-- Published: Tuesday, 18 September 2018 | Print | Disqus
By Craig Hemke
With the news now behind us regarding U.S. tariffs and Chinese retaliation, the prices of many commodities were soaring on Tuesday. Many, but not all—with the exception being COMEX gold and COMEX silver. Why?
In what seems to be a classic case of "sell the rumor, buy the news", most industrial commodities, grains and crude oil rallied on Tuesday in response to the announcement of reciprocal U.S. and Chinese import tariffs. Below is a snapshot taken mid-day on Tuesday:
However, be sure to note that while copper, platinum and palladium are all up from 2-3%, COMEX gold and silver remain largely unchanged. And why is this? No doubt Tuesday's muted reaction to the tariff news is directly related to the ongoing peg of dollar gold prices to the dollar exchange rate of the Chinese yuan. We first wrote about this new phenomenon back in early July, and we urge you to re-read that article now: https://www.sprottmoney.com/Blog/has-the-pboc-take...
The impact of this apparent (and actively-managed) "peg" can be seen below. But first, there's a reason why so many analysts miss this correlation. The yuan-dollar exchange rate is often quoted as USDCNY, and if you plot this rate with COMEX gold, you see no correlation. In fact, you see a mirror image instead. To reveal the correlation and apparent peg, all one needs to do is invert the USDCNY to CNYUSD. Once that's done, you simply plot the two together as we have below, with CNYUSD in candlesticks and the price of Dec18 COMEX gold as a blue bar. This chart dates back to before June 15… the date when an active devaluation of yuan began and this "peg" appeared to begin in earnest.
Looking closer, here's the same chart, but the time period is just the past few days. Again, the correlation is obvious:
However, these charts of the correlation/peg only explain WHY gold and silver prices have been flat and slow to recover. Far more interesting questions surround the imposition of the peg itself.
- How is this correlation/peg managed?
- Which organizations/traders are behind it?
- What does this mean for the future of the dollar price of gold and silver?
In the above-referenced article from July, we asked you to consider this next set of bullet points. Please do so again now. Perhaps these items are unrelated, and perhaps they are not.
• In 2013, a major Chinese conglomerate called Fosun International purchased One Chase Manhattan Plaza from JP Morgan: https://money.cnn.com/2013/10/18/news/china-jpmorg...
• Why would this be significant? Because it's the same property that houses a massive underground gold vault... that just happens to be directly across the street from the New York Fed: https://www.zerohedge.com/news/2013-03-02/why-jpmo...
• Next, ICBC (Industrial and Commercial Bank of China) purchased the lease of DeutscheBank's massive London vaults in early 2016. ICBC then petitioned to join JPM, HSBC, Scotia, Barclays and UBS as a member of the London Daily Fix process: https://www.telegraph.co.uk/finance/commodities/12...
• Soon thereafter, ICBC also bought a massive London gold vault from Barclay's: https://www.theguardian.com/business/2016/may/16/b...
• Most recently, the World Gold Council announced the offering of a new gold ETF to supplement the existing GLD. The custodian of the gold for this new fund? You guessed it... ICBC: https://www.prnewswire.com/news-releases/icbc-stan...
And thus, as we first asked in July, what are the implications of China assuming control of the global gold price and the existing physical distribution centers in London and New York? Many have long speculated that the Chinese government and the PBOC have stockpiled thousands of metric tonnes of physical gold over the past two decades. It should come as no surprise that the world's largest holder of physical gold would want some measure of control over its price. It's often stated that "he who owns the gold sets the rules", but to what end would China be driving price?
By linking the dollar price of gold directly to the yuan, the PBOC has eliminated, for now, a level of foreign exchange risk to their gold portfolio. Have they done this to enable themselves to continue acquiring physical gold from the west at a "set price" ahead of further yuan devaluations? Is the PBOC planning for a trade war or a liquidation of their massive U.S. treasury position? Or, instead, are they planning for something much more significant?
These are all VERY important questions that deserve your attention. But consider this too: if, in the 21st century, Shanghai is assuming global control of the pricing and delivery of precious metal from the 20th century titans of London and New York, is this a good thing? Is this beneficial in dollar terms going forward, or will prices simply be held in a tight range for the foreseeable future? Would Chinese control stretch and break the current paper derivative pricing scheme that relies upon leverage, minimal physical demand and unallocated metal in order to survive?
As an owner of physical gold and silver, you need to thoroughly consider these questions as well as the long-term implications of your answers.
Our Ask The Expert interviewer Craig Hemke began his career in financial services in 1990 but retired in 2008 to focus on family and entrepreneurial opportunities. Since 2010, he has been the editor and publisher of the TF Metals Report found at TFMetalsReport.com, an online community for precious metal investors.