ROSS NORMAN – Taking a Reverse View On Gold
If data shows a strong correlation between obese people and the consumption of diet soft drinks, then conventional wisdom might lead us to speculate that perhaps artificial sweeteners are contributing to the problem. Cause and effect.
But if you reverse the argument you have a very different insight … perhaps the obesity came first and the switch to diet drinks is an attempt to control their metabolism issue – so diet soda consumption is the consequence of the problem … and not the cause. This paradox is called “reverse causality”.
Now try the same exercise with the gold market.
It is clear that gold prices have roughly doubled in 18 months and the cause is thought to primarily be unreported central bank buying – the explanation is clear and the arguments well-rehearsed ... de-dollarisation, inflation expectations, geopolitical uncertainty etc etc. This points us straight to China and perhaps a few of their BRICS friends. There is some data to suppose this but it's thin and largely anecdotal.
Now reverse the issue … and let me give you a mandate to acquire as much gold as you possibly can over the next 10 years and at the best possible price … what would you do ? And how might your actions be manifested ?
To start with, discretion would be essential... (and articles like this, unhelpful). If the world knew there was a universal buyer in the market and prices only likely to rise, then the market would rapidly escalate … and you would have failed in your mission. For that, a big tick in the box … commonly available statistical data shows very little to account for the rapid appreciation in the price.
Then you might consider opaque ways of acquiring physical gold. Not easy, it is a finite market and the effects of your buying can normally be observed through subtle and often ignored measures such as logistics rates, refining terms, backlogs for delivery, import stats etc … sectors very rarely monitored or reported on. So far, so good. Nothing to see here … go about your business.
Likely you would deal through a very narrow network of trusted suppliers … and yes, those that say don't know … and those that know, don't say.
What other measures would you instigate ? Take command of the price discovery process ? Build your domestic brands internationally ? Let the market know just how central you now are ? Definitely not. In much the same way that you don't see Chinese branded cars prominently on the streets of London or New York, why frighten the horses ? The US may relish hard power, others achieve market domination through soft power.
You would closely observe the gold price action too. The laws of supply and demand dictate that your desire to acquire gold would eventually manifest itself in rising prices … but once it was declared that gold was technically “overbought” you would ease back and then brief periods of consolidation or even some profit-taking would provide good cover for your true desire. Observable price corrections would be present, but rare … too good a chance to fill the coffers at an attractive price … so prices would rise but not get ahead of themselves and dips would be short and brief … sound familiar ? It might also explains gold's ambivalent correlation with traditional price drivers.
By tradition the East has been price-sensitive to rising prices, especially the jewellery sector and hence it is usually met with reduced demand in rival Asian markets … great, more for us. Over the last 3 years the world's former largest market - India - has seen jewellery demand fall by about 10% which has been offset by a rise in investment demand … in short, they are not part of this story.
What should our central bank report by way of gold purchases … how about some (to sound plausible) but not too much. Over the last 18 months China has officially reported purchases of 316 tonnes out of about 1600 tonnes acquired by central banks globally – so less than 20%. Sounds about right.
As a manufacturing power-house, what should we do about gold refining capacity ? Build it … but quietly. In 1991 there were 48 London Good Delivery Gold Refineries of which only 1 was Chinese … today there are 66 LGD refineries and 15 of these are Chinese (17 if you include Hong Kong).
What about PR and Comms ? Well, if you wanted to be tricky you might encourage anti-gold sentiment in the West … not saying they are behind this but anyway, the West does a pretty good job in ascribing gold with an “alternative” status and remember “cash for gold” … we in the West have a tendency to cash out.
The flow of gold from the West to the East has been the story of several hundreds of years … in Marco Polo's time we received spices for our precious metals, today we simply fill the shelves of Walmart.
A little like Sherlock Holmes who approached problem-solving by eliminating the impossible and whatever remains is the cause, however improbable (eliminative induction) … in gold you end up with the same answer … and it is that China is discretely acquiring significant amounts of gold. In the 1960's gold was about 5% of total global financial assets - by the 1980's it was just under 3% - and today it is still less than 1% ... which suggest the world at large has still not caught on about the powerful role it has to play in wealth preservation.
When my wife asks me where we should go on holiday, rather than listing the usual obvious countries I sometimes reverse it by asking what do you fancy doing ? If the answer was say “kayaking” or “water sports” that might throw out the Dordogne Valley in France … which was never on the former list … which just shows how reversing things can sometimes generate a new way of looking at things … but in gold's case it merely seems to confirm them. No ship Sherlock.
Ross Norman
CEO
Metals Daily
www.metalsdaily.com
ross@metalsdaily.com