Australian Financial Review Warns About Paper Gold: China Moves To Physical Only ~ Derivatives Not Allowed.

China Derivatives

One of the strongest arguments against investing in gold was that the metal yielded no interest while you were holding it ~ so it stands to reason that the environment of low interest rates should be friendly for investors in precious metals.

That argument, while valid, has lost significant merit, because investors don’t get much of an interest rate holding government bonds or bank deposits. Indeed in several countries interest rates have gone negative, which means that investors are paying governments for the privilege of holding their bonds.

The price is set every night in derivative trading on Comex in New York. The gold price is also nominally fixed in London. The London market is theoretically a physical market, but in practice ~ it is really a derivative market with very few physical deliveries.

The big holders of gold are in China and other Asian countries. So the price is being set by derivative traders who hold little or no gold, while Asians are continually amassing the physical metal.

If, one day somewhere in the future, the physical holders decide to start setting the price, it will rise quite sharply. So it’s not a bad strategy to buy gold whenever it dips.

GATA

gold dragon“If, One Day Somewhere In The Future “

->Just Arrived April 19, 2016<-

It’s worth noting that gold has been a better investment in $A than $US. Gold climbed to $US1883 in August 2011, dropped to $US1061 last December and has since rallied to about $US1200.

That’s been a very bouncy ride for American investors but Australians have not suffered anywhere near the same level of trauma.

Gold peaked at $1784 in September 2011, when our currency was at a premium to the $US. It slumped to $1306 in April 2013, ran to a recent high of $1740 in February and is now hovering around $1600.

So for Australians the barbarous metal, as Lord Keynes once described it, has been holding up quite well. Investors should be aware, however, there is a fundamental instability in the gold price.

The price is set every night in derivative trading on Comex in New York. The gold price is also nominally fixed in London. The London market is theoretically a physical market, but in practice it is really a derivative market with very few physical deliveries.

The big holders of gold are in China and other Asian countries. So the price is being set by derivative traders who hold little or no gold, while Asians are continually amassing the physical metal.

If, one day somewhere in the future, the physical holders decide to start setting the price, it will rise quite sharply. So it’s not a bad strategy to buy gold whenever it dips. There are several bullion houses in Australia who can provide the metal.

At, say, $1640 an ounce, the bullion house might quote a buy price of $1654 and a sell of $1616, giving itself a margin of about $38. An investor is, of course, betting not only on the gold price but also on the $US exchange rate.

Investors who don’t fancy buying the metal can opt instead to buy shares in gold mining companies. There are plenty listed on the ASX and any who can’t make profits at the current price can be dismissed as hopeless.

An employee shows off silver and gold bullion bars engraved with dragons at a gold shop in Beijing.

Silver and gold bullion bars engraved with dragons at a gold shop in Beijing.

MOVING IN SYNC

Silver has been moving broadly in sync with gold and is now about $22 an ounce.

The other precious metal enjoying a buzz at present is platinum, which rallied from $US811 an ounce in January to $US1008 in March before easing in April. Platinum is partly an industrial metal because of its use in vehicle engines.

The statistics on platinum show that demand has been outstripping supply for the past four years and will again in 2016. The estimates for the current year are for supply to be just under 6000 ounces while demand is expected to total 6200. The world must have been living on inventories.

The biggest supplier, dwarfing the rest, is South Africa, which produces about 4300 ounces a year. However, the workforce is militant and the South African government has been unfriendly to the producers, who have suffered frequent disruptions.

South African mine costs were estimated at about $US1200 an ounce in 2014 and spot prices averaged $US1055 last year, so maybe half of the mines were cash-flow negative. Even after the recent rally, the platinum price is not high enough to stimulate capital expenditure or greater production.

The big players in the platinum market are traders on Nymex, who have been alternatively buying and shorting the metal, so once again we’re looking at a market where the derivative tail wags the physical dog.

This situation cannot persist. A few platinum miners may be making profits, but as the inventories become exhausted a rise in the price must follow.

Australian Financial Review

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