
Helicopter Musings on Gold and Silver
It's been a while since I posted one of these. It looks to me like there are a strong rip currents happening right now though - price action is not reflecting underlying vault flows.
Gold
India's MCX exchange has been running a large >$30/ozt premium to LBMA spot even after discounting the 15% Indian import duty for the last couple of weeks. Meanwhile, MCX gold vault stock (for the KG contract used by Indian industry) has been rising (indirectly indicating that India is importing gold in quantity). It is up ~10% over the last two weeks. News from India indicates that retail demand for Diwali has been very strong (over 10% more than last year). This morning, the IBJA PM fix (Indian spot) (excluding import duty) surged to a ~$14 premium over LBMA spot. Diwali may have ended, but India still has to make up for 3 months of lost imports from May-July as a result of government import duties and restrictions. It appears that demand is still running hot.
I don't get vault flow data for China's SGE or SHFE markets, but SGE/SHFE gold prices have remained in a consistent premium to LBMA spot. Media reports says that China is buying/importing record amounts of gold lately. Their main retail gold market was apparently swarming with shoppers during a holiday recently. It certainly seems like all indications are supportive of gold demand in China remaining strong.
Some European nations have made news in recent weeks regarding efforts to repatriate their gold from NYC. The Netherlands' efforts were particularly curious as they did a partial physical delivery and a partial "sell NYC stock, buy London replacement" swap. It raised several questions in my mind:
"Why do it for a partial repatriation? If it was more cost effective to sell/repurchase, why didn't they do that for all of it? If it was not cost effective, why did they do it at all? Assuming the last case was correct, did the Fed just not have the physical gold to deliver?"
While global demand is running hot and the Fed may not have market acceptable gold in the vaults, the West's free float vault stock (COMEX + LBMA less Bank of England and ETFs/ETPs) shrunk 2 metric tons in October. The West's pile of gold is shrinking while the East races to build gold trading hubs in Hong Kong and Singapore to challenge London for market dominance.
"Buckle up."
Silver
In late October, it was reported that India had issued permits for importing 6,500 metric tons of silver through the next six months (through April). India's MCX exchange's silver KG vault's 5 day moving average flipped from vault stock drain to vault stock gain at the start of November. Since the start of the month, the MCX silver KG vault has added ~42 metric tons. It certainly seems like India has started to process some of that 6,500 tonnes allotment. Meanwhile, both the MCX silver KG futures and IBJA spot prices have maintained premiums to LBMA spot even after discounting India's 15% import duty. As with gold, Diwali may have ended, but India still has to make up for 3 months of lost imports from May-July as a result of government import duties and restrictions. It appears that demand is still running hot.
In China, the SHFE futures exchange has drained ~10% (~4M ozt) of its vault stock since the start of October. The SGE has posted two consecutive weeks of outflows encompassing >3.3M ozt or >10% of its late October vault stock. China is supposedly restricting silver exports, so presumably, these vault drains represent domestic demand and not sales to India, though customs import/export data will confirm or deny that when it becomes available. In the meantime, SHFE/SGE prices for silver remain at a premium to global markets (both LBMA & India). It looks to me like China is not importing sufficient quantities of silver to meet domestic demand.
The London vault stock of silver ETFs increased in October thanks to heavy lifting from SLV. The LBMA's free float silver vault stock took a huge hit in October. How long can the USA's shadow inventory continue to support the LBMA in satisfying global demand? I think we find out in the months ahead.