Central Bankers Now Between a Rock and a Hard Place

With the Bubble of Everything showing weakness, the trigger of the coronavirus, and rising gold prices (up until last week), Central Bankers are now between a rock and a hard place. But before I discuss this, let’s discuss China’s future plans for gold. Let us begin with the 2020 New Year message from the Chinese Gold Association:

“In the new year, the gold industry will be closely united around the Party Central Committee with Comrade Xi Jinping as the core, and unswervingly implement the spirit of the Party ’s 19th National Congress with the guidance of Xi Jinping ’s new era of socialism with Chinese characteristics: Fulfill new missions, further strengthen supply-side structural reforms, optimize industrial structure, promote innovation drive, adhere to green development, accelerate the pace of ‘going global’, and jointly promote the high-quality and sustainable and healthy development of the gold industry. The transition to a gold power has made new and greater contributions, and started a more brilliant golden age!”

From the above message, it is apparent that an official State goal of China is to continue to develop its gold industry and to increase the importance of the role gold plays in its national economy. The “official” State released gold figure for China is still less than 2,000 tonnes as it was updated at the end of last year to 1,948 tonnes.  From leafing through all the data of physical gold imported via Hong Kong to China as well as reported gold production in-house, however, an educated speculation would conclude that China’s official reserves are likely ten times their reported number, if not more. Last year, China reported gold production of 380.23 tonnes, a drop of 5.21% in production from the prior year. This production drop seemed to coincide with past year reports that world gold production had peaked in 2018 and was now on the decline. However, given the opacity of all State reported gold data, including that reported by China, we can only make this assessment from culling official data without knowing the veracity of such data.

The Chinese Gold Association (CGA) reported national gold consumption in 2019 (exclusive of gold acquired for State reserves) to be 1,002.78 tonnes, consisting of gold jewelry (676 tonnes, down 8.16%), bars and coins (226 tonnes, down 26.97%) and industrial and other (101 tonnes, down 4.90%). At the end of 2019, the CGA reported, “The high price of gold has led investors in real gold to be cautious and wait and see, and the sales of gold bars by key enterprises and commercial banks have also fallen sharply.” Oddly enough, when I visited some gold dealers in Bangkok at the end of 2019, they also told me the fact that sales were down because of the “high gold price”, a conclusion that even gold dealers do not understand when gold prices should be described as “high” and do not truly understand gold’s monetary value. A few years from now, a $1,500 gold price will be reflected upon as a cheap gold price.

Four nine fine gold sold on the SGE (Shanghai Gold Exchange) continues to trade at higher prices than in New York and London, though not as high as a premium as it did in 2019.  For example, last year in US dollar prices, gold peaked at about $1,557.03 an ounce, while it peaked at 369.24 yuan/gram in China. At the yuan/USD forex rate that existed on that day, 369.24 yuan/gram converted to a USD price of $1,602.89 an ounce, roughly 3% higher than the high price for gold in the US. The premium of gold price in China versus overseas markets in 2019 was growing over time, as Zhang Bingnan, the Beijing Gold Economy Center President, stated in 2008, “Gold prices in China should be 1 yuan a gram, or more than $4 an ounce, higher than the overseas market on average.”  At peak prices last year, the US dollar price was equivalent to 358.68 yuan/gram of gold, not 1 yuan per gram cheaper, but 10.56 yuan/gram cheaper, an anomaly that was also reflected in the much greater annual increase in yuan gold prices versus USD gold prices of 13.73% versus 9.84% last year. Anytime, gold prices exhibit great discrepancies, this means Central Bankers are now between a rock and a hard place, as this is a problem they must solve as quickly as possible, as such anomalies expose the fraud of the global commodities and futures markets. In 2020, China has voiced a commitment to the exploration and discovery of deep gold (gold deposits at depths greater than 1,000 meters), so it will be interesting to observe if China announces any significant underground gold discoveries in the next couple of years.

There was one development at the end of last year on the Shanghai Gold Exchange (SGE), however, of which I was very wary. The SGE, the world’s largest physical gold exchange, that previously mandated that all gold futures contracts that traded and settled on their exchange do so only in physical gold, granted the shady Chicago Mercantile Exchange (CME) officials a license to use, create and list futures contracts based on SGE’s Shanghai Gold Benchmark PM Price that traded both in USD and yuan and settled in cash. These were the first gold futures contracts listed on the SGE that were allowed to settle in cash instead of physical gold, and my big fear when I heard this announcement last year was that Western bankers would now have a third gold futures market, for the first time located in Asia, in addition to the ones in London and New York, by which to execute shenanigans and manipulate gold (and silver) prices lower. It appears that one of the reasons for this arrangement was to bring the premium in China gold prices back closer to US gold prices, as the US dollar price of the USD denominated gold futures that trade on the SGE no longer have the massive premium in price over the USD gold futures contracts that trade in New York since this arrangement was consummated.

Although many pointed to this arrangement as proof that China has been in on the gold prices suppression game and has been sleeping with the enemy all the while, I’m not so sure I agree with that assessment. To begin, trading volume in these new COMEX gold future contracts that trade on the SGE is tiny, compared to the volume of gold future contracts on the COMEX. For example, total global trading of the US dollar denominated COMEX Shanghai Gold Futures contracts was only 430 in the afternoon of 3 March, and for the renminbi denominated COMEX Shanghai Gold Futures contracts, only 135. Comparatively speaking, the total global trading volume of Gold Futures contracts trading on the COMEX the same day was nearly 60,300 contracts. Furthermore, the COMEX gold futures contracts that trade in Shanghai are only 32.15 troy ounces per contract, whereas the COMEX gold futures contracts represent 100 troy ounces per contract. So at least for the time being, any manipulation of gold futures prices is still taking place in London and New York.

Secondly, though the COMEX contracts were the first to trade on the SGE that did not require physical settlement, this may have merely been a concession willingly given to American bankers in order to try to build the international influence of the SGE. The Chinese always play the long game, so it certainly is possible that they could change the rules for the COMEX gold futures contracts in the future and force them to also settle in physical once trading volume builds to a respectable level.  Consequently, one cannot blame the development of fiat-currency settled gold futures contracts trading on the SGE for the $126 an ounce drop in gold’s price from 24 February of $1,689 to $1,563 on 28 February. This type of price manipulation is still definitely being executed in the Western hemisphere gold markets.

However, the last time I regularly observed such extreme volatility in the intraday prices of gold from high prices in the Asian market to low prices in the London/US market of more than $40, $50, $60 and even in excess of $100 an ounce, was in 2008. As we all know, 2008 was the year global stock markets went haywire and ushered in a global financial crisis. Every time, massive gold price volatility happens, whether up or down, we can be sure that Central Bankers are now between a rock and a hard place. So it is coincidence that on 24 February of this month that gold rose to $1,689 an ounce and four days later, plummeted to $1,563?  I interpret such a steep, rapid pullback in gold prices as a sign of the level of importance the global banking cartel has assigned to suppressing gold prices, in light of the fragility of US stock markets at the current time.

Thus, the greater the suppression of gold (and silver) prices, the greater the severity of current problems afflicting the global stock markets and the more Central Bankers are now between a rock and a hard place. Only this time, since drastically slashing interest rates is the only tool left by Central Bankers to calm the stock markets, they find themselves with no way out, as their solution to calming US stock markets will also reverse the price pullback in gold and silver prices (as even crashing gold back to $1,200 an ounce with no interest rate cut would not calm US stock markets).

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J. Kim

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