for wealth preservation, and a store of value. I don’t really buy the Marxist concept of surplus value; that employers are ripping off their employees. It’s just the market mechanism — you sell your labour for whatever you can get, and the capitalist sells what is produced for whatever they can get. People who want to “take back” surplus value should just work for themselves. It’s possible today in ways it never was in Marx’s day.
Aziz, all investors are looking for, “something for nothing.” The idea that, “your money works for you,” is as fallacious as your wife/girlfriend telling you that you are the “best” she’s ever had. Pure fantasy.
Making money off of other people, in whatever form it takes, causes most of the problems that confront Mankind; and although He will attempt to justify this behavior a thousand different ways, the result of this behavior is what’s important, i.e., the few with most everything, and the rest caught in the trap of socio-economic/political poverty.
And, YES, everybody should work for themselves, but this has become quite difficult in a world where most are priced/legislated out of this opportunity.
The only true “something for nothing” transactions are theft and charity.
Imp.: We’ll see if AZIZ repeats his refutation of your Marxist (or whatever/whose-ever) hogwash, but I can tell you about ordinary people who work, raise and educate children, give to charity, save, invest, retire, and hope to leave something for heirs. As workers, consumers, investors, etc. we appreciate the accumulation and aggregation of capital (including “intellectual property”) so that life, including opportunity, is far better than in the past. If that doesn’t suit you, try someplace like a Muslim theocracy, North Korea, Venezuela, etc. But please don’t aid and abet despot wannabes like Obama and his czars.
DG, you are mis-understanding what I am saying. Systems are created by the few for the benefit of the few. Capitalism, even in its purest form, has tremendous internal contradictions creating serious crises over and over and over.
I am simply advocating a “non-system” system [least destructive] having fundamentals that are as close as possible to having individual control. This is called moving closer toward more freedom. It is a great deal of the reason people came to this country in the first place.
Although it is certainly healthy to desire personal prosperity, making avaricious greed [and the attendant manipulations that necessarily follow] the centerpiece of your society’s thrust, makes for a very poor outcome.
“The only true “something for nothing” transactions are theft and charity.”
Aziz, your are 100% correct, but one must qualify that by stating that most theft that takes place in this world is perfectly legal.
I believe gold has a very bright future. The turmoil throughout the world is driving people and countries to look for a safety net. Gold has always been the standard even in ancient times, and will always continue to be. Whether you are a large or small investor, you should consider owning gold. I am a small investor and often have difficulty finding a reputable seller who is interested in working with small amounts of coinage. I was fortunate to find http://www.cherishedgold.com . If any readers know of other sites, please let me know. I want to thank the author and I have enjoyed the reader comments.
There is a trustworthy local (Houston area) dealer (gold &silver, bars & coins) who also sells via the internet to China. He may also offer rare coins. springcoins@gmail.com
Very helpful to the individual investor, who must understand gold. Thanks, AZIZ!
Would you please do the same for silver? Compared to gold, silver price manipulation probably is overall WORSE, concentrated in New York banks rather than in London bullion banks, more stabilized by industrial demand, less stabilized by central banks and other large accumulators.
Silver is driven by some of the same fundamentals (distrust of finance, etc), but much moreso by industrial demand, so it is much more cylical. Silver is going to struggle to end 2012 above $30 an ounce, even with QE3, which is way-down on where people were buying last year. I like to buy silver (in the very long run and purely on industrial demand I expect silver to outperform gold and maybe even reach parity with gold), but it is very long term speculation.
See: “Another shocking revelation about the death of the dollar”, emailed July 10 by WyattResearch.com, for a chart showing the duration of six reserve currencies (Portugal, Spain, Netherlands, France, Britain, US) from 1400 to the present. While the email touts gold, it’s not on their chart.
Zero Hedge has had that chart up multiple times.
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If Gold is considered by the Bank for International Settlements “BIS” as Tier 1 0% risk weighting, then watch Gold become more than a Gold Bug Fantasy. “Serious” people will be scrambling for it.
I remember working on the Basle 2 project at a major Australian Bank and I was amused to see Residential Mortgages given a lower risk weighting by the BIS. As a result Banks were encouraged to lend for housing as opposed to business. In fairness Australia has “Full Recourse” lending so you would forego plasma TV’s and holidays before foregoing your home and becoming bankrupt. But the USA????
Paul Krugman says BoIS has gone “full-blown liquidationist”. Watch out.
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What is the official sector? Does that mean central banks? Where do you feel gold/silver is heading?
For the record, I understand your opinion is leaning toward down. But I mean, where do we go from there?
Official sector means governments, intergovernmental organisations (like the IMF, etc).
I don’t know where gold is going. My guess is that it’s going down in the short term, although I suppose a negative article in Alphaville could easily be a strong contrarian indicator for a swing upward.
One upward signal would be the BIS redesignating gold as tier 1 capital. That would create significant demand.
But it doesn’t really matter what happens in the short term.
In the medium term, the upward trend will be sustained, because the distrust of the status quo — by BRIC nations, by Western citizens, etc — is growing and spreading and people are looking assets with little systemic risk.
Like all things, getting to the common denominator is the way to reveal the truth. In this particular crisis, it is debt, in particular debt-money. In economics, in general, it is understanding where economic value is generated and then who ends up with this value [especially understanding the transfer mechanism(s)].
Health care in the United States is a wonderful example of how these systems operate. On the one hand, you have technology which promises temporary salvation from the inevitability of the human life-cycle, where on the other hand, the price exacted leads to severe system dys-function.
The common denominator in health care is in understanding that this life-cycle is finite, and that entertaining a strategy that might attempt to replace/repair body parts at unlimited costs is pure fiscal insanity.
In the same breath, attempting to analyze this pseudo-captialist economic system without understand labor-value’s dynamics, and instead concentrating on its abstracted money-form(s), completely confuses the conundrum.
Economics is ALWAYS the relationship between producer and consumer. All else is non-sense.
The line between producer and consumer will always be kind of blurry. I think the economy functions as an ecosystem; demand creates supply and supply creates demand, labour powers capital and capital powers labour.
Aziz, you are assuming that capital and labor will always have the relationship they current enjoy. It is this relationship which distracts people from seeing beyond the abstractions.
For instance, I am a physician. The health care dilemma in the United States is critical, by all accounts. A couple of weeks ago, I was at a conference and was having a bite to eat with 7 or 8 colleagues and the discussion turned to the crisis.
With the catastrophic effects that the American people have been experiencing over the past 25 years, you might think that the discussion might center on these issues, but no, it was all about decreasing reimbursements, malpractice insurance premiums, i.e., the problems that affects providers. Not one word was spoken about patients.
Aziz, its not that people don’t care, it’s just that, institutionally, groups allow people to act in the interest of the group instead of what should be obvious [with professionals of all stripes in total denial].
This economic crisis is a perfect example of how those with power [institutions] wait until there is nothing left to steal. How much worse must things get, and how many more millions must suffer before people in positions of power say, “enough is enough!?”
You know, I see the problems as having originated in the system previous to the crisis, that created the crisis, and that still hasn’t been fixed. Glass Steagall effectively regulated the banks for sixty years, and so it is repealed and lo and behold we are back in the depression. Glass Steagall was 37 pages long; Dodd-Frank is over 2300. A massively complex system can be loopholed and gamed far more easily than a simple, clear one. The gold exchange standard keep credit creation relatively proportionate to the level of productivity, and yet it was repealed and so we had a huge 30 year credit boom, up to the point when gains in credit creation came to surpass those in industrial production, and lo and behold we have a Minsky moment, and a deleveraging-fuelled crash.
Personally, I believe we have to look forward to get ourselves out of the mess. The whole austerity thing would have solved the problem before the crisis, but now it is just making the problem worse. I think we need a debt jubilee.
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Dr. Imp.: I’m delighted to see that you are a U.S. physician! Question: if you were, not just president, but king/dictator, what would our healthcare system be???
There is only one solution…prevention only. The real problem in health care is technology and the fact that it has already created a situation where the costs of treatment has outrun this society’s ability to afford them.
But, understanding that almost nobody is ready to deal with taking that kind of personal responsibility, a well-controlled universal health care system will enable the can to be kicked down the road a few more years.
The current system is even more horrible than any of us believed it could get to 30+ years ago. Corporations making health care decisions is like God hiring the Devil to screen “applicants” at the Pearly Gates.
Can you be more specific as to what a “well-controlled universal health care system” ought to be?
While we can’t appoint a “benevolent dictator”, improvements could be nominated as goals. I’m not in the profession, but my “amateur” plan would be market-oriented: those who are unable or unwilling to buy private care (with risk-based free-market insurance available), can receive free clinical care “IN KIND”, i.e., not insurance, cash reimbursement, etc. — like the Salvation Army gives food, clothing and shelter in kind. This won’t immediately solve what I suspect is one of your worst frustrations (along with disincentives for prevention) — massive consumption of resources for minimally extending life. If medical technology grows more affordable as does other technology, that will help. What about trends in cost (and benefits) of old fashioned X-ray, without CT scanning?
It seems to me that at least some* of your colleagues must address cost, resource allocation, financing, etc. — the practical economics of any provider of goods or services. At least in the near term, medical care must be/is/will be rationed. I see the market (choice & competition), plus voluntary charity, doing a lot better job than politicians or non-benevolent tyrants.
* Medical research surely will remain a satisfying life work.
AZIZ of Jul 11 19:40:37: A beautiful summing up. But what are “Minsky moment” and debt jubilee”?
Google – ” Debt Deflation Steve Keen ” He specialises in Minsky analysis.
Thanks. Also, see AZIZ’s opening post under “The Deleveraging Trap” of July 11.
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Hi there I was just working on a long term analysis of the gold chart and came to the following conclusion that if gold breaks $1500, then its lights out for gold at least in the immediate future. You might want to take a look at it.
http://bit.ly/N1y7mG
It is based on Gann’s method of forecasting.
As per this forecast of gold breaks $1500 we could be staring at 1080-1200 levels on gold. http://bit.ly/N1y7mG
I don’t have much time for technical analysis. It’s interesting, and somewhat plausible but the bottom line is that the majority of gold buyers are not tech traders watching prints on Bloomberg terminals to find emergent patterns; they’re buying out of faith in gold as a hedge against systemic risk.
Without technical analysis you would not have the London based brokerages offering FX and equity market trading platforms and skimming the SHEEPLE traders who follow the “Common” pattern recognition.
Train the Sheeple to trade then milk them.
Aziz the theory that I espounded helped me nail the top of NIfty in January 2008. and also the the bottom of March 2009. Awesome and tough to believe.
I am a perrenial gold bull with more than 90% exposure to the precious metals. HOwever it is always better to stand aside and take an unbiased bird eye view on the situation.
And Gann theory and its wave forms precisely provides the same. Its a accurate theory and I am surprised not so much in vogue consider the founder W>D> GAnn made more than $50 mn during the 1950s. (Thats an awful lot of money!)
Its no about watcing prints but taking into cognizance that apart from the wishful upside dowsides to take place and the nature f markets is to oscillate. So we could time it better
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Very incisive and hard-hitting, especially the conclusion.
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It’s going through the roof as they’ve been saying… buy forget ETFs, forget “paper”, forget bonds even… I guess after all the physical assets are the ones that count most and we’d better stockpile up a substantial amount of precious metals.
Gold is too high now… but I guess it will go down just before New Year, as it usually does… then, there will be a great buying opportunity!
The effective way to measure or to expect the gold price is by knowing and learning two important things which are technical analysis and fundamental analysis. It may easy to start a trading by looking at the graphics but the truth is the graphics moved by several news. Nowadays, new beginners want to find their luck in the market but most of them get loss because they want to get an instant way to get profits. It’s completely wrong and by learning those crucial things, the risk can be decreased.