A long post for a Sunday afternoon.
The problem I have with goldbugs isn't their shrill calls of "to da moon, Alice". It's not their hushed whisperings about how the illuminati control my life, either. My problem is their 'lack of intellectual rigor', as my superbly diplomatic friend PP would say. Or that 'they run with the hare and the hound' as my literary friend JL would say. Me? I just say 'dumbass'.
Case in point: Some time late last week some Chinese dude let slip officially that China's gold reserves now stand at 1,054 metric tonnes (MT) of the yellow stuff. Before you could say "Can I have your autograph, Mr. Sinclair" the interwebnetpipes were chock-a-block with reports and analyses that all go for variants on the same bottom line, namely that gold is going up due to this. I've had several problems with this propaganda overload, so here we go with a rundown:
1) There has been no balanced viewpoint. This news is automatically bullish and so no counterbalance viewpoints or thoughts are allowed to be included. Any one-sided argument makes me suspicious (except my own, of course :-) but a dozen one-sided arguments and it's unfurl the red flag time.
2) Errr....dudes....this isn't news. Well it is I suppose, but on the other hand it's nothing to be shocked about. That China has been adding to CenBank gold reserves is an open secret and has been that way for a couple of years. All we've had is an official recognition and a precise number. Both good, of course, but neither comes from left-field.
3) But the thing that gets me most is the hypocrisy in the goldbug argument. These people drone on for hour after hour after article after article telling us that gold is different, gold is special, gold is money and gold cannot be classed as a commodity the same way as, for example, copper.
Please note that I agree with this droning. However, what I don't do and will never do is change my argument at the drop of a hat when some convenient piece of news comes along. Because all of a sudden, with the news of this China reserves stock, the same people that say gold can't be classed as a commodity are shouting from the rooftops about how supply and demand is the overriding bullish case! This is ridiculous and it's what I meant with those phrases from PP and JL in the introduction (hi guys). Normal, rational people don't change their base philosophies on a whim, but the goldbug self-support group community sees no problem at all in doing precisely that. In fact, I doubt they even notice when they do it, wrapped up as they are in their own little world.
4) As mentioned above, I happen to agree that supply/demand dynamics don't apply to gold. This because it's a store of wealth (be it logical or not, Mr. Buffett, it's the way it is). Gold is not a commodity that gets used, rather something that gets saved. And because of this, all the 162,000MT or so of gold that has been mined through history (according to the World Gold Council, at least) is still out there and available to us in its refined form. Because of this, even if demand outstrips the year's new supply by two to one in any given year, we're talking a very small percentage of the gold out there that is available. As a practical example of what I'm talking about here, did you see those TV adverts for rip-off companies such as Cash4Gold suddenly appeared when gold hit $1,000/oz headlines? This is not a coincidence and the bling that got melted down shows where new supply can come from very quickly. We all have our price; even the IMF has its price (so we're told, via another revolving goldbug rumour).
5) But let's suppose, for argument's sake, that the supply/demand argument being used by the goldbugs this time around is a good one. Let's say that this new China CenBank squirreling is what the goldbugs think it to be and is this new dynamic (or whatever phrase it is being used). It seems to me that if China wants to affect the WORLD price for gold it has to be out there affecting the WORLD demand. If it just swaps dollars for gold internally it's a zero-sum game for the rest of us. And this means that the true way of measuring just how much China has changed things is to try and find out the Chinese trade balance of gold with the rest of the world. So here come a few charts that I obsessed about yesterday instead of writing the reports I should have been writing.
Please note before we go any further that sometimes estimates and extrapolations have been made with the numbers used. As much as possible, sources such as the World Gold Council, GFMS and Chinese Central Bank and official news agency numbers are used. However the nature of Chinese statistics publication is always patchy at best (ask Setser) so sometimes estimates are used. However I'm pretty confident that the guesstimates are in the ballpark. Also, in the end it's the final round-up totals for the aggregated years that are most important, not the annual breakdowns. This is, after all, big picture stuff.
So firstly, here are my estimates for yearly China CenBank holdings. Of the years in question, we know the 2003 number and we know the recently announced 2009 number. We're also pretty sure of the 2005 number as "we have 650MT" was published in a China Gold Industry report in early 2006. The other years are my extrapolated estimates of how the years in between behaved.
So now to the argument of just how much China affects world demand for gold. Firstly we have to look at just how much gold China has produced recently. Here's the chart:
The numbers to 2008 are from GFMS. Out of interest I've added the WGC estimates for the next two years. As we can see, China has upped its gold production sharply in recent years. This means that it is less reliant on imported gold to satisfy its demand, of course. So the next job is to look at Chinese gold demand. Here it is in the crucial 2006-2008 period:
Each bar is broken down into its three main components, namely jewellery demand, retail investment demand and CenBank demand for its reserves (using my estimates from above). As we can see, jewellery is still by far the biggest user of gold in China.
So if we now place supply and demand for these years next to each other.......
...it's pretty clear that Chinese internal production for gold falls well short of the demand for the stuff inside the country. So we're now close to being able to estimate China's "trade balance of gold" with the rest of the world. To do that we have to take the shortfall above, which is logically made up by gold imports, and compare it to the amount of gold that leaves China. As exporting of bullion is illegal in China the only way it leaves is via its jewellery trade. This chart shows the two stats side-by-side:
The export figure for gold jewellery is based on the 2007 figure reported by the China Gold Industry. This is the only estimate I feel I'm guessing at more than I'd like to, as I've used the 2007 total jewellery production in China to the amount of jewellery exported (i.e. the figures reported by China) and used the same percentage ratios to estimate both 2006 and 2008 numbers. I can't for the life of me find the 2008 number, so if anyone has a better figure for Chinese jewellery exports in 2008 I'm all ears.
So in the period 2006 to 2008, when China likely added 304MT to its CenBank gold reserves the real effect of China's gold hoarding with the rest of the world (according to our estimates) has been just 81.4MT of gold spirited away from the world that is not China. And when you look at just how much gold is produced every year.....
...81MT or so isn't going to set the world on fire, not even lumping it all on the 2008 production figure. China's gold trade balance effect in 2008 amounted to a little over 3% of world supply. Compare that with India in the same period, as according the the WGC 2007 demand for gold in the world's biggest market for Au was 773MT and in 2008 it dropped 113MT to stand at 660MT. Just the drop in India more than makes up for the rise in China.
The conclusion to all this is pretty simple. The news out of China last week, although definitely not a negative for gold, really ain't no biggie. For one thing, it was an open secret anyway. For another thing, goldbugs are being hypocritical to genuflect at the temple of Adam Smith after telling us for so long that gold isn't a commodity and can't be treated as such. But even if we buy that supply/demand argument, the gold trade balance that China has with the rest of the world, although net importers, isn't that telling when compared with the whole of the industry. When all is said and done, the relationship gold has with other currencies (dollar foremost) will still be by far the most important influence on its price in the months and years to come. And notably, on the subject of the dollar it's interesting to note that in 2003 China held 1.6% of its reserves in gold. In 2009 that's now 1.7%. Hardly a seismic shift in attitude, is it?
The problem I have with goldbugs isn't their shrill calls of "to da moon, Alice". It's not their hushed whisperings about how the illuminati control my life, either. My problem is their 'lack of intellectual rigor', as my superbly diplomatic friend PP would say. Or that 'they run with the hare and the hound' as my literary friend JL would say. Me? I just say 'dumbass'.
Case in point: Some time late last week some Chinese dude let slip officially that China's gold reserves now stand at 1,054 metric tonnes (MT) of the yellow stuff. Before you could say "Can I have your autograph, Mr. Sinclair" the interwebnetpipes were chock-a-block with reports and analyses that all go for variants on the same bottom line, namely that gold is going up due to this. I've had several problems with this propaganda overload, so here we go with a rundown:
1) There has been no balanced viewpoint. This news is automatically bullish and so no counterbalance viewpoints or thoughts are allowed to be included. Any one-sided argument makes me suspicious (except my own, of course :-) but a dozen one-sided arguments and it's unfurl the red flag time.
2) Errr....dudes....this isn't news. Well it is I suppose, but on the other hand it's nothing to be shocked about. That China has been adding to CenBank gold reserves is an open secret and has been that way for a couple of years. All we've had is an official recognition and a precise number. Both good, of course, but neither comes from left-field.
3) But the thing that gets me most is the hypocrisy in the goldbug argument. These people drone on for hour after hour after article after article telling us that gold is different, gold is special, gold is money and gold cannot be classed as a commodity the same way as, for example, copper.
Please note that I agree with this droning. However, what I don't do and will never do is change my argument at the drop of a hat when some convenient piece of news comes along. Because all of a sudden, with the news of this China reserves stock, the same people that say gold can't be classed as a commodity are shouting from the rooftops about how supply and demand is the overriding bullish case! This is ridiculous and it's what I meant with those phrases from PP and JL in the introduction (hi guys). Normal, rational people don't change their base philosophies on a whim, but the goldbug self-support group community sees no problem at all in doing precisely that. In fact, I doubt they even notice when they do it, wrapped up as they are in their own little world.
4) As mentioned above, I happen to agree that supply/demand dynamics don't apply to gold. This because it's a store of wealth (be it logical or not, Mr. Buffett, it's the way it is). Gold is not a commodity that gets used, rather something that gets saved. And because of this, all the 162,000MT or so of gold that has been mined through history (according to the World Gold Council, at least) is still out there and available to us in its refined form. Because of this, even if demand outstrips the year's new supply by two to one in any given year, we're talking a very small percentage of the gold out there that is available. As a practical example of what I'm talking about here, did you see those TV adverts for rip-off companies such as Cash4Gold suddenly appeared when gold hit $1,000/oz headlines? This is not a coincidence and the bling that got melted down shows where new supply can come from very quickly. We all have our price; even the IMF has its price (so we're told, via another revolving goldbug rumour).
5) But let's suppose, for argument's sake, that the supply/demand argument being used by the goldbugs this time around is a good one. Let's say that this new China CenBank squirreling is what the goldbugs think it to be and is this new dynamic (or whatever phrase it is being used). It seems to me that if China wants to affect the WORLD price for gold it has to be out there affecting the WORLD demand. If it just swaps dollars for gold internally it's a zero-sum game for the rest of us. And this means that the true way of measuring just how much China has changed things is to try and find out the Chinese trade balance of gold with the rest of the world. So here come a few charts that I obsessed about yesterday instead of writing the reports I should have been writing.
Please note before we go any further that sometimes estimates and extrapolations have been made with the numbers used. As much as possible, sources such as the World Gold Council, GFMS and Chinese Central Bank and official news agency numbers are used. However the nature of Chinese statistics publication is always patchy at best (ask Setser) so sometimes estimates are used. However I'm pretty confident that the guesstimates are in the ballpark. Also, in the end it's the final round-up totals for the aggregated years that are most important, not the annual breakdowns. This is, after all, big picture stuff.
So firstly, here are my estimates for yearly China CenBank holdings. Of the years in question, we know the 2003 number and we know the recently announced 2009 number. We're also pretty sure of the 2005 number as "we have 650MT" was published in a China Gold Industry report in early 2006. The other years are my extrapolated estimates of how the years in between behaved.
So now to the argument of just how much China affects world demand for gold. Firstly we have to look at just how much gold China has produced recently. Here's the chart:
The numbers to 2008 are from GFMS. Out of interest I've added the WGC estimates for the next two years. As we can see, China has upped its gold production sharply in recent years. This means that it is less reliant on imported gold to satisfy its demand, of course. So the next job is to look at Chinese gold demand. Here it is in the crucial 2006-2008 period:
Each bar is broken down into its three main components, namely jewellery demand, retail investment demand and CenBank demand for its reserves (using my estimates from above). As we can see, jewellery is still by far the biggest user of gold in China.So if we now place supply and demand for these years next to each other.......
...it's pretty clear that Chinese internal production for gold falls well short of the demand for the stuff inside the country. So we're now close to being able to estimate China's "trade balance of gold" with the rest of the world. To do that we have to take the shortfall above, which is logically made up by gold imports, and compare it to the amount of gold that leaves China. As exporting of bullion is illegal in China the only way it leaves is via its jewellery trade. This chart shows the two stats side-by-side:
The export figure for gold jewellery is based on the 2007 figure reported by the China Gold Industry. This is the only estimate I feel I'm guessing at more than I'd like to, as I've used the 2007 total jewellery production in China to the amount of jewellery exported (i.e. the figures reported by China) and used the same percentage ratios to estimate both 2006 and 2008 numbers. I can't for the life of me find the 2008 number, so if anyone has a better figure for Chinese jewellery exports in 2008 I'm all ears.So in the period 2006 to 2008, when China likely added 304MT to its CenBank gold reserves the real effect of China's gold hoarding with the rest of the world (according to our estimates) has been just 81.4MT of gold spirited away from the world that is not China. And when you look at just how much gold is produced every year.....
...81MT or so isn't going to set the world on fire, not even lumping it all on the 2008 production figure. China's gold trade balance effect in 2008 amounted to a little over 3% of world supply. Compare that with India in the same period, as according the the WGC 2007 demand for gold in the world's biggest market for Au was 773MT and in 2008 it dropped 113MT to stand at 660MT. Just the drop in India more than makes up for the rise in China.
The conclusion to all this is pretty simple. The news out of China last week, although definitely not a negative for gold, really ain't no biggie. For one thing, it was an open secret anyway. For another thing, goldbugs are being hypocritical to genuflect at the temple of Adam Smith after telling us for so long that gold isn't a commodity and can't be treated as such. But even if we buy that supply/demand argument, the gold trade balance that China has with the rest of the world, although net importers, isn't that telling when compared with the whole of the industry. When all is said and done, the relationship gold has with other currencies (dollar foremost) will still be by far the most important influence on its price in the months and years to come. And notably, on the subject of the dollar it's interesting to note that in 2003 China held 1.6% of its reserves in gold. In 2009 that's now 1.7%. Hardly a seismic shift in attitude, is it?