Stocks Markets Charge Ahead; Gordon Chang: Blowup w/ China, N. Korea Could Change Almost Everything

Happy New Year and welcome to this week’s Market Wrap Podcast, I’m Mike Gleason.

Coming up we’ll hear a wonderfully insightful interview with Asian expert Gordon Chang. Gordon shares his views on Donald Trump’s much-hyped Tweet about the size of his nuclear button, gives his very studied view on the state of the Chinese economy and what the state of all of the Asian geopolitics will mean for the global markets. Be sure to stick around for my very interesting conversation with Gordon Chang, coming up after this week’s market update.

Precious metals markets are off to a strong start in the New Year.

The gold market shows a 1.2% gain this week to bring spot prices to $ 1,319 an ounce. The first key technical level to watch going forward from here is $ 1,350 – gold’s high mark for 2017. After that, the $ 1,375 and $ 1,400 levels will come into play. A breakout above $ 1,400 would represent a multi-year high and likely induce some strong momentum buying for the first time in years. But for now the yellow metal still remains mired in a long-term basing pattern.

Turning to silver, prices currently come in at $ 17.24 per ounce and are higher by 1.5% for this first week of 2018. Platinum was the laggard in the PM space in 2017 but is a leader in the first few trading days of 2018 – posting a gain of 4.0% this week to trade at $ 970. Its sister metal palladium made a new all-time high on the heels of a 3.0% weekly advance and currently trades at $ 1,095 an ounce as of this Friday morning recording.

On Wednesday, the Federal Reserve released the minutes from its December meeting. Metals initially sold off as the dollar strengthened, but those market reactions both reversed on Thursday.

Policymakers raised the Federal funds rate by a quarter point this past December. But as the meeting notes reveal, opinion is divided over whether to continue raising rates at a gradual pace this year. The consensus forecast is for the central bank to push through three rate hikes in 2018. Traders are now putting the odds of a March hike at close to 70%.

The GOP’s tax cut passage may tilt the Fed slightly more hawkish. Fed economists now project modestly higher GDP growth thanks to the tax cut stimulus.

The fiscal stimulus should help push inflation rates up toward the Fed’s 2% target by the end of the year – and perhaps beyond. In recent weeks, inflation-correlated assets such crude oil, precious metals, and resource stocks have perked up while interest rate sensitive assets such as bonds have struggled.

The stock market, of course, keeps chugging ahead – where it finally stops, no one knows. Momentum chasers keep buying, which pushes prices higher, which creates more momentum to chase. The stock market has long past the point of being a place for value investors – at least when it comes to the major averages such as the Nasdaq and S&P 500. Valuations are now in bubble territory.

Investors may look back on 2018 as the opportunity of a lifetime to switch from overvalued stocks to undervalued precious metals.

The supply and demand fundamentals for precious metals are set to improve in 2018. Low gold and silver prices over the past few years have severely hurt the mining industry. It has continued to operate existing mines – sometimes at losses – even as it has slashed exploration and development of new projects. That will mean years of stagnating or even declining output ahead.

Metals Focus projects mining output of gold in 2018 will show a slight decrease from 2017. Analysts expect a more significant drop could occur in 2019.

A similar pattern is expected to play out in silver, though it’s more difficult to forecast since few primary silver miners exist. Demand for silver is also more variable, with investment demand being the biggest wild card.

Commodity markets analysts at TD Securities believe silver may be the metal to own in 2018. They forecast silver prices will hit $ 20 this year. That would be an important technical level to hit. Yet $ 20 per ounce silver would still be less than half of its all-time high. You can’t say that about gold or most any other commodity or asset class on the planet right now.

From a value perspective, silver looks compelling. Stacking more silver may be a great new year’s resolution for investors to keep in 2018.

Well now, without further delay, let’s get right to this week’s exclusive interview.

Gordon Chang

Mike Gleason: It is my privilege now to welcome in Gordon Chang, author, television pundit, and columnist at the Daily Beast. Gordon is a frequent guest on Fox News, CNBC, and CNN, among others, and is one of the foremost experts on Asian economics and geopolitics, having written books on the subject and it’s great to have him back on with us.

Gordon, it’s a real honor to have you on again, and thanks so much for your time today. I know it’s been a busy week for you given all of your media appearances, and we’re grateful that you could join us today. How are you?

Gordon Chang: I’m fine, thank you, and thank you so much, Mike. I really appreciate the opportunity.

Mike Gleason: Well, there are many things to cover here given all that’s going on right now. We certainly appreciate your expertise, particularly when it comes to the developments in Asia. There’s a lot going on in that part of the world with big implications for investors. Let’s start with North Korea. That’s obviously been at the forefront of the news this week with tensions getting ratcheted up again.

Kim Jong-Un and President Trump are both bragging about their nuclear arsenals. The over the top posturing on both sides makes it hard to gauge just how seriously the threat of nuclear exchange should be taken. The market seems to have stopped paying attention for the most part. Please give us your thoughts on the matter. Is there any likelihood the disagreement over North Korea’s nuclear weapons program will escalate beyond words, Gordon, or is this war only going to be fought on Twitter?

Gordon Chang: If you look at Twitter, this certainly is a matter of concern, but I think the reality is much different. Right now, Kim Jong-Un, the ruler of North Korea, is feeling sanctions. We saw a hint of that in his New Year’s address where he referenced it, at least indirectly, and at one point he actually called the sanctions an existential threat.

What he’s trying to do right now with his overture to South Korea is to get the South Koreans to shovel money into his regime. What he would like in return for sending two figure skates to the winter Olympics in South Korea next month would be for South Korea to lift sanctions to resume inter-Korean projects, like the Kaesong Industrial Complex, and also for more North and South Korean aid.

I don’t think that those expectations are realistic. Some of what he wants would be a violation of UN sanctions, and President Trump’s policy has been to cut off the flow of money to Pyongyang so it can’t launch missiles or detonate nukes. This is going into, I think, a very crucial period, because if you look back in history, and I’m talking seven decades, we have seen North Korea engage in military provocations shortly after making peace overtures. And this whole concept of the Olympics and his opening of dialog with South Korea, that’s a peace overture.

Mike Gleason: We’ve got two huge wild cards at the forefront of all this with President Trump and Kim Jong-Un being rather unpredictable, to say the least. Is Trump’s tit-for-tat responses to his adversary here going to make diplomacy harder to achieve as our allies might have a hard time joining in full force to combat the North Korean threat?

Gordon Chang: I think on Tuesday, the second of his two tweets certainly made diplomacy harder. I think it was a setback for the American position. You’ve got to remember that in the morning, the first tweet was actually quite constructive. In the first tweet, President Trump talked about how sanctions were biting the North Korean regime.

What Trump needs to do, and this is not just among friends, but also neutral countries and potential adversaries like Russia and China, the backers of North Korea, what he needs to do is to get them to cut off the flow of money to the North. Any time that he talk about sanctions, that’s important. That’s good for us, but Tuesday evening in that exchange of messages, we saw President Trump with his tweet about button size. This was a setback in the sense that we’re no longer talking about what’s important for diplomacy, which are sanctions. We’re now talking about infantile behavior on the part of the American president. That’s not a good thing.

Mike Gleason: Now, let’s talk about North Korea’s much larger neighbor for a bit. Chinese officials just held the Communist Party’s National Congress, a gathering held once every five years to formalize the party leadership. Some think the event may be significant in that it will mark a turning point, the theory being that officials there worked hard to prevent a slowdown in the Chinese economy until after Congress has concluded, and now that it is done, a much-needed correction could be underway. Do you see National Congress as meaningful, Gordon, and what are you expecting for the Chinese economy in the year ahead? Because as we know, what happens in China has far-reaching effects on markets globally.

Gordon Chang: The Congress was important I think because Xi Jinping outlined a very expansive notion of Chinese power. That’s going to be I think an overstretch. I think that their commitments now are far bigger than their resources. This has implications, of course, for the economy and the strains on it. This year, this whole issue is going to be deleveraging. Chinese officials have been talking about deleveraging for years. They haven’t been able to accomplish it. And that’s largely because they are not willing to undertake structural reforms. They’re not willing to see the economy go into a recession.

In 2016, the last year where we really had good numbers, the World Bank thinks that the Chinese economy grew not at the 6.7% pace that the official national bureau statistics claimed. They actually released a chart in the middle of 2017 and with a little arithmetic, you can see that the World Bank thinks that the Chinese economy grew by 1.2%. Also, that 1.2%, although it might be shockingly low to many people, is consistent with the most reliable indicator of Chinese economic activity. That’s the overall consumption of energy.

In 2016, overall energy consumption increased, but only by 1.4%. So, we’re talking an economy that is growing maybe now a little bit better than 2016. Maybe we’re talking 2%. I don’t know. But the point is that they’re accumulating debt at a pace which is about six, seven, maybe eight times faster than they are producing output. They can do that for a little while because they control the banks, they control the big state enterprises, they control the markets, but they can’t do that forever.

Mike Gleason: You haven’t been terribly optimistic about the Chinese economy, and for good reason. However, from a certain point of view, there is a massive amount of central economic planning going on everywhere. You just alluded to that. Obviously, there’s a lot of that going on here in the U.S., of course. We’ve seen some extraordinary maneuvers from the U.S. Federal Reserve over the past decade, and the truth is that we almost certainly don’t know the full extent of what our central bank has been doing to intervene in markets. If history is a guide, all of the tampering could lead to serious trouble.

It probably isn’t fashionable to ask since most are talking about strength in the U.S. economy, but it is at least possible that there are bubbles waiting to pop in both the US and China. Admittedly, there are lots of differences between the two nations, and the potential for central bank policy errors is just one piece of the equation. What are your thoughts? Is the risk of a bubble bursting lower here than in China?

Gordon Chang: Well, I don’t know if it’s lower. In China, there’s going to be a bubble bursting. It could be a lot later than I think, but it will burst. Of course, in the United States, when you have a run up in the economy, you’re going to have a rundown at some point. But whether it’s going to be a 2008 style burst, I just don’t think so.

In any event, from the Chinese perspective, they look at the U.S. economy. They’re extraordinarily dependent on us. For instance, in 2016, the last year for which we have complete figures, a full 68% of China’s merchandise trade surplus related to sales to the U.S. When the U.S. is doing well, Chinese exporters do well, but there’s a real risk in the U.S. doing well, which I think people don’t talk about. And that is, the Chinese are able to hang on because they’ve been able to control the renminbi, but with the Federal Reserve tightening, that is putting pressure on the Chinese currency. It makes it much more difficult for Chinese technocrats to manage in a difficult environment already.

If you talk to the American citizen, they might even not know what the Federal Reserve is. They certainly don’t follow what’s going on in terms of interest rates for the most part, but if you go to China, many housewives can tell you a lot about what the Fed is doing because it affects their pocketbook in a very immediate way.

China has been able to staunch the outflow of currency. In 2015, it was about $ 1 trillion according to Bloomberg. 2016, probably a little bit more than that. Last year, a lot less because of extraordinary capital controls, some of them announced, some of them not. With the Fed tightening, that makes it very difficult for China to maintain those controls, which are difficult even under the best of circumstances. I think it’s going to be a very difficult environment for Beijing this coming year, much more difficult than it was in 2017 or 2016.

Mike Gleason: If we recall back to late summer of 2015 when the Chinese stock market had a sharp and deep correction, it had major implications for markets around the world, including the U.S., so they certainly are interconnected. If the Chinese markets were to be the first to falter, you would have to think that U.S. investors would feel that, as well, just like it did two and a half years ago.

Speak to that and then also comment about the likelihood that the Chinese and thus the world will be able to right the ship this time, like they did last go around, when they were able to prevent that snowball from really getting going.

Gordon Chang: Well, of course, any major downturn, especially a sharp one in China, is going to ripple through global markets. It will be felt here, but we’re relatively, I think, in good shape because China is less important to the global economy than people think. Yes, there’s a lot of growth there, but China has been taking growth away from other countries through predatory trade practices.

So, if it were to disappear down a dark hole, yes, we’d all be shot, but I think in six months, we’d realize, “Hey, this wasn’t so bad,” because when you have Chinese producers not able to flood the global markets as they have been, producers in other countries will take up that slack and there will be, I think, better conditions elsewhere, including the United States. So, I think that the effect of China’s problems really, I think are just exaggerated in people’s conceptions.

With regard to the second question, I think that central banks are not in as good a position today as they were in 2008, 2009 to take up the slack. And so I see things better of course in many, many, many ways than the last decade, but I don’t think that we’re going to get the relief efforts from central authorities that we did last time. But I think the economies are better than they were before, so I’m a relative optimist about the rest of the world, but we’ve got to remember, though, that geopolitical problems in North Asia could actually be the one thing that takes all of our assumptions and makes them incorrect.

Mike Gleason: Getting back to capital controls, Chinese citizens have certainly had a big appetite for cryptocurrencies like Bitcoin and others as they look to flee the local currency. Any developments there to update us on when it comes to the government cracking down and trying to prevent people from diversifying with cryptos?

Gordon Chang: I don’t think there’s been really very much in the way of developments in the last week or so. The most important thing is that the Chinese authorities are very suspicious of crypto-currencies. They are going to continue to try to attack Bitcoin and others. They may let up every once in a while, but I don’t think that they have given up in any event, because this is where Chinese technocrats view the last stand. They’ve got to protect the renminbi. If they don’t, it’s all over, and not only for the Chinese economy and financial system, but also for the political system. So, they’re going to do everything possible to make sure that currency doesn’t leave China.

As we saw in 2017, they were really determined. Now, they’re going to pay a big price, or actually many big prices, for their currency controls. What they did was they solved their immediate problem. These guys are looking at the short-term. They don’t look at the long-term. So, you can expect for them to go after Bitcoin, go after the crypto-currencies, go after any other conceivable way to get money out of China. The Chinese authorities are going to attack it. So, any sort of optimism short-term about Beijing changing its views I think is just misguided.

Mike Gleason: China recently launched an oil futures contract, which is denominated in yuan but convertible into gold. This looks to us like another assault on the supremacy of the Petrodollar, what we’ll see if the gold backing is enough to lure some of the energy trade away from the established markets. If you’ve been following that development, please give us your comments. Is the yuan a significant threat to the dollar here, Gordon?

Gordon Chang: No. If we’re talking 50 years, 60 years, 70 years down the road, yeah, it could very well be a threat to the dollar, but not now. Renminbi usage around the world over the last couple years has been in decline, and it will remain in decline as long as China has those capital controls announced and unannounced. By the way, having unannounced capital controls makes China look like a Banana Republic.

So, as much as they’re going to try to encourage use of the renminbi, it’s just not going to have significant success until they’re willing to open up their capital account. And I don’t see that (happening) any time soon because there’s just too much pressure on the currency for them to do that. So, they can devise whatever instrument they want. They might make a little bit of in road here and there, but long-term, renminbi usage probably will continue to fall. That’s just because if you can’t get the money out, you’re just not going to want to use that as a medium of exchange.

Mike Gleason: We often talk about how the Asian world is full of very strong hands as it relates to gold and that much of the precious metals that leave the West and head East don’t come back. Any thoughts there about what that might mean for the western world if we do have a big rush into precious metals as a safe haven investment during an economic and market downturn, given that so much gold has left western in recent years and gone over to China?

Gordon Chang: What leaves will come back. The U.S. has a strong economy. It’s relatively stable. Asia right now is a place of geopolitical danger, and I think that there’s going to be a long-term reversal. Right now, there’s just too many hot spots along the periphery of China. One of those situations is going to go wrong. I can’t tell you which one. It could be India. It could be South China Sea. It could be East China Sea. It could be North Korea. We don’t know, but if you’re looking at safe havens, Asia is not it.

Mike Gleason: Well, as we’re getting close here, Gordon, any final comments that you want to leave us with? Maybe give us an idea of what you’re watching most closely here over the coming weeks and months in terms of the geopolitical theater in Asia, and then the impact that it’s likely to have on U.S. investors.

Gordon Chang: The most important thing will be the attitude of the Trump administration towards China. There are a number of items on the agenda which could derail relations. For instance, the section 301 investigation into China’s intellectual property theft and a number of other investigations. There’s going to be continuing friction between the United States and China, not only over North Korea, but other matters. This is not going to be good for the markets. I can understand markets not discounting this now, but when things happen, I think that we will see sharp reversals. This is just the thing to keep in mind in terms of geopolitical risk, because it’s the one thing that could change almost everything, or even everything overnight.

When it comes to geopolitical risk, I think that there’s a mis-perception of things. The one thing that really concerns me is war talk in the United States. There’s an assumption in Washington among many people that the United States can strike North Korea without consequences. That could very well be true, but we’ve got to remember that in August of 2017, the Chinese said that if the United States were to strike North Korea first, it would come in and aid North Korea.

While although there could be no consequences to an American attack on North Korea’s missile and nuke sites, we could very well end up in an exchange of nuclear weapons, not only with the North Koreans, but with the Chinese and perhaps the Russians, as well. So, all of these scenarios are there. Of course, the extreme scenarios, the extremely good ones and the extremely bad ones usually don’t come to pass, but we’re at a time where it resembles in many ways the prelude to the Cuban Missile Crisis of 1962.

There are extraordinarily large number of ways that all of this can go wrong. I’m not saying it will, but I don’t think people have started to think about the consequences of some of the courses of action that they’re recommending. The United States can peacefully disarm North Korea, not use force in doing that, but there’s no political will in the United States to do that – which is essentially to impose cost on North Korea’s backers, primarily Russia and China. It is easier to start a chain of actions that could lead to global conflict than it is to go after North Korea’s backers. That’s a very dangerous situation.

Mike Gleason: Well, very good summary there to close us out. Gordon, it’s been a truly fascinating conversation. I really enjoyed it. It was great to have you on. Once again, I’m really glad you were able to find time for us this week with everything going on. Continued success to you in the new year, and I would love to have you on again in the future as this all unfolds. Thanks again and have a great weekend.

Gordon Chang: Thank you so much, Mike.

Mike Gleason: Well, that will do it for this week. Thanks again to Gordon Chang, Daily Beast columnist. You can follow him on Twitter @GordonGChang or check out his book The Coming Collapse of China.

And check back next Friday for the next Weekly Market Wrap Podcast. Until then, this has been Mike Gleason with Money Metals Exchange, thanks for listening and have a great weekend, everybody.

Precious Metals News & Analysis – Gold News, Silver News




Imports From China Hit Record High As U.S. Trade Deficit Continues To Explode

It should upset you that virtually everything stocking the shelves of our major retailers seems to have been made somewhere else.  As a nation, we are consuming far more wealth than we are producing, and that is a recipe for national economic suicide.  This week we learned that imports from China hit an all-time record high in October, and that was one of the primary reasons why our trade deficit hit a staggering 48.7 billion dollars during that month.  Year after year we buy far more stuff from the rest of the world than they buy from us, and this is systematically impoverishing us.

Let me put this another way.  The amount of money that leaves our country each month is far greater than the amount of money that comes into it.  When you grasp this concept, it becomes easy to understand why major exporting nations such as China have become so wealthy, and why we are drowning in debt.

Sadly, most Americans don’t understand the trade deficit, and so they don’t understand how important news like this really is.  The following comes from Bloomberg

The U.S. trade deficit widened in October to a nine-month high on record imports that reflect steady domestic demand, Commerce Department data showed Tuesday.

The surge in imports probably reflected merchants preparing for the holiday-shopping season. Consumer goods imports increased almost $ 800 million, including a $ 303 million gain in cell phones and other household goods, as well as more inbound shipments of furniture, appliances, toys and clothing.

Since China joined the WTO in 2001, the United States has lost more than 70,000 manufacturing facilities and millions of good paying manufacturing jobs.  Formerly great manufacturing cities such as Detroit now resemble war zones, but until Donald Trump came along nobody seemed to really care very much about what was happening.

Of course the Chinese are going to keep taking advantage of us for as long as they can.  They slap all sorts of tariffs and fees on our goods, and meanwhile we allow them to flood our shores with their products.  As a result, our trade deficit with China keeps hitting record high after record  high

Record imports from China helped drive up the U.S. trade deficit 8.6 percent in October as retailers stocked up for the holidays, the Commerce Department reported Tuesday.

Goods and services coming into the U.S. from China, Mexico and the European Union all hit record levels, which boosted the trade gap to $ 48.7 billion from $ 44.9 billion in September. It’s the highest monthly trade deficit recorded since President Trump took office.

President Trump is precisely correct when he says that our trade agreements are not fair to American workers and American businesses.  We will always need to trade with the rest of the world, but we need to do so in a way that is fair for both sides.  As a member of Congress, I will fight tirelessly for American workers, and if you believe in what I am trying to do I hope that you will join the team.

We simply cannot stand by and do nothing.  Our trade deficits are absolutely killing our long-term economic future, and the only way that we have been able to maintain our standard of living is by going on the greatest debt binge in human history.

If we truly want to make America great again, we need to start making things in America again, and we need to start sending leaders to Washington that understand these issues.

Michael Snyder is a Republican candidate for Congress in Idaho’s First Congressional District, and you can learn how you can get involved in the campaign on his official website. His new book entitled “Living A Life That Really Matters” is available in paperback and for the Kindle on Amazon.com.

The Economic Collapse




China Gold Import Jan-Sep 777t. Who’s Supplying?

BullionStar

While the gold price is slowly crawling upward in the shadow of the current cryptocurrency boom, China continues to import huge tonnages of yellow metal. As usual, Chinese investors bought on the price dips in the past quarters, steadfastly accumulating for a rainy day. The Chinese appear to be price sensitive regarding gold, as was mentioned in the most recent World Gold Council Demand Trends report, and can also be observed by Shanghai Gold Exchange (SGE) premiums – going up when the gold price goes down – and by withdrawals from the vaults of the SGE which are often increasing when the price declines. Net inflow into China accounted for an estimated 777 tonnes in the first three quarters of 2017, annualized that’s 1,036 tonnes.

Exhibit 1.

Demonstrated in the chart above Chinese gold imports and known gold demand by the Rest Of the World (ROW) add up to thousands of tonnes more than what the ROW produces from its mines. One might wonder where Chinese gold imports come from, which is why I thought it would be interesting to analyse as detailed as possible who’s supplying China. Is one country, or only the West, supplying China? Although absolute facts are difficult to cement, my conclusion is that China is supplied by a wide variety of countries on several continents this year.

China doesn’t publish its gold import figures so we have to measure exports from other countries to the Middle Kingdom for this exercise. This year the primary hubs that exported to China have been Switzerland and Hong Kong.

The Swiss net exported 18 tonnes to China in September, which brings the year to date total to 221 tonnes, down 4 percent year on year. Because Switzerland is the global refining centre, a storage centre and trading hub I’ve plotted a chart showing its gross imports and exports per region.

Exhibit 2. I’ve included Asian countries with significant mining output that are net exporters at all times, like Uzbekistan, in ROW to get the best perspective of above ground stock movement.

In the above chart we can see that Switzerland was a net exporter to China in all months, but in most months Switzerland in total was a net importer, displayed by the red line; for each of those months Switzerland itself was not the supplier to China.

Combined with data from Eurostat (on the UK’s total net flow) and USGS (on the US’ total net flow) the Swiss data tells me that gold moving from Switzerland to China had several sources this year. In January, for example, it was the UK that was supplying – being a net exporter in total and a large exporter to Switzerland. I must add that in theory little gold from the UK arrived in China via Switzerland, as the numbers don’t say which bar from whom was sent to who. But we can say “the UK made it possible China bought an X amount of gold in the open market at the prevailing price that month”. The same approach suggests that in June it was the US and Switzerland (Switzerland being a net exporter that month), and in September it was Asia (including the Middle-East) supplying gold to customers of Swiss refineries at the prevailing prices. There was not one source of above ground stock that exported to China (via Switzerland) as far as I can see.

The Hong Kong Census And Statistics Department (HKCSD) has recently published data indicating China absorbed 30 tonnes from the Special Administrative Region in September, down 8 percent relative to August and down 44 percent compared to September last year. A decline was expected because China has stimulated direct gold imports circumventing Hong Kong since 2014. Nevertheless, Hong Kong net exported 515 tonnes to the mainland through the first three quarters of 2017 (down 15 percent year on year).

Exhibit 3.

Hong Kong is a gold trading hub too, though. If Hong Kong is a net exporter to China, the actual source can be any country. Have a look at the next chart that shows the net flows through Hong Kong per region: the West, East and ROW (1). I’ve also added the net flow with China.

Exhibit 4. I’ve included Asian countries with significant mining output that are net exporters at all times, like Uzbekistan, in ROW to get the best perspective of above ground stock movement. To be clear, the blue line + the grey line + the yellow line = the red line. All lines are “net import”, calculated as import minus export. While Switzerland is included in the West, gold from all over the world can flow via Switzerland to Hong Kong.

First observe the red line, “Hong Kong total net flow”. We can see that in 2013 Hong Kong became a massive net importer until about half way through 2015. The major suppliers to Hong Kong during this period were Switzerland and the UK, next to the ROW.  I’m not aware of what type of entities were accumulating in Hong Kong at the time. The largest net importer from Hong Kong was China (included in the East).

After 2015 supply from the West (through Hong Kong) has slowly dried up while demand by China continued, shown by the blue line coming to zero and the yellow bars remaining to trend sub-zero. And thus Hong Kong commenced net exporting gold itself as we can see the red line in the chart falling far below zero. Apparently, since 2015 Hong Kong is a net exporter.

How much gold is left in Hong Kong? Unfortunately, online data from the HKCSD goes back only to 2002. The HKCSD does keep physical records from its international merchandise trade statistics from before 2002 but strangely “gold export” from 1972 until 1998 is omitted in these books (2).

Exhibit 5.

As you can see in this last chart Hong Kong has suffered net exports from 2002 until 2008 and after 2015. It’s possible there is still bullion in Hong Kong if it had been accumulated before 1998, but since 1998 Hong Kong already “net lost” 727 tonnes. Another possibility is that refineries in Hong Kong import a lot of scrap gold, which is nearly impossible to track in customs reports and is not included in any of my data, that is being refined into bullion and exported. In this case Hong Kong is not a net exporter, or less of a net exporter. We’ll see in coming months or years if Hong Kong can continue net exporting bullion.

In exhibit 4 we can see a vague correlation between “Hong Kong net export to the China” and “Hong Kong’s total net export” for 2016 and 2017. It looks like Hong Kong is feeding its big brother. Or is it?

There is a gold kilobar futures contract listed on the COMEX that is physically deliverable in Hong Kong. The trading volume of this contract is neglectable, and so is physical delivery, but remarkably the designated vault (Brinks) throughput is sky-high. When looking at a chart of kilobars received and withdrawn at the Brinks vault in Hong Kong, supplemented by cross-border gold trade, there is a pattern revealed: the amount of kilobars received and withdrawn, and Hong Kong’s gold total import and re-export to China are correlated.

Exhibit 6.

The chart suggests that Hong Kong is mainly supplying China from its imports (and any gold supplying other countries than China was stored in Hong Kong in previous years or was sourced from scrap). As the imports are correlated to kilobars received in the Brinks vault and kilobars withdrawn are correlated to re-exports to China, both flows seem to be one and the same trade. I don’t know for sure, but I think this is largely true.

The next question is from what countries does Hong Kong import bullion to dispatch to China? From countries all over the world. Have a look.

Exhibit 7.

The composition is quite diverse. From the first until the the third quarter of this year gold came in from Switzerland, South-Africa, the US, Australia and the Philippines, inter alia.

Next to gold flowing through Switzerland and Hong Kong to China, countries that supplied gold directly to China this year have been Australia at 20 tonnes (3), the US at 14 tonnes, Japan at 3 tonnes and Canada at 4 tonnes. The UK has practically exported zero gold directly to China this year.

In total Hong Kong (515 tonnes), Switzerland (221 tonnes), Australia (20 tonnes), the US (14 tonnes), Japan (3 tonnes) and Canada (4 tonnes) net exported 777 tonnes to China mainland in the first three quarters of 2017 (4).

Conclusion

It must be mentioned that in theory gold import by China arrives in the Shanghai Free Trade Zone (which is not the domestic market) where the Shanghai International Gold Exchange (SGEI) operates. As most of you know the SGEI can serve foreign customers that can import gold traded on the SGEI, for example into India. Hence, it’s possible not all gold imported into China mainland arrives in the domestic market but ends up in the Shanghai Free Trade Zone or abroad. Global cross-border trade statistics by COMTRADE, however, show that barely any country is importing from China.

Until new evidence shows up my best guess is that China net imported 777 tonnes in the first nine months of 2017, sourced from all corners of the world: the UK, South-Africa, Australia, Switzerland, the US, Middle-East and Philippines. It seems Chinese banks are active all over the world looking to buy gold on the dips. Snapping up physical metal when the time is right.

Chinese imports add to China’s domestic mining output. The China Gold Association disclosed on November 1 that mine production accounted for 313 tonnes, down 10 % compared to last year. Nearly all this gold (313 + 777) is sold through the SGE. Withdrawals from the vaults of the SGE accounted for 1,505 tonnes over this period, implying 415 tonnes (1,505 – 313 – 777) was supplied by scrap and disinvestment (or partially recycled through the SGE system).

Since all non-monetary gold imported and mine production ends up in the private sector, my estimate for total gold owned by the Chinese people now stands at 16,575 tonnes. Added by a more speculative estimate of 4,000 tonnes held by the PBOC makes 20,575 tonnes.

Exhibit 8.

If you like to learn more about the Chinese gold market please read The Chinese Gold Market Essentials or visit the BullionStar University.

Footnotes

1) Hat tip to Nick Laird from Goldchartsrus.com for providing the HKCSD data from January 2002 until September 2017.

2) Huge hat tip to Winson Chik that went to the HKCSD office in Hong Kong for us to obtain the data from before 2002!

Exhibit 9. Courtesy Winson Chik.

3) The Australian Bureau of Statistics (ABS) amended its gold export data to China and Hong Kong until August 2016. Before that I had my own way of computing direct gold export from Australia to China – which is now obsolete. A few days ago I got confirmed by ABS they stopped amending the data as China has allowed gold import bypassing Hong Kong. ABS data on gold export to China can now be taken at face value. On November 10, 2017, ABS wrote me:

Previously ABS amended exports of gold bullion going to Hong Kong to China as at the time the ABS had been provided with information to suggest that the majority of gold exports to Hong Kong ultimately ending up in China.
In 2016 a review of this methodology was undertaken, and it was determined that in recent years direct imports to the Chinese mainland have become increasingly common. by 2013-14, China eased restrictions on the direct importation of gold to ports outside of Hong Kong, and as a result users have abandoned using Hong Kong gold imports as an appropriate proxy measure for Chinese imports.

The ABS implemented improvements to more accurately reflect the country of final destination of gold bullion, non-monetary (excl. unwrought forms and coins of HS 7118 and HS 9705) (AHECC 71081324) exported to Hong Kong and China in August 2016. The series were revised back to January 2012, inclusive. This impacted the country series only, as published in tables 14a and 36a-36j of International Trade in Goods and Services, Australia (cat. no. 5368.0) and detailed country statistics available on request. Total levels were not impacted, nor will there be any implications for other ABS collections. The ABS defines the country of final destination for exports as ‘the last country, as far as it is known at the time of exportation, to which goods are to be delivered’. The ABS conducted a review of the country of final destination of gold bullion into China and Hong Kong. There was evidence that Hong Kong had ceased serving primarily as an intermediate shipping country of gold into China and was importing and transforming gold bullion in its own right.

4) Data from Australia and the US for September hasn’t been released yet, so the numbers disclosed are provisional.

The post China Gold Import Jan-Sep 777t. Who’s Supplying? appeared first on Koos Jansen.

Koos Jansen




Will China Bring an Energy-Debt Crisis?

It is easy for those of us in the West to overlook how important China has become to the world economy, and also the limits it is reaching. The two big areas in which China seems to be reaching limits are energy production and debt. Reaching either of these limits could eventually cause a collapse.

China is reaching energy production limits in a way few would have imagined. As long as coal and oil prices were rising, it made sense to keep drilling. Once fuel prices started dropping in 2014, it made sense to close unprofitable coal mines and oil wells. The thing that is striking is that the drop in prices corresponds to a slowdown in the wage growth of Chinese urban workers. Perhaps rapidly rising Chinese wages have been playing a significant role in maintaining high world “demand” (and thus prices) for energy products. Low Chinese wage growth thus seems to depress energy prices.

(Shown as Figure 5, below). China’s percentage growth in average urban wages. Values for 1999 based on China Statistical Yearbook data regarding the number of urban workers and their total wages. The percentage increase for 2016 was based on a Bloomberg Survey.

The debt situation has arisen because feedback loops in China are quite different from in the US. The economic system is set up in a way that tends to push the economy toward ever more growth in apartment buildings, energy installations, and factories. Feedbacks do indeed come from the centrally planned government, but they are not as immediate as feedbacks in the Western economic system. Thus, there is a tendency for a bubble of over-investment to grow. This bubble could collapse if interest rates rise, or if China reins in growing debt.

China’s Oversized Influence in the World

China plays an oversized role in the world’s economy. It is the world’s largest energy consumer, and the world’s largest energy producer. Recently, it has become the world’s largest importer of both oil and of coal.

In some sense, China is the world’s largest economy. Usually we see China referred to as the world’s second largest economy, based on GDP converted to US dollars. Economists use an approach called GDP (PPP) (where PPP is Purchasing Power Parity) when computing world GDP growth. When this approach is used, China is the world’s largest economy. The United States is second largest, and India is third.

Figure 1. World’s largest economies, based on energy consumption and GDP based on Purchasing Power Parity. Energy Consumption is from BP Statistical Review of World Energy, 2017; GDP on PPP Basis is from the World Bank.

Besides being (in some sense) the world’s largest economy, China is also a country with a very significant amount of debt. The government of China has traditionally somewhat guaranteed the debt of Chinese debtors. There is even a practice of businesses guaranteeing each other’s debt. Thus, it is hard to compare China’s debt to the debt level elsewhere. Some analyses suggest that its debt level is extraordinarily high.

How China’s Growth Spurt Started

Figure 2. China’s energy consumption, based on data from BP Statistical Review of World Energy, 2017.

From Figure 2, it is clear that something very dramatic happened to China’s coal consumption about 2002. China joined the World Trade Organization in December 2001, and immediately afterward, its coal consumption soared.

Countries in the OECD, whether they had signed the 1997 Kyoto Protocol or not, suddenly became interested in reducing their own greenhouse gas emissions. If they could outsource manufacturing to China, they would be able to reduce their reported CO2 emissions.

Besides reducing reported CO2 emissions, outsourcing manufacturing to China had two other benefits:

  • The goods being manufactured in China would be cheaper, allowing Americans, Europeans, and Japanese to buy more goods. If more “stuff” makes people happy, citizens should be happier.
  • Businesses would suddenly have a new market in China. Perhaps the people of China would start buying goods made elsewhere.

Of course, a major downside of moving jobs to China and other Asian nations was the likelihood of fewer jobs elsewhere.

Figure 3. US Labor Force Participation Rate, as prepared by Federal Reserve Bank of St. Louis.

In the early 2000s, when China started competing actively for jobs, the share of people in the US workforce started shrinking. The drop-off in labor force participation did not level out until mid-2014. This is about when world oil prices began to fall, and, as we will see in the next section, when China’s growth in average wages began to fall.

Another downside to moving jobs to China was more CO2 emissions on a worldwide basis, even if emissions remained somewhat lower locally. CO2 emissions on imported goods were not “counted against” a country in its CO2 calculations.

Figure 4. World carbon dioxide emissions, split between China and Rest of the World, based on BP Statistical Review of World Energy, 2017.

At some point, we should not be surprised if countries elsewhere start pushing back against the globalization that allowed China’s rapid growth. In some sense, China has lived in an artificial growth bubble for many years. When this artificial growth bubble ends, it will be much harder for China’s debtors to repay debt with interest.

China’s Rapid Wage Growth Stopped in 2014

Rising wages are important for making China’s growth possible. With rising wages, workers can increasingly afford the apartments that are being built for them. They can also increasingly afford consumer goods of many kinds, and they can easily repay debts taken out earlier. The catch, however, is that wage growth cannot get ahead of productivity growth, or the price of goods will become too expensive on the world market. If this happens, China will have difficulty selling its goods to others.

China’s wage growth seems to have slowed remarkably, starting in 2014.

Figure 5. China’s percent growth in average urban wages. Values for 1999 based on China Statistical Yearbook data regarding the number of urban workers and their total wages. The percentage increase for 2016 was estimated based on a Bloomberg Survey.

This is when China discovered that its high wage increases were making it uncompetitive with the outside world. Wage growth needed to be reined in. Its growth in productivity was no longer sufficient to support such large wage increases.

China’s Growth in Energy Consumption Also Slowed About 2014 

If we look at the annual growth in total energy consumption and electricity consumption, we see that by 2014 to 2016, their growth had slowed remarkably (Figure 6). Their growth pattern was starting to resemble the slow growth pattern of much of the rest of the world. Energy growth allows an economy to increasingly leverage the labor of its workforce with more energy-powered “tools.” With low energy growth, it should not be surprising if productivity growth lags. With low productivity growth, we can expect low wage growth.

Figure 6. China’s growth in consumption of total energy and of electricity based on data from BP Statistical Review of World Energy, 2017.

It is possible that the increased rate of electricity consumption in 2016 is related to China’s program of housing migrant workers in unsalable apartments that took place at that time. The fact that these apartments were otherwise unsalable was no doubt influenced by the slowing growth in wages.

This decrease in energy consumption most likely occurred because the price of China’s energy mix was becoming increasingly expensive. For one thing, the mix included a growing share of oil, and oil was expensive. The proportion of coal in the mix was falling, and the replacements were more expensive than coal. There was also the issue of the general increase in fossil fuel prices.

Lower Wage Growth in China Likely Affected Fossil Fuel Prices

Affordability is the big issue with respect to how high fossil fuel prices can rise. The issue is not just buying the oil or coal or natural gas itself; it is also being able to afford the goods made with these fuels, such as food, clothing, appliances, and apartments. If wages were depressed in the developed countries because of moving production to China, then rising wages in China (and other similar countries, such as India and the Philippines) must somehow offset this problem, if fossil fuel prices are to remain high enough for extraction to continue.

Figures 7 and 8 (below) show that oil, natural gas, and coal prices all started to slide, right about the time China’s urban wages growth began shrinking (shown in Figure 5).

Figure 7. Oil and natural gas prices, based on BP Statistical Review of World Energy data.

Figure 8. Coal prices between 2000 and 2016 from BP Statistical Review of World Energy. Chinese coal is China Qinhuangdao spot price and Japanese coal is Japan Steam import cif price, both per ton.

The lower recent increases made China’s urban wage growth look more like that of the US and Europe. Thus, in 2014 and later, Chinese urban wages present much less of a “push” on the growth of the world economy than they had previously. Without this push of rising wages, it becomes much harder for the world economy to grow very rapidly, and for it to have a very high inflation rate. There is simply not enough buying power to push prices very high.

It might be noted that the average Chinese urban wage increases shown previously in Figure 5 are not inflation adjusted. Thus, in some sense, they include whatever margin is available for inflation in prices as well as the margin that is available for a greater quantity of purchased goods. Because of this, these low wage increases may help explain the recent lack of inflation in much of the world.

Quite likely, there are other issues besides China’s urban wage growth affecting world (and local) energy prices, but this factor is probably more important than most people would expect.

Can low prices bring about “Peak Coal” and “Peak Oil”?

What does a producer do in response to suddenly lower market prices–prices that are too low to encourage more production?

This seems to vary, depending on the situation. In the case of coal production in China, a decision was made to close many of the coal plants that had suddenly become unprofitable, thanks to lower coal prices. No doubt pollution being caused by these plants entered into this decision, as well. So did the availability of other coal elsewhere (but probably at higher prices), if it is ever needed. The result of this voluntary closure of coal plants in response to low prices caused the drop in coal production shown in Figure 8, below.

Figure 8. China’s energy production, based on data from BP Statistical Review of World Energy, 2017.

It is my belief that this is precisely the way we should expect peak coal (or peak oil or peak natural gas) to take place. The issue is not that we “run out” of any of these fuels. It is that the coal mines and oil and gas wells become unprofitable because wages do not rise sufficiently to cover the fossil fuels’ higher cost of extraction.

We should note that China has also cut back on its oil production, in response to low prices. EIA data shows that China’s 2016 oil production dropped about 6.9% compared to 2015. The first seven months of 2017 seems to have dropped by another 4.2%. So China’s oil is also showing what we would consider to be a “peak oil” response. The price is too low to make production profitable, so it has decided that it is more cost-effective to import oil from elsewhere.

In the real world, this is the way energy limits are reached, as far as we can see. Economists have not figured out how the system works. They somehow believe that energy prices can rise ever higher, even if wages do not. The mismatch between prices and wages can be covered for a while by more government spending and by more debt, but eventually, energy prices must fall below the cost of production, at least for some producers. These producers voluntarily give up production; this is what causes “Peak Oil” or “Peak Coal” or “Peak Natural Gas.”

Why China’s Debt System Reaches Limits Differently Than Those in the West

Let me give you my understanding regarding how the Chinese system works. Basically, the system is gradually moving from (1) a system in which the government owns all land and most businesses to (2) a system with considerable individual ownership.

Back in the days when the government owned most businesses and all land, farmers farmed the land to which they were assigned. Businesses often provided housing as part of an individual’s “pay package.” These homes typically had a shared outhouse for a bathroom facility. They may or may not have had electricity. There was relatively little debt to the system, because there was little individual ownership.

In recent years, especially after joining the World Trade Organization in 2001, there has been a shift to more businesses of the types operated in the West, and to more individual home ownership, with mortgages.

The economy acts rather differently than in the West. While the economy is centrally planned in Beijing, quite a bit of the details are left to individual local governments. Local heads of state make decisions that seem to be best based on the issues they are facing. These may or may not match up with what Beijing central planning intended.

Historically, Five-Year Plans have provided GDP growth targets to the various lower-level heads of state. The pay and promotions of these local leaders have depended on their ability to meet (or exceed) their GDP goals. These goals did not have any debt limits attached, so local leaders could choose to use as much debt as they wanted.

A major consideration of these local leaders was that they also had responsibility for jobs for people in their area. This responsibility further pushed them to aim high in the amount of development they sought.

Another related issue is that sales of formerly agricultural land for apartments and other development are a major source of revenue for local governments. Local leaders did not generally have enough tax revenue for programs, without supplementing their tax revenue with funds obtained from selling land for development. This further pushed local leaders to add development, whether it was really needed or not.

The very great power of local heads of state and their administrators made these leaders tempting targets for bribery. Entrepreneur had a chance of getting projects approved for development, with a bribe to the right person. There has been a recent drive to eliminate this practice.

We have often heard the comment, “A rising tide raises all boats.” When the West decided to discourage local industrialization because of CO2 concerns, it gave a huge push to China’s economy. Almost any project could be successful. In such an environment, local rating agencies could be very generous in their ratings of proposed new bond offerings, because practically any project would be likely to succeed.

Furthermore, without many private businesses, there was little history of past defaults. What little experience was available suggested the possibility of few future defaults. Wages had been rising very rapidly, making individual loans easy to repay. What could go wrong?

With the central government perceived to be in control, it seemed to make sense for one governmental organization to guarantee the loans of other governmental organizations. Businesses often guaranteed the loans of other businesses as well.

Why the Chinese System Errs in the Direction of Overdevelopment

In the model of development we are used to in the West, there are feedback loops if too much of anything is built–apartment buildings (sold as condominiums), coal mines, electricity generating capacity, solar panels, steel mills, or whatever else.

In China, these feedback loops don’t work nearly as well. Instead of the financial system automatically “damping out” the overcapacity, the state (or perhaps a corrupt public official) figures out some way around what seems to be a temporary problem. To understand how the situation is different, let’s look at three examples:

Apartments. China has had a well-publicized problem of  building way too many apartments. In about 2016, this problem seems to have been mostly fixed by local governments providing subsidies to migrant workers so that they can afford to buy homes. Of course, where the local governments get this money, and for how long they can afford to pay these stipends, are open questions. It is also not clear that this arrangement is leading to a much-reduced supply of new homes, because cities need both the revenue from land sales and the jobs resulting from building more units.

Figure 9 shows one view of the annual increase in Chinese house prices, despite the oversupply problem. If this graph is correct, prices have increased remarkably in 2017, suggesting some type of stimulus has been involved this year to keep the property bubble growing. The size of an apartment a typical worker can now afford is very small, so this endless price run-up must end somewhere.

Figure 9. Chinese house price graph from GlobalPropertyGuide.com.

Coal-Fired Power Plants. With all of the problems that China has with pollution, a person might expect that China would stop building coal-fired power plants. Instead, the solution of local governments has been to build additional power plants that are more efficient and less polluting. The result is significant overcapacity, in total.

May 2017 article says that because of this overcapacity problem, Beijing is forcing every coal-fired power plant to run at the same utilization rate, which is approximately 47.7 % of total capacity. A Bloomberg New Energy Finance article estimates that at year-end 2016, the “national power oversupply” was 35%, considering all types of generation together. (This is likely an overestimate; the authors did not consider the flexibility of generation.)

Beijing is aware of the overcapacity problem, and is cancelling or delaying a considerable share of coal-fired capacity that is in the pipeline. The plan is to limit total coal-fired capacity to 1,100 gigawatts in 2020. China’s current coal-fired generating capacity seems to be 943 gigawatts, suggesting that as much as a 16% increase could still be added by 2020, even with planned cutbacks.

It is not clear what happens to the loans associated with all of the capacity that has been cancelled or delayed. Do these loans default? If “normal” feedbacks of lower prices had been allowed to play out, it is doubtful that such a large amount of overcapacity would have been added.

If China’s overall growth rate slows to a level more similar to that of other economies, it will have a huge amount of generation that it doesn’t need. This adds a very large debt risk, it would seem.

Wind and Solar. If we believe Darien Ma, author of “The Answer, Comrade, Is Not Blowing in the Wind,” there is less to Beijing’s seeming enthusiasm for renewables than meets the eye.

According to Ma, China’s solar industry was built with the idea of having a product that could be exported. It was only in 2013 when Western countries launched trade suits and levied tariffs that China decided to use a substantial number of these devices itself, saving the country from the embarrassment of having many of these producers go bankrupt. How this came about is not entirely certain, but the administrator in charge of wind and solar additions was later fired for accepting bribes, and responsibility for such decisions moved higher up the chain of authority.

Figure 10. China current view of solar investment risk in China. Chart by Bloomberg New Energy Finance.

Ma also reports, “Officials say that they want ‘healthy, orderly development,’ which is basically code for reining in the excesses in a renewable sector that has become yet another emblem of irrational exuberance.”

According to Ma, the Chinese National Energy Administration has figured out that wind and solar are still about 1.5 and 2.5 times more expensive, respectively, than coal-fired power. This fact dampens their enthusiasm for the use of these types of generation. China plans to phase out subsidies for them by 2020, in light of this issue. Ma expects that there will still be some wind and solar in China’s energy mix, but that natural gas will be the real winner in the search for cleaner electricity production.

Viewed one way, we are looking at yet another way Chinese officials have avoided closing Chinese businesses because the marketplace did not seek their products. Thus, the usual cycle of bankruptcies, with loan defaults, has not taken place. This issue makes China’s total electricity generating capacity even more excessive, and reduces the profitability of the overall system.

Conclusion

We have shown how low wages and low energy prices seem to be connected. When prices are too low, some producers, including China, make a rational decision to cut back on production. This seems to be the true nature of the “Peak Coal” and “Peak Oil” problem. Because China is reacting in a rational way to lower prices, its production is falling. China is already the largest importer of oil and coal. If there is a shortfall elsewhere, China will be affected.

We have also given several examples of how the current system has been able to avoid defaults on loans. The issue is that these problems don’t really go away; the get hidden, and get bigger and bigger. At some point, all of the manipulations by government officials cannot hide the problem of way too many apartments, or of way too much electricity generating capacity, or of way too many factories of all kinds. The postponed debt collapse is likely to be much bigger than if market forces had been allowed to bring about earlier bankruptcies and facility closures.

Chinese officials are now talking about reining in the growth of debt. There is also discussion by heads of Central Banks about raising interest rates and selling QE securities (something which would also tend to raise interest rates). China will be very vulnerable to rising interest rates, because stresses that have been allowed to build up in the system. For example, many mortgage holders will not be able to afford the new higher monthly payments if rates rise. If interest rates rise, factories will find it even harder to be profitable. Some may reduce staff levels, to try to reach profitability. If this is done, it will tend to push the system toward recession.

We likely now are in the lull before the storm. There are many things that could push China toward an energy or debt crisis. China is so big that the rest of the world is likely to also be affected.

 

 

Republished with permission from Our Finite World




Oil For Gold – Real Or Imagined?

By having control of the physical market for gold, China can threaten to use it to destabilize the dollar, without destabilizing the yuan. As such, it is potentially devastating, and used carelessly could trigger an economic collapse in Western capital markets, wreaking financial and economic havoc in America and other advanced nations. China will never be wholly independent from trade with these nations, and severe financial and economic damage to the advanced economies will rebound upon her to some extent. For this reason, she has so far held off using gold as an economic and financial weapon, while she continues to insulate herself from periodic crises in Western economies.   – Alasdair Macleod (Oil For Gold)

In response to questions about when China would finally cast aside the dollar and run the price of gold up, I’ve always replied that China would be shooting itself in the foot if it tried to replace the dollar too quickly.  Don’t forget, China holds about $ 1.2 trillion in the form of Treasuries. Note: this ratio does not include the market value of its gold holdings, the actual amount of which is unknown outside of a small circle of Chinese officials.

When the idea of a gold-backed yuan-denominated oil futures contract surfaced, it became en vogue for those unable to analyze their way  out of a paper bag to issue commentary refuting the idea.  For some, if an event has not already occurred, they are unable to “see” it.

This article from Alasdair Macleod is a must-read for anyone who wants to understand the path leading up to the ability to convert oil sold in yuan or gold by China’s largest oil suppliers.  Judging by the various recent oil trading and gold trading agreements between Russia and China, the conversion of oil sales into gold  may well be already occurring in a two-stage process between Russia and China.

The purpose of this article is to put the proposed oil for yuan contract, which has been planned for some time, into its proper context. It requires knowledge of the history of how China’s policy of internationalising the yuan has been developed, and will be brought up to date with an analysis of how the partnership of China and Russia is taking over as the dominant power over the Eurasian land-mass, a story that is now extending to the Middle East. To read the rest click here: Oil For Gold – Macleod

While Alasdair does not overtly acknowledge the idea of a gold-backed oil contract coming from China, I would argue that the article about a gold-yuan oil futures contract  in the Nikkei Asian Review – a highly regarded publication – was likely floated intentionally by the Chinese Government. If you read through Alasdair’s article, it’s difficult not to come away with the impression that China has been methodically and patiently putting together the pieces to support the ability to convert oil sold China – benchmarked by the yuan – ultimately into gold.

Yes, the fact that China does not currently permit gold to be removed from China in large quantities needs to be addressed.  Analysts using this to refute the oil/yuan/gold notion seem to conveniently overlook the fact that regulations can be revised.  I would suggest that “footprints in the snow” are leading to this eventuality. It’s now possible to sell oil to China in dollars or rubles or rials then  convert the proceeds into offshore yuan and buy gold in China’s Free Trade Zone.  As Alasdair himself points out:  “Gold futures contracts in yuan are now available to international dealers in Hong Kong and Dubai using the SGE gold price as benchmark.”

Furthermore, the Commercial Bank of China (State-owned) is the sponsor of a gold futures contract offered by the London Metals Exchange.  Seems pretty obvious that an oil seller can ultimately convert the proceeds of oil sold to China into gold using three transactions.  Why not consolidate that process into one contract?  I would suggest that a gold-backed yuan-denominated oil futures contract is inevitable.  Just maybe not one the timeline preferred by the western gold investing community.

Investment Research Dynamics




Fed Inflation Expectations, Gold Strengthens; Jim Rickards: War on Gold, China Collapse, & War w/ N. Korea

Welcome to this week’s Market Wrap Podcast, I’m Mike Gleason.

Coming up we’ll hear a wonderful interview with Jim Rickards, author and well-connected global finance insider. Jim shares his thoughts on the ongoing War on Cash, the developing War on Gold and how that will play out, and talks about the ticking time bomb in the Chinese economy and what it means for the U.S. stock market. Don’t miss my amazing recent conversation with Jim Rickards, coming up after this week’s market update.

Precious metals markets rallied strongly this week as the Federal Reserve released the minutes from its most recent policy meeting.

Markets are continuing to price in a likely rate hike in December. Yet even as the Fed sounds a nominally hawkish tone on interest rates and balance sheet normalization, Fed officials are also sending out dovish signals on inflation.

The central bank’s preferred inflation indicator is the “core” Personal Consumption Expenditures index. The PCE has been running persistently below the Fed’s 2% target and shows no signs of hitting that target before the Fed’s December meeting.

Janet Yellen and company face the conundrum of trying to push inflation rates higher while simultaneously wanting to raise interest rates and trim the Fed’s balance sheet.

Federal Reserve Bank of Chicago President Charles Evans reiterated this week that policymakers are committed to higher inflation rates. He also said he would be willing to push inflation above the 2% target.

Charles Evans (Chicago Fed): Getting inflation up to 2% is something that’s very important, and moving inflation expectations up by just talking about it, making sure. We’re willing to go above 2% if that actually happens, because we’ve got a symmetric inflation objective. That’s my opinion. We do have a symmetric inflation objective. I think we should be willing to push inflation above 2%, because we should be spending some time above 2% just like we’ve spent quite a lot of time below 2%.

Richard Clarida (PIMCO).: Chair Yellen has said 2% is not a ceiling it should be something of an average, but since the Fed became an inflation targeter, inflation has been below 2%, I think every month now for going on six years, so I think Charlie Evans has a good point. In particular, I think if you want inflation expectations to be stable, which the Fed does, then it’s going to have to spend at least some time above 2%.

The inflation trade is back on at least for this week, as the U.S. Dollar Index dropped and metals gained. Gold prices rallied back up to the $ 1,300 level on Thursday and currently come in $ 1,299 an ounce, for a 1.6% gain this week. Silver is registering a 2.7% weekly advance to bring spot prices to $ 17.35 an ounce as of this Friday the 13th recordin0067. Platinum is up 2.8% on the week to $ 945, and palladium is up a whopping 7.9% to $ 997 per ounce.

On Thursday, President Donald Trump signed an executive order championed by Senator Rand Paul to dismantle some elements of Obamacare. The order allows individuals and small businesses to obtain cheaper coverage through association health plans. It also enables them to shop across state lines for better plans.

The market for short-term health-insurance will open up from three months previously to one year going forward. These short-term plans lack the full slate of benefits required of regular plans and can be obtained at a relatively cheaper cost.

So will Trump’s executive order lower healthcare costs for most Americans? Probably not. The controversial core of Obamacare is still intact: the individual mandate. The requirement that insurers cover pre-existing conditions will also still be in force, although individual states will have more leeway to allow one-year plans that cater to healthy people who have no pre-existing conditions.

Trump’s executive order is bound to face legal challenges from Democrats. And it still falls far short of the repeal and replace promise that Republicans ran on. That can only be delivered through legislation passed by Congress. Perhaps wavering Senate Republicans will have new impetus to act. Or perhaps after the 2018 elections they will finally obtain a large enough majority to act without having to placate John McCain or Susan Collins.

In the meantime, runaway healthcare inflation will continue to exert pressure on taxes, deficits, and family budgets. Medical costs are underreported in the Federal Reserve’s official inflation gauge, which is one of many reasons why the government reported number keeps coming in so low.

Unfortunately, it’s hard for individuals to hedge against rising medical costs directly. You can hedge food costs by stocking up on non-perishable foods or even buying futures contracts on agricultural commodities. But there are no futures contracts for prescription drugs or health insurance premiums.

Of course, there is the all-purpose inflation hedge of physical precious metals. They tend to perform best when inflation expectations are rising.

We could be on the cusp of that. The Fed clearly wants to boost inflation expectations. Perhaps it will have a surprise in store for markets come December.

Well now, without further delay, let’s get right to this week’s exclusive interview.

Jim Rickards

Mike Gleason: It is my great privilege to be joined now by James Rickards. Mr. Rickards is editor of Strategic Intelligence, a monthly newsletter, and Director of the James Rickards Project, an inquiry into the complex dynamics of geopolitics and global capital. He’s also the author of several bestselling books including The Death of Money, Currency Wars, The New Case for Gold, and now his latest book The Road to Ruin.

In addition to his achievements as a writer and author, Jim is also a portfolio manager, lawyer and renowned economic commentator having been interviewed by CNBC, the BBC, Bloomberg, Fox News and CNN just to name a few. And we’re also happy to have him back on the Money Metals Podcast.

Jim, thanks for coming on with us again today. We really appreciate your time. How are you?

Jim Rickards: I’m fine, Mike. Thanks. Great to be with you. Thanks for having me.

Mike Gleason: I wanted to ask you about a tweet you sent out earlier this month – and for people who want to follow you there, it’s @JamesGRickards – but in that tweet you wrote:

Just informed that Scotia Bank branch is now a gold buyer only. Will not sell to retail clients. Get it while you can. War on gold is here.

Expand on that here, Jim. What did you make of that move and why did you make those comments?

Jim Rickards: Sure. We have a war on cash. I think that’s pretty well known to the listeners, so we see it everywhere. India just abolished its two most popular forms of cash. They literally woke up one day and they said, I think it was the 2,000 rupee note and the 1,000 rupee note, if I’m not mistaken. I believe those are the right denominations. Not worth a whole lot by our standards, worth like $ 15 or whatever. But they were, by far the most popular and widely used, widely circulated bank notes in India. And the government just woke up and said they’re all illegal. They’re worthless. Just like that. Now what they said is, “Now you can take them down to the bank and you can hand them in, and we’ll give you digital credit in your account—oh by the way, the tax inspector’s going to be there asking you where you got the money.” So obviously it was designed to flush out people suspected of tax evasion.

Although, in fact it turned out that there weren’t that many tax cheaters. They were just people who actually preferred money. The preferred cash and they were forced out of the system, forced into this digital system. And there were all kinds of negative repercussions of that. So, there’s a whole country that abolished the most popular forms of cash.

Sweden is very close to cashless. You go around the United States, you might have some, what we call in Philadelphia “walking around money.” I can look in my wallet and there’s probably some 20s and maybe a couple 50s in there, but when you transact, you get paid digitally. You pay your bills with automatic debits. You transfer money with wire transfers. You use your debit card. You use your credit card, etc. You shop on Amazon, you pay with a debit or credit card, etc. maybe PayPal. And I do that. Everyone does that. I’m no different. I’m not exempt from or outside the system.

The point is the dollar is already a digital currency. It’s actually a digital crypto-currency, not that different from Bitcoin. It has a different issuer, but in form it’s really a digital currency. But we’re very far down the road of a cashless society. It wasn’t that long ago, certainly when I was a kid, we had $ 500 bills. And they were in circulation. You’d see one every now and then. Those were abolished in 1968. That left us with the $ 100 bill as our largest denomination. But the $ 100 bill of 1968 is only worth about $ 20 today in terms of relative purchasing power. So, they don’t even have to get rid of the 100, they just have to keep waiting and it’ll be worth about 10 cents in time.

So, the war on cash is underway. That’s partly to set up for negative interest rates. I said earlier that the Fed has not used negative interest rates and has no immediate plans to. That’s true, but they can. There’s nothing stopping them. And of course, other countries have. We’ve seen this in Europe, Switzerland, Japan, and elsewhere. So how does the negative interest rate work? So, you have 100,000 in the bank and the negative interest rate of one percent. You go away for a year, come back, you only have 99,000 left. The bank took $ 1,000 out of your account instead of paying you interest, they take your money as negative interest rate.

Well you say, “Okay, well one of the ways to beat negative interest rate is to take all my cash out… stick it under my mattress or whatever, right?” So you go to the banks, they give you $ 100,000. They give you ten, what they call straps or $ 10,000, a 100 100s with a band around it. That’s one strap. So, they give you 10 of those and there’s your $ 100,000. And you put it away safely, and a year later, you still have 100,000. But your neighbor with the money in the bank, he only has 99 (thousand), because they took 1% interest. So, the way to beat negative interest rates is to go to cash.

So therefore, the leads say, “Well, we might want to use negative interest rates, so we have to get rid of cash before we can go to negative interest rates.” So that’s the war on cash. Now, one of the ways to fight back in the war on cash is to buy gold. Right, so take your cash, buy gold, put that in a safe place. Now even if they eliminate cash, you still have the gold. In theory, even in the world of digital currency you could always sell the gold for a certain amount of digital currency. And you also preserve your value. And for the people they really don’t like, terrorists and tax evaders and others. I mean I’m talking about honest citizens. But for the people the government doesn’t like, they’re already making the migration. Like, “Okay, you want to make it impossible to be a money launderer or impossible to move money around by cash. Let’s just use gold. Good luck tracing that. It’s non-digital.”

By the way, this is already going on in what I call the axis of gold. The axis of gold is Russia, China, Iran, Turkey and North Korea. When North Korea sells missile technology to Iran, they don’t get paid in dollars through Swift. That would never happen. That money would be frozen obviously. The North Koreans really don’t want Russian rubles, what are they going to do with them? They can’t get dollars, because of the state of the U.S. controls the payment system. So, Iran actually pays them with Korean gold, physical gold. Puts it on a plane, they can fly it to North Korea, or maybe North Korea designates someplace else like Russia as a storage place, because they don’t want it in their own backyard. But be that as it may. As I say, Russia, China, Iran, Turkey and North Korea and perhaps others are already settling their payments to each other either for weapon sales or other activities in physical gold.

So, if you have a war on cash people very quickly migrate to gold, which means you have to have a war on gold also. So, one of the reasons I’ve been predicting a war on gold is because I see the war on cash is already here. And if the answer to the war on cash is to go to gold, then if you’re the global power elite, you have to have a war on gold also. So, a lot of these things don’t exist today, but it’s very easy to see limitations on sales, certainly from 1933 to 1975, gold was contraband in the United States. It was illegal for a U.S. citizen to possess gold. With very few exemptions. You could have gold denture fillings, I guess or some gold jewelry, but not coins or bullion. So, you could limit sales, you could put all kinds of reporting requirements on dealers, which don’t exist today. You could put surtaxes on dealer transactions, which don’t exist today, etc. or require licensing, which does not exist today.

There’s a lot of things you could do to make it very, very difficult to buy or sell gold if not impossible. So, my advice to investors is pretty simple, which is the war on cash is here. The war on gold is coming. Why not go get your gold today, put it in a safe place, and then when they shut the door on gold, you’ll be okay, because you’ll have yours. People who are waiting, like, “Oh, I’m just going to wait. I’m going to wait until things get worse. I’m going to wait till the price goes up a lot. What’s the hurry?” My answer is, “By the time you’re ready to move, it may be too late.”

Mike Gleason: Jim, 2018 is setting up to be a pivotal year. You are expecting Chinese officials to keep a lid on their unfolding debt crisis until after the all-important Congress of the Communist Party in China this fall. It is a pivotal gathering in the current party leadership wants badly to put on a good face and avoid turmoil leading up to that event. But you anticipate they will have trouble maintaining control of that situation much beyond the fall. Meanwhile, by next year, Americans should have a better handle on how much of what Trump promised in terms of infrastructure and tax relief might actually come to fruition. It looks like the president has his work cut out for him in Congress. So, as we begin to close here, Jim talk a bit, if you would, about what you think investors should be watching as we move through the next 18 months or so.

Jim Rickards: Well I don’t think there’s much that will happen that you can’t perceive today. Now there are always surprises. I understand that there’ll be terrorist attacks we haven’t anticipated, etc. but a lot of the big things that are going to happen in 2018, you can always see them coming, because this is the kind of analysis I do. It’s complex dynamic systems analysis. In other words, rather than using stochastic equilibrium models, which is what the Fed does or other obsolete models that are linear in nature, I use a complex theory in complex dynamic systems modeling, because I like to say the future’s already here today. It just hasn’t played out yet. In other words, if you understand how a system evolves and you understand something about the initial conditions, you can make some forecasts.

So, for example, one model would be the Mundell-Fleming model, which is sometimes called the impossible trinity. It’s one of the leading models of international monetary economics. And basically, it says there are three things that you cannot have at the same time if you’re a country. You cannot have an open capital account, a fixed exchange rate and an independent monetary policy. you can have two out of three, one out of three, but you can’t have all three. If you try, you will fail. And then the only analytic question is how will you fail and when? But it’s called the impossible trinity for a reason, which is you can’t have it.

Now, and the reason is that has to do with arbitrage. If money can come in and out, and I’m pursuing independent monetary policies, my rates are different than somebody else. But I’m trying to peg my exchange rate. Well, obviously, people are going to flee the jurisdiction where they think the interest rate is going to devalue and go to another currency where the interest rate is higher and the currency is going to appreciate not depreciate. And that’s going to deplete your capital account and cause a foreign exchange crisis. I don’t mean to be glib about the impossible trinity. There are actually good reasons when you look below the surface why it’s true. But just take it for true, but now and again, there’s decades of evidence to support it.

China was trying to do this. They were trying the impossible trinity. If you go back to the middle of 2016, even towards the end of 2016, they were running an open capital account to keep the IMF happy. They were trying to peg to the dollar to keep the United States happy. And they were trying to have an independent monetary policy of low interest rates to prop up their Ponzis and their state-owned enterprises and avoid unemployment. So, they had three good reasons for doing three separate things. But they were trying to have the impossible trinity and as they say in Mundell-Fleming model would say, “You’re going to fail.” And they did fail. They started to fail, which is between late 2014 and late 2016, China lost one trillion dollars in reserves. That was exactly what Mundell would have predicted. The money will run out the door, because they think your fixed exchange rate is not sustainable, because your interest rate policy is too low, etc.

They lost a trillion dollars. If you had extrapolated that. It’s never a very good idea to extrapolate anything. But just as a thought experiment, if you had extrapolated that and further assuming that it accelerates, which historically, they do. China would have been broke by the end of 2017. Now what I said was, that’s not going to happen. They’re not going to let that happen. So, the question is, what are they going to do about it? Well, you had three choices. You could close the capital account, break the peg to the dollar, or raise interest rates. They decided to maintain the peg. They did the other two. They closed the capital account, pretty effectively for the time being. And they raised interest rates in lock step with the Fed.

So, they gave up on two of the three legs, kept the third, which is the peg to the dollar. The yuan has been pretty constant against the dollar lately, which was done to, as we get into late 2016, early 2017 to appease Donald Trump, because remember Donald Trump was the one running around on the campaign trail saying, “China’s the greatest currency manipulator of all time.” While the last thing the Chinese needed was the devaluation. That would have played into Trump’s hands, allowed them to slap on all kinds of trade sanctions and other punitive measures as a result of being labeled a currency manipulator, etc. Trump didn’t do any of that for two reasons.

One, China had maintained the peg, did not devalue further, they actually spent money to prop up the yuan. And two, Trump wanted China’s help on North Korea, so he was willing to play nice in the economic sphere to get help in the geopolitical sphere. Now, both of those things are coming to an end, because they’re not sustainable. And specifically, if you close your capital account – and they have done a pretty good job of that – they stopped the bleeding. But that has an effect on direct foreign investment and portfolio investment in China. Who wants to put their money in if you can’t get your money out? The answer is nobody. So, their investment inflows are drying up. That’s the other side of closing the capital account.

Number two, this monetary tightening is creating a more difficult situation for the state-owned enterprises and other debtors, and China’s just one big credit bubble, one big Ponzi waiting to burst. And three, it’s now become apparent, literally a couple days ago, Trump sent out a tweet saying, “Looks like China can’t help with North Korea, but at least they tried.” Words to that effect. It’s not the exact quote, but it’s close enough. In other words, Trump is signaling that he believes China has failed or will fail to help with North Korea. And I think that’s right. There isn’t really a lot China can do about North Korea without risking war. China can do a lot with North Korea if they risk war. But they don’t want to risk war and therefore, they won’t do much. Therefore, Trump won’t be satisfied and then he’ll turn back to the currency war and other punitive measures that we talked about earlier.

Now why is China doing all this? They’re doing this to keep a lid on the situation, to avoid confrontation, avoid crises until President Xi gets, in effect, anointed or reconfirmed for a second term with certain conditions that make him the new Mao Tse-tung this fall. But once that happens, once he gets that power that he’s looking for, and once it’s apparent that Trump’s going to play hard ball on the trade and currency issues, because China can’t help with North Korea. He will have no further reason to maintain the peg. So, what I expect then is, they will go back to an open capital account. They will cut interest rates. But they’ll reconcile the impossible trinity with a maxi devaluation of the Chinese yuan. The last two times that happened, the New York Stock market crashed. That was August 2015 and January 2016. So, look out below.

It’s going to be interesting times. And then I also expect a war with North Korea in 2018. You can see that playing out now. The war is coming. We’ve been warned by General Mathers. President Trump took the whole Senate up to the White House, basically told them this was going to happen. Orders have already been given. We’re going to give diplomacy a chance and sanctions a chance in 2017, but my estimate is that they will not be fruitful and we’ll go to war in 2018. So, 2018 is set to be a tumultuous year because of the Chinese shock devaluation and a war with North Korea.

Mike Gleason: Well, Jim, once again, it’s been a real pleasure to speak with you, and we certainly appreciate the time. Now before we go, please tell listeners about your latest book, The Road to Ruin as well as anything else you’re working on these days or want folks to know about. And then also how they can follow your work more regularly.

Jim Rickards:Thank you very much, Mike. As you mentioned at the beginning, I’m the editor of Strategic Intelligence, that’s a newsletter from Agora Financial and a couple other newsletters with them. But Strategic Intelligence is our flagship newsletter. My latest book, The Road to Ruin from Penguin Random House, available on Amazon and leading bookstores. That covers a lot of the ground that we’ve covered in this interview. And I’m very active on Twitter. My Twitter handle is @JamesGRickards. It’s about 10% Phillies baseball and random things, but 90% of it is the international monetary systems. So, I hope followers find that helpful. I’m also on another platform called Collide. Just Collide.com. It’s a new platform, but I do weekly commentaries there.

Mike Gleason: Well excellent stuff. We’re grateful as always to have you on and for your time and your incredible insights. We certainly look forward to our next conversation, and I hope you enjoy your weekend and your summer. Thanks very much. Appreciate the time, Jim.

Jim Rickards: Thank you.

Mike Gleason: Well, that’ll do it for this week. Thanks again to Jim Rickards, author of Currency Wars, The Death of Money, The New Case for Gold, and now The Road to Ruin, and also editor of the Jim Rickards’ Strategic Intelligence newsletter, be sure to check those out.

And don’t forget to check back next Friday for the next Weekly Market Wrap Podcast. Until then, this has been Mike Gleason with Money Metals Exchange. Thanks for listening and have a great weekend, everybody.

Precious Metals News & Analysis – Gold News, Silver News




China Won’t Roll Over Until Liquidity Tightens

This year on October 18th The Communist Party of China will kick off their 19th National Congress and set the leadership for the next five years.

It’s an extremely fragile time for incumbents. During this Congress a group of party representatives will review a report from President Xi on what has been achieved in the past five years as well as what he believes the party should work on going forward.

If they like what they see, Xi and his administration will stay. If not, then it’s onto the next guy…

President Xi has done well for the Chinese people, at least on the surface. (Nevermind the megaton debt bomb that’s bound to explode at some point.)

He’s been able to somehow navigate the country through the Mundell-Fleming Trilemma without setting off a full blown banking crisis. And he has the positive growth numbers to point to as evidence.

GDP growth has been humming along in the 6-7% range with uncanny consistency.

Chinese GDP Growth

President Xi absolutely loves power and the last thing that he wants is an economic meltdown before this important Congress.

So what can a power hungry politician do to guarantee his seat for the next five years?

Well he can turn on the liquidity taps.

If you’ve been reading Macro Ops for awhile you know that the single most important fundamental to markets is liquidity. Nothing else comes close, which is why the investing legends like Soros, Druck and PTJ kept a close watch on how central bankers and government officials used the liquidity spigot.

In China’s case, Xi has made sure that spigot has been running at full bore going into the end of the year. Year over year loan growth to non-financial companies has been cranked up to near 16% — the highest levels seen in nearly 5 years.

China Y-Y Loan Growth to Non-Fin

All of this extra credit creates a huge wall of demand that creates a bunch of economic activity and elevated prices.

This liquidity injection is the reason why China A-shares have caught a nice rally over the last three-months.

We’ve been on for the ride during the entire breakout because we watch liquidity like a hawk. One of our own Chinese liquidity indicators has been signaling looser liquidity conditions since mid-2016. And right now it’s actually hitting new all time highs!

Liquidity AS

Yes, China has a bunch of long-term debt problems that will inevitably lead to a blow up. But with liquidity conditions this strong it’s suicide to play for the implosion. We need to wait until liquidity tightens up before we see any real financial stress.

And our guess is that won’t be happening until President Xi has secured his presidency for the next 5-years.

If you aren’t monitoring liquidity conditions around the world you’re really missing out on an extremely effective market timing tool.

We check liquidity conditions on a monthly basis in every major market.

Click here if you want to see how we monitor U.S. liquidity.

 

 

Macro Ops




Australia Exports Record Amount Of Gold To China

Are the Chinese getting close to announcing a new gold-backed currency? Well, if the record amount of Australian gold exports into China is an indicator, it may be close at hand. While the Chinese have been importing a lot of gold from Australia, it reached a new record high in 2017.

According to the recently released data by the Australian Government June 2017 Resources and Energy Quarterly, Australia exported more gold to Hong Kong and China during the first quarter of 2017 than any other quarter in history.

Australian gold exports to Hong Kong and China were 54% higher Q1 2017 versus the same quarter last year:

Australian Gold Exports to Hong Kong & China

As we can see in the chart above, Australia exported 57.4 metric tons (mt) of gold in Q1 2017 compared to 37.2 mt Q1 2016. What a difference in ten years. Australian gold exports to Hong Kong and China were nonexistent in 2008. However, after the U.S. and global market meltdown that year, China started to import more gold, especially since 2011.

Even though I compared Q1 2017 Australian gold exports to China to the first quarters of previous years in the chart above, the data for all quarters shows that the present quarter is the highest amount on record.

Furthermore, Australia is now exporting the majority of its gold to Hong Kong and China. For example, of the total 75 mt of Australian gold exports Q1 2017, 57.4 mt or 77% went to Hong Kong and China. Here was the breakdown for Q1 2017.

Australian Gold Exports Q1 2017:

Hong Kong & China = 57.4 mt

U.K. = 7 mt

Singapore = 2.1 mt

India = 2.0 mt

Thailand = 2.0 mt

Other = 4.5 mt

In addition, of the 83 mt of Australian gold exports Q4 2016, two-thirds made their way to Hong Kong and China. So, we can plainly see that China is importing the most gold from Australia ever.

Now, what is even more interesting is that Australian exports more gold than they produce from their domestic gold mines. This is also true for the United States. I decided to take the gold mine supply and gold export figures from these two countries to produce the chart below:

Australia & U.S. Gold Mine Supply vs Exports

Here we can see that Australia and the U.S. produced a combined 510 mt of gold in 2016, but their gold exports totaled 762 mt. Thus, these two countries exported nearly 50% more gold than they produced in 2016.

Here is a breakdown of Australian and U.S. gold mine supply and gold exports:

Australia Gold Production vs. Gold Exports

2014 = 274 mt Gold Mine supply vs. 289 mt Gold Exports (difference = +15 mt)

2015 = 279 mt Gold Mine supply vs. 282 mt Gold Exports (difference = +3 mt)

2016 = 288 mt Gold Mine supply vs. 329 mt Gold Exports (difference = +41 mt)

United States Gold Production vs. Gold Exports

2014 = 210 mt Gold Mine supply vs. 500 mt Gold Exports (difference = +290 mt)

2015 = 214 mt Gold Mine supply vs. 494 mt Gold Exports (difference = +280 mt)

2016 = 222 mt Gold Mine supply vs. 433 mt Gold Exports (difference = +211 mt)

While Australia is exporting more gold than it produces, the U.S. is clearly the BIG WINNER here. As I have stated in previous articles, the U.S. is not only exporting more gold than it produces, it is also exporting more gold than it imports.

In 2015, the United States produced 214 mt of gold and imported 265 mt for a total of 479 mt. However, the U.S. exported a total of 494 mt of gold in 2015. Which means, it exported 15 mt more gold than it produced and imported that year.

Regardless, Australia and the U.S. continue to export the majority of its gold to Hong Kong and China. For example, Australia and the United States exported 121 mt of gold to Hong Kong and China during the first quarter of 2017. Australia exported 57.4 mt, while the U.S. exported 63.3 mt. Thus, Hong Kong and China received 55% of all Australian and U.S. gold exports Q1 2017.

Could the increase in Chinese gold imports suggest they are setting the state for a new Gold-Back Currency or Trade? According to the recent article on Zerohedge, Moscow And Beijing Join Forces To Bypass US Dollar In Global Markets, Shift To Gold Trade:

The Russian central bank opened its first overseas office in Beijing on March 14, marking a step forward in forging a Beijing-Moscow alliance to bypass the US dollar in the global monetary system, and to phase-in a gold-backed standard of trade.

….Speaking on future ties with Russia, Chinese Premier Li Keqiang said in mid-March that Sino-Russian trade ties were affected by falling oil prices, but he added that he saw great potential in cooperation. Vladimir Shapovalov, a senior official at the Russian central bank, said the two central banks were drafting a memorandum of understanding to solve technical issues around China’s gold imports from Russia, and that details would be released soon.

If Russia – the world’s fourth largest gold producer after China, Japan and the US – is indeed set to become a major supplier of gold to China, the probability of a scenario hinted by many over the years, namely that Beijing is preparing to eventually unroll a gold-backed currency, increases by orders of magnitude.

In order for China (and Russia) to unroll a gold-backed currency, China must acquire as much gold as it can before the global currency reset. It is quite interesting to see the record amount of gold being exported from Australia to China as talks increase about a new Chinese-Russian gold-backed currency.

With the economic indicators in the U.S. and abroad peaking and rolling over, forecasts that a major market correction to take place towards the end of this year may indeed motivate China to roll out its gold-backed currency sooner rather than later. However, it’s a matter of WHEN, not IF the world moves to a new gold-backed currency system. Investors who continue to play RUSSIAN ROULETTE in the markets will likely be the biggest bag holders in history when the world switches over to a new gold-backed currency system.

Precious Metals News & Analysis – Gold News, Silver News




A Healthy Economic Fear of China

There’s an old adage in finance concerning borrowing and lending: If you owe the bank $ 1 million, you have a problem. If you owe the bank $ 100 million, the bank has a problem.

It’s all about scale.

When it comes to countries and markets, there is no scale, and therefore no problem, like the Middle Kingdom.

China is the land of the “biggest.”

General Motors now sells more cars in China than it does in the States.

The country boasts more than 1.3 billion registered cell phones, the most of any nation, and basically one for every citizen.

Chinese domestic consumption is growing by double digits while consumers in the developed world keep a tight grip on their wallets. This trend has continued for a decade… but it might be changing.

Unfortunately, no one knows for sure because the Chinese are notorious for rosy projections and opaque results.

As the rest of the world convulsed during the financial crisis of 2008-09, China watched its GDP growth fall from 14.2% in 2007 to 9.2% in 2009. Something had to be done!

The Chinese government injected hundreds of billions of dollars into the economy, goosing economic growth back above 10%… for a year or so.

Eventually, even with more financial engineering, growth fell below 9%, then under 8%, and has now dipped below 7%.

To keep the factories open, China has become a posterchild for exploding debt.

Not national government debt, which stands at less than 50% of GDP, compared to the U.S. total of about 100%. In China, it’s all about non-financial debt, which exploded by 18% per year between 2010 and 2015, reaching 160% of GDP and certainly well beyond that today.

Through banks and local entities, the national government funnels loans to state-owned enterprises (SOEs), which are government-run businesses.

If a factory is an SOE, it must serve two masters – making a profit and satisfying political demands. When those two goals conflict, which happens when such a company should downsize (and fire workers) to be efficient, they often choose to be politically correct. This means borrowing money to operate since they’re bleeding cash.

This approach works as long as banks, at the direction of the government, keep funneling money to the losing entities. When the government grows weary of the charade, all bets are off.

Given recent statements to this effect from China’s President Xi Jinping, SOEs might lose their financial lifelines, which will lead to closing businesses and job losses.

This rotation away from bloated businesses will help the economy in the long run, but it will be painful in the short-term. And the pain won’t stay in China. It will ripple around the globe, washing up on foreign shores.

Recently Chinese futures for iron ore, coking coal (used in steel mills, among other places), and rebar got hammered (pun intended). It was interesting because official Chinese steel inventory sat below normal levels.

It could be a temporary dislocation in the markets, or it could be the beginning of a slide.

Around the same time, Moody’s downgraded Chinese debt from Aa3 to A1, noting higher debt levels and a softening economy.

Hmm.

Those who sell raw materials should be concerned, and not just those who sell to China.

When the biggest buyer in the market loses interest, all suppliers take a hit.

While the ebbs and flows in the iron and copper markets are well known, there’s another market that should be eyeing China with trepidation – oil.

Every week the world gets a glimpse at how much oil sits in inventory in Cushing, Oklahoma. This measure, along with some data points in Europe, provides insight on oil supplies.

But that’s only half the equation.

To estimate where the price of oil will go next, we need to know demand. And better yet, future demand. This is where things get murky.

Chinese oil purchases have been driving marginal demand for years. As more Chinese take to the road for the first time, this makes sense.

But the country has also been adding to its strategic petroleum reserve (SPR). The problem is, no one knows the size of the reserve or how much more the Chinese will store.

JPMorgan estimated that China added roughly 1.2 million barrels of oil per day to its SPR in the spring of 2016. But it doesn’t know for sure.

The Chinese report on their SPR, but their numbers seem a tad light.

Why would a nation almost four times the size of the U.S. have a reserve less than half the size of ours? Analysts think the Chinese reserve is closer to 600 million or 700 million barrels, just shy of the U.S. SPR capacity of 735 million.

No matter what the size, eventually the reserve will be full. Unless business and consumer energy consumption ramps up dramatically, which seems unlikely given slower GDP growth and potential cutbacks at SOEs, Chinese oil demand could decline.

If it happens soon, then the slowdown will coincide with OPEC’s attempt to prop up prices through continued production cuts. Falling production would be met with falling demand, thereby keeping the oil market in equilibrium at a time when U.S. inventories are near record highs.

And then there’s that pesky business of U.S. fracking companies ramping up production.

Let’s not lose sight of the fact that OPEC is a cartel, and is working with non-OPEC members to manipulate the markets. They need to drive up profits to help their busted budgets.

They should be very fearful of changing Chinese demand… and it couldn’t happen to a nicer bunch.

Rodney Johnson
Follow me on Twitter @RJHSDent

The post A Healthy Economic Fear of China appeared first on Economy and Markets.

Rodney Johnson – Economy and Markets ()




17 Reasons To Avoid Gold

(Warning: Satire and sarcasm alert!)

Central bankers are managing paper currencies for the benefit of the people, not the financial and political elite. Consequently consumer prices are stable and there is no reason to own gold as protection from currency devaluations.

Time Magazine confirmed that Greenspan, Rubin and Summers saved the world in 1998. Bernanke did it again after the last crisis. In 2012 he was called “The Hero” by The Atlantic.

Our economic world is now stable and secure and central bankers will not need to “save” it again. Because we live in a safe world, there is no need for gold.

China, India and Russia have acquired a massive stockpile of gold bullion, (not the paper stuff) while the western world has sold gold to them. Frankly, who cares why the Chinese are buying gold or what they anticipate?

Gold will trade under $ 700 because it is a useless commodity.

The U.S. official debt is $ 20 trillion and unfunded but promised liabilities are $ 100 – $ 200 trillion, but not to worry… (Devaluation and default are viable options but officials don’t discuss either in polite company.)

Central banks have created, from “thin air,” about $ 10 trillion since the financial crisis, but that was “necessary.” Believe what central bankers announce and trust their good intentions…

Per James Rickards, “The Chinese credit bubble is a ticking time bomb. That bubble is primed to explode with or without anything Trump does.” As long as China exports telephones and TVs to us, who cares about their credit bubble? Why would their bubble impact the western world? Not to worry…

Politicians and central bankers have told us our paper currencies are strong and well managed so we should ignore gold. Would they lie to us?

Per Adam Taggart: “… we now live under a captive system. From our retirement accounts, to our homes, to the laws we live under – the banks control it all. And they run the system for their benefit, not ours.” But the “official story” is that banks are helpful, good for the economy, “doing God’s work” and are anxious to increase our indebtedness. Probably it’s true… Best to ignore Taggart and trust the banking cartel…

Politicians work for the benefit of the voters, not the corporations who own them. Those promised but unfunded benefits, global wars, ever-increasing medical costs, and depreciating currencies will sort themselves out, for the ultimate benefit of the voters. Probably…

From Future Money Trends (Dan Ameduri): “What a total Ponzi scheme it is with central banks buying each other’s bonds, buying their own government bonds, and buying stocks…It’s pure lunacy – what a total scam.” Create currency from “thin air” and buy stocks with it. Sounds fantastic! The Swiss National Bank owns over $ 60 billion in stocks, but that is a good thing, right? No downside, I’m pretty sure…

U.S. government spending increases every year, faster than revenues. The national debt increases more rapidly. Pretend the U.S. economy can survive $ 20 trillion in official government debt in 2017. Will it survive $ 40 trillion in debt in 2025? How about $ 80 trillion in debt in 2033-34? (9% increase each year for over a century) Not to worry! Greenspan, Rubin, Summers and Yellen will save us…

Given the successes of the War on Poverty, War on Drugs, War on Terror, Vietnam War, Afghanistan War, and other wars, we should expect great things from the Syrian War, expanded Middle East Wars, Korean War 2.0, and any other wars created as distractions and justifications for massive spending.

Hope and Change will Make War Great Again!

Fortunately we know the financial and political elite have implemented effective fiscal and monetary policies to maintain high employment, no inflation, and strong moral values. Our economies are intelligently managed for the benefit of everyone. With no hints of oncoming catastrophes, currency crashes, corrections in over-valued stocks, or other disturbances … we should feel financially safe and secure.

Student loan and sub-prime auto loans total less than $ 3 trillion, so not to worry… Real estate, currency, and bond bubbles are no big deal, and the U.S. pension crisis is well under $ 10 trillion, so nothing to see here…

A crisis/crash can occur at any time but might be delayed indefinitely:

1977: Inflation ramping up, American prestige and bonds flopping.

1987: Stock market crash

1998: Long Term Capital Management crash

2008: Mortgage, derivatives and stock markets crash

2017-2018: Something ugly this way comes!

Conclusions: (Sarcasm alert!)

  • Things are not just good, they’re GREAT!
  • There is no need for gold (or silver) as insurance against financial and currency destruction. Everything is great – review this article if not entirely convinced.
  • Paper currencies, over valued stock markets, multi-century lows in most interest rates, negative interest rates on sovereign bonds, and excessive debts have created disastrous consequences in the past, but this time will be different … I’m pretty sure.
  • Forget gold, sound economic principles, balanced budgets, sane economies, and skepticism about the motives of politicians and central banks. It will turn out peachy … really!

  • Alternative in case any of the above doesn’t fit your outlook:

Read my short book explaining through 44 graphs why we need gold and silver as financial insurance. “Buy Gold Save Gold! The $ 10K Logic.”

Republished with permission by The Deviant Investor.