Eric Sprott On The Implications Of The "Chinese Gold Vortex"

Tyler Durden's picture

Submitted by Eric Sprott via Sprott Global Resource Investments,

After a long and agonizing winter which was attributed to the so-called “Polar Vortex”, we thought it would be appropriate to highlight for precious metal investors the implications of what we call the “Chinese Gold Vortex”. Over the past year, we have been very vocal about what we consider an aberration: the complete disconnect between gold supply and demand fundamentals and the actual price of the metal.

We have shown in February Markets at a Glance (MAAG) that, for all of 2013, demand from emerging markets, particularly China, was extremely strong, outstripping world mine supply by a fair amount. But this extreme tightness in the physical market was not reflected in gold prices. We have since then discussed many signs of manipulation in both the paper and physical gold markets (ETF flows, Indian intervention, LBMA fixings, to name a few).

This month’s Markets at a Glance presents an update on the demand dynamics in China, discussion around new evidence of manipulation and concludes with an illustrative example of the opportunity in gold equities.

Supply and Demand

While the year is still young, we have been able to gather a few data points from China and they are truly impressive. The table below shows Chinese net imports of gold for the first two months of 2014.1 So on average, each month this year, China has imported about 204 tonnes of gold, up from about 143 tonnes last year.2

maag-4-2014-table1.gif
Chinese data is taken from the Hong Kong Census and Statistics Department. Swiss data is taken from the Swiss Customs Administration, which started reporting gold exports to specific countries in 2014.

To put these numbers in perspective, for the full year 2013, total mine supply excluding China and Russia averaged 192 tonnes per month (see the February 2014 MAAG for details on the methodology).3 Basically, China is currently vacuuming, on a monthly basis, all of the world’s mine production plus an additional 10 tonnes. But that is only China; anecdotal evidence from other countries suggests that demand remains strong in other Emerging Markets, where Central Banks keep adding to their gold reserves. Moreover, whereas last year’s ETFs contributed (unsustainably) to supply, this year has so far seen net inflows into gold bullion ETFs.

What immediately comes to mind is: where does all this gold come from? As we have long argued, gold to Emerging Markets has been supplied by Western Central Banks for many years.4 Recent data substantiates this claim. A closer look at Swiss import and export data shows that it imports most of its gold from the US and the UK and exports most of it to China and Hong Kong. For example, in the first two months of 2014, the UK has exported over 233 tonnes of gold to Switzerland; this is more than half of the Chinese net imports over the same period (remember the UK doesn’t produce any gold). Similarly, the US, which has a monthly gold production of about 19 tonnes, has exported, in the month of January alone 56 tonnes, most of which went either to Switzerland or to Hong Kong directly.5 So where does all this gold come from? It is supplied by Western Central Banks, which according to our analysis have very little gold left.

While it is still early, the Chinese Gold Vortex is firing on all cylinders and data so far this year suggests that demand will far outstrip supply.

Manipulation

The topic of gold price manipulation seems to be making its way into the mainstream. Regulators in Germany made the first foray into gold manipulation with their investigations of the London Bullion Market Association (LBMA) now infamous Gold Fixing.6 Now, we hear that the CME Group (which owns the COMEX, where paper gold trades) has been sued by three traders for allegedly selling order information to HFTs ahead of the broader market.7

Simultaneously, academic studies have found evidence of manipulation in the gold market and a consultancy (Fideres) even claims that “global gold prices may have been manipulated 50% of the time between January 2010 and December 2013”.8

We have long suspected manipulation, but it is now clear to us that both the physical and paper bullion markets have been tampered with for quite some time, to the advantage of those that are naturally short gold (i.e. the bullion banks and other gold dealers). With the increasing amount of scrutiny from the public, academia, regulators and now lawyers, manipulators should have a progressively more difficult time preventing gold from reaching fair value.

The Opportunity

The stars are aligned in 2014 for a significant re-rating of the gold price. In our opinion, the best way to participate in a return of the gold price to fundamentals is to invest in junior gold miners. The tables below show EPS estimates under various gold price scenarios and the associated stock price targets, assuming a price-to-earnings ratio of 10x, for both a major (Barrick) and a junior (Crocodile) miner. From the table, it is obvious that junior gold miners have much more leverage to the price of gold.

maag-4-2014-table2.gif
Estimates are for FY2014. Price returns assume a P/E ratio of 10x. All figures in USD.
Source: Sprott Estimates and RBC Capital Markets
For illustrative purposes only, Eric Sprott and Sprott Asset Management Funds beneficially (directly or indirectly) may own in excess of 1% of one or more classes of the issued and outstanding securities of the above securities.

In summary, the tailwinds are twofold for gold: the Chinese Gold Vortex is putting an undeniable pressure on the physical market, while focus on price manipulation makes it progressively harder for price manipulators to operate. The reversal of this anomalous, yet explicable market dysfunction could provide astute investors with multi-hundred per cent returns.

Do not miss this Golden Opportunity!

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Cattender's picture

Paper (the u.s. Dollar is KING!) LOL!!!!

Xibalba's picture

How many days did it take to get Ukraine's gold into US vaults?  Er...or should I say hours?  Apparently it has no problem arriving to the FRBNY.  It's just the leaving part that takes 20years

 

http://translate.google.com/translate?sl=auto&tl=en&js=n&prev=_t&hl=en&i...

Peter Pan's picture

Can someone tell me where Gadaffi's gold is?

DoChenRollingBearing's picture

 

 

Anyone who reads Zero Hedge should be able to work his/her way up to 5% in gold and/or silver (mostly gold IMO). And at 5% in (physical) gold, you are ahead of 99% of all Americans!  Yay!

"Easy-peasy", just takes time and discipline.

ltsgt1's picture

Wrong country. Germany has gotten only 5 tons of their gold so far. Gadaffi had around 160 tons of gold. Venezuela repatriated all of their 180 tons a few months after we occupied Tripoli.

DoChenRollingBearing's picture

I have read a couple of reports -- reports that I cannot verify -- that Germany does NOT want its gold from the FRBNY very quickly.  The reports both had items like "ease of trading" and "ability to manipulate".

Insurance companies do not like to insure more than 2 - 3 tonnes at a time on airplane flights (one tonne is worth over $40,000,000).

German and Swiss refiners do not have all that much spare capacith to refine huge new amounts of gold either.

Like I said, there may be other reasons we do not know why Germany is NOT getting it gold.  I don't know, and I doubt that many do.  It was political pressure by a small-ish German group that pushed the Bundesbank to ask for their gold.

***

Yes, Venezuela sent a warship to London to fetch (some of) their gold, as did France (to the USA0 in 1970 (? date).

hobopants's picture

I guess those could all be good explanations, but the discrepancy between the amount on the delivery schedule and what they are actually receiving is suspicious (but that could be partly explained by the transport cost you mention).

I think the biggest tell that the FED simply doesn't have it is the fact that the bars Germany is receiving are newly minted and of inconsistent quality, not the stuff Germany originally gave to the FED to store.

SuperRay's picture

I think that Venezulan gold was carcinogenic....

Poor Grogman's picture

Venezuela is in dire need of some humanitarian, freedom loving, anti terriss, gun totin, non lethal, intervention.

It sure is nice of them to hang onto Uncle SAMs gold in the meantime...

Xibalba's picture

I'll take China for 1000

Poundsand's picture

The US broadcast they were coming.  Do you think that was gold that they carried away, or something that passed as gold on quick inspection?

Spitzer's picture

Where is this gold coming from ?

Pickleton's picture

Good Lord that pissed me off.  Disarm the military and arm the beurocracy.  

sunnydays's picture

Well China and Russia are about to take control of the London fixing prices of metals.  Will they let them shine ?  :)

http://sherriequestioningall.blogspot.com/2014/04/chinas-view-of-obamas-...

zerocash's picture

They will destroy the ammunition in the Ukraine.

hobopants's picture

They can drop all the 5.56 and 7.62x51 off at my house, I'll make sure it's properly "destroyed"

DoChenRollingBearing's picture

 

 

http://gunbot.net/ as all the ammo you need from many retailers.

hobopants's picture

Wow I'm in your debt, fantastic find.

Four chan's picture

they are just throwing us off the track those bullets are for killing us citizens.

Papasmurf's picture

First point, it was intentional to purchase $1B of ammo slated for destruction after delivery. The purpose was to crowd out private availability. Secondly, the article says information can't be shared effectively to move ammo where it's needed. It is not in the interest of the MIC to share this information as that would reduce profits on both ends of the transaction.

Scarlett's picture

if the purpose was to crowd out the people, these imbeciles just gave a reason for manufacturers to improve capacity

maskone909's picture

I got some jr's... AUMN seems like a good one if gold pick up momo. If u have money to burn check it out. Other than that i think nothing fundementaly has changed. Still records amount of debt anywhere u look. I would rather have gold coins than giving my money to a bank. Good luck my friends!

Dorelei's picture

I send you a picture of what I do with my gold  !


http://uppix.net/nWyTzzl.jpg

 

Yeah thats right, I eat it ! Its fucking goldlicious !!!

You can use it as a dressing for every meal !

That's the best way of using this store of true greed value used since googols ages !

And what a better way to keep your hard assets close to you ?


When I need to pay my groceries I just spit in the face of the face of the clerk !

When I go the bank I just let my vampiresquid banker suck my dick to get my golden semen !

Men it feels good to go to the bank !!!


As a bonus, I feel like an alchemist every time I go to take a dump!

For the sake of politeness I won't send you a pictures of my shiny shit !

But to get an idea of what it looks like just watch yourself in the mirror, all of you greedy Goldlums shitfaces !!

gmrpeabody's picture

Punk..., comes to mind with that guy.

Yes..., I'd say dorelei is a punk.

Dorelei's picture

The fight club movie being  based on the story  of a  rebellious counterculture group I take it as a compliment  !

bardot63's picture

Hey, Dora-whatever, you can get up off your knees now.  We know when we're licked.

Dorelei's picture

I know you’r really angry because every time you go to the bank you get pounded without lub .

 

The banker hasn’t even finished banging you that every time he says “aaand it’s gone “ …

“Pooop” !!!

Latitude25's picture

Where is the gold?  The average 1%er owns 53 oz.

https://www.youtube.com/watch?v=GAoSj3pyEOw

cifo's picture

WTF is an "average 1%er"?

Latitude25's picture

Watch the video instead of asking stupid questions.

Salamanda's picture

Ha... great question.

 

a 0.5%er??

 

Salamanda's picture

Ha... great question.

 

a 0.5%er??

 

DoChenRollingBearing's picture

The median 1%-er might be a more accurate number to gauge what the wealthy are doing with gold.  One billionaire would skew the average a lot.  I would doubt that the median 1%-er would own 53 oz...  

If I had to guess (my favorite word?), I would say that the median 1%-er might own only 5 - 20 oz.  Not over 50.

Latitude25's picture

Good clarification.  Sounds about right.  Most of those 1%-ers must be Asian though.

CHX's picture

Anyone holding more than 10 oz will be part of the future 1%ers, so at the top, there will be some newbies, but  the overall change will be negligble (in relative terms) no matter what'll happen, with the exception of current 99%ers that are 10+oz-owners.

I am a Man I am Forty's picture

So how much are these gold miners hedging on the gold price?  I remember way back when when gold skyrocketed Barrick had prices locked in way lower.  I hate when they discuss gold miners without showing the data on this.  Look at a 5 year chart for the price of gold vs. the GDX and tell me what you would rather own.

fonzannoon's picture

I am investing in the junior miners through the TBTF banks that will end up throwing them a lifeline in bankruptcy to keep them operational after the equity holder have been wiped out.

withglee's picture

On March 10th, 2014, someone else suggested we should do that. So on paper I bought 13 junior golds. As a group, they are down 17.91% in a month and a half. Only one, OGC is up and it by 4.51%. The worst down is JUNG at -43.66%. They may not have gotten the memo.

On that 3/10 hot tip, the juniors went up for 3 days in a row. Then dove for the next two weeks and have been pretty flat since 3/28. Guess its time to spin the plates again.

quasimodo's picture

"The stars are aligned in 2014 for a significant re-rating of the gold price"

Not sure what he considers properly aligned but this statement just sounds like more ballyhoo and poppycock to me.

BigJim's picture

No, no, he really means it this time.

Al Huxley's picture

If you're convinced that the end-game is the end of the USD as reserve currency, but NOT the end of the world as we know it, then having more time to accumulate gold while its still available at a non-reset price is not a bad deal.

Let them eat iPads's picture

Hey look! A goldbug says gold is going higher.

Thanks for the insightful article, ZH.

TheMonetaryRed's picture

Why do people assume that HFT traders are pushing the price of gold DOWN when they are pushing the price of everything else UP?????

cpnscarlet's picture

Turk is interviewed by Greg Hunter and silver tanks...after three years he still won't take my advice to just STFU.

TURK = moron; SINCLAIR = senile; Maloney = dreamer; Turd = turd; Willie = Jackass; Von Greyez = harlequin; Sprott = buffoon....

The day it all breaks, they will all be screaming about how they were so smart. Well, you know what they say about a broken clock.

hack3434's picture

Spot on...Sprott got kicked out his fund after underperforming the market for years plus redemptions. The fund went from +$3 Billion in 2008 down to $350 Million as of last year. He should just STFU and let things play out instead of nitpicking information to make his point. 

devo's picture

Exactly. These guys are wrong 99% of the time.

Maloney is the funniest of the bunch...trading ounces for homes. Good one.