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COULD CHINA RIDE THE YEAR OF THE HORSE INTO A GOLDEN SUNSET?

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 Apparently (according to one broadsheet astrologer anyway) The Chinese Year of the Horse heralds difficult times for those involved in the minerals mining industries. Given that country’s recent focus on gold, I think even the Chinese would dispute that prediction.

At the end of 2013 I wrote in the Black Swan newsletter “Gold has looked weak throughout the year but guess who has been buying: China.

COULD CHINA RIDE THE YEAR OF THE HORSE INTO A GOLDEN SUNSET? 7The chart above is China’s imports of gold from Hong Kong. They will also have been buying through Shanghai and other areas but this remains a good proxy for what is happening overall as it is the data least likely to be faked!

We can be sure that China has a plan here so it is still a sensible move to have a decent exposure to the yellow metal. Apart from that the markets look very “toppy”. The Swan has an exposure against the Dow which may yet come good but the only sectors looking like strong buys are miners: the China boom has NOT ended.”

I have been puzzling ever since over what China’s plan with gold might be. Today I want to set out one possible scenario but first I want to talk about market rigging and fraud.

The LIBOR Stitch-up

If someone had asked me in 2011 if LIBOR was rigged I would have scoffed and answered “NO!”. I would probably have gone on to say that it would be impossible to have a conspiracy that large amongst so many people. Sooner or later somebody would crack and the whole thing would be blown wide open.

Come June 2012 that “someone” turned out to be Barclays. Clearly realizing that the game was about to be up Barclays “confessed” and in exchange for shopping all the other banks involved paid a reduced $460mil in fines. This looks a bargain against the $1.5bil paid by UBS that December but actually all the fines were pretty meagre.

LIBOR is the starting point for around $350 trillion in derivatives trades and the Financial Times reported that the rigging had been going on since 1991. You do not need many basis points on $350tril over a twenty year period to move your lifestyle well into the comfort zone; or your bank’s profits; or your bank’s balance sheet.  So actually those fines look like something of a bargain: particularly as no one has yet been jailed.

There is strong evidence that a similar market manipulation has been happening to gold and that it may be about to come to an end. As we look at this possibility it is important to remember how impossible the rigging of LIBOR once seemed.

Gold as a supporter of currencies

Richard Poulden

Richard Poulden

Gold has been used as a medium of exchange for thousands of years. Back in Roman or pre-Roman times there were a number of good reasons for this. Firstly it is rare, but not too rare. Secondly, it is simple and easy to mine. At the basic level it is visible in rich veins and these can be mined with simple tools. It can then be smelted at a relatively low temperature to turn it into bars or ingots. Thirdly, it is golden: most of the other elements in the periodic table, which might appear as prospective currencies, are silvery in colour and thus hard to distinguish instantly from each other. Then, lastly, it does not corrode.

For hundreds of years gold circulated as physical currency until the convenience of holding gold in a vault and simply passing on the certificate entitling someone to that gold came to be seen as more convenient. The creation of what is effectively paper money is often erroneously attributed to the London Goldsmiths in the 17th Century. Wrong, it was the Chinese who invented paper money with “Merchant Receipts” circulating in the Tang Dynasty around 700.

Although of course the merchants and goldsmiths quickly worked out that they could issue more certificates than the gold they held (because not everyone would ask for it back at once) the certificates were nonetheless linked to gold and could always be exchanged for it.

 Purchasing power parity on the left scale, currency in circulation on the right

COULD CHINA RIDE THE YEAR OF THE HORSE INTO A GOLDEN SUNSET? 8COULD CHINA RIDE THE YEAR OF THE HORSE INTO A GOLDEN SUNSET? 9

Indeed, for most of history, the currency that has circulated in economies has either been itself an item of intrinsic value (gold/silver) or linked to an item of intrinsic value (Bretton Woods and the post World War Two exchange rate mechanism). This automatically prevented governments from simply “printing money”. Then, on August 15th 1971, Richard Nixon severed the final link of the US dollar to gold. In so doing he severed the last link of paper currencies to any item of real value. True, international gold convertibility of most major currencies had gone decades before but in the 1960’s the US dollar could still be exchanged for gold at the rate of $35 per ounce.

We thus entered a period when, for the first time in history ALL world currencies were “Fiat Currencies”[iii]. The last 43 years have thus been fundamentally different from all preceding economic history. We have lived in a period where currencies have not been linked to anything other than a government’s statement of what a currency is worth.

Once governments could issue as much money as they chose the inevitable happened. They could not resist : they “printed” money. There is a whole discussion to be had here, one I’ll address another time,  but suffice to say that for the governments the decline in the value of the currencies is actually beneficial.

The return of gold: Back to the Future?

But hold on….governments still have a lot of gold in their central banks right? Well they all say they have and since they are governments it must be true. Or is it all nothing but a game of Liar’s Poker?

2011 was the last time China released data on its gold reserves. According to the World Gold Council the following is the current ranking.

Now the Chinese data here is actually 2011 data and since we know that China purchased in excess of 1,000 metric tonnes of gold last year alone this table is clearly out of date even though it purports to be as of January 2014.

World Gold Holdings over 1,000 Meteric tonnes

  1. USA 8,133.5
  2. Germany 3,387.1
  3. IMF 2,814.0
  4. Italy 2,451.8
  5. France 2,435.4
  6. China 1,054.1
  7. Switzerland 1,040.1
  8. Russia 1,015.1

But it gets more interesting. If we assume gold has been mined at 1,400mt a year for 200 years (which is probably on the high side) then the total gold ever mined is around 280,000mt. Some of this is sitting in jewellery and museums and some has been consumed in industrial uses: the computer on which I am writing this for instance. So I am going to round that to 250,000mt of gold ever mined in the world. Now the top 20 countries on the World Gold Council list hold 27,500mt between them or in other words about 11% of all the gold ever mined!

No one below the top 8 has over 1,000 tonnes so China’s purchase of 1,000 tonnes last year alone is absolutely massive. If as is rumoured, China is about to announce that its holdings of gold are now in excess of 5,000mt the only possible source for this gold is the USA.

So China is in the process of cornering the physical gold market and right now I would say they have probably done it.

Another LIBOR? Could the gold markets also be rigged?

Given what we have seen with LIBOR the obvious answer is “yes” they could be. Conspiracy theories have been around on the gold price for years[iv]. But a recent article by Paul Craig Roberts and Dave Kranzler really caught my attention.[v]

I have stated since the Quantitative Easing program began in 2008 that this would inevitably lead to inflation. It is impossible to inject that amount of money into the system, both in the US and Europe and NOT get inflation.

At the same time as the massive QE programs have been injecting money into the system, Asia, and in particular China, have been buying gold and demanding physical delivery of every ounce they buy (see the graph at the start of this article).

What Roberts and Kranzler clearly explain is the method by which the market has been manipulated. The major bullion banks (at the behest of the Federal Reserve) go short on the Comex[vi] exchange in New York. They do this running naked short positions (a position where they do not have the gold to deliver). If the derivative positions on COMEX are allowed to remain open, and closed only when there is a fall in the gold price, the downward pressure can be relentless.

The same banks are also dumping physical gold on the LBMA[vii] in a way so as to ensure the maximum downward pressure on the price. Although this started as long ago as 2000 the main effort to push down the price has been since the recent high of $1,900 in 2011. Unless this intervention had taken place the price of gold would probably be closer to the $5,000 predicted by Standard & Chartered a couple of years ago.

The objective of the manipulation was to protect the value of the dollar in the face of the massive injections of money into the system and you would have to say that it has by and large worked. However on the other side of most of the physical trades sat the Chinese, each time demanding physical delivery of everything they purchased.

Let’s hear from Roberts and Kranzler: “It became more imperative to drive down the price, but the lower price resulted in higher Asian demand for which scant supplies of gold were available to meet. Having created more paper gold claims than there is gold to satisfy, the Fed has used its dependent bullion banks to loot the gold exchange traded funds (ETFs) of gold in order to avoid default on Asian deliveries. Default would collapse the fractional bullion system that allows the Fed to drive down the gold price and protect the dollar from QE.”[viii]

So is there evidence, as there was with LIBOR, of people heading for the exit? Yes, there is.

Firstly Germany asked for its 1,500mt of gold held in the Federal Reserve to be sent back. Instead of complying the Fed negotiated seven years in which to return 300mt. So pretty obviously they have not got the gold to deliver.

Secondly, Deutsche Bank has withdrawn from gold and silver price fixing. These price “fixes” occur twice daily and there are only 5 banks involved. That number has just been reduced by 20%.

Conclusion:

China is almost certainly the largest holder of physical gold in the world and by a very substantial margin. Much of the physical gold purchased by them over the last few years looks as though it can only have come from the vaults of the Western central banks, particularly the Fed. However long this continues, at some point it will come to an end and at that point China will control the world gold markets and the world monetary system.

What should investors do about it? Well, hold gold obviously but also hold the shares of gold mining companies. I can not do better than quote Louis James, Senior Metals Investment Strategist at Casey Research: “While we’re convinced that buying gold and silver right now will provide handsome rewards, much more money will be made by investing in companies that mine these precious metals.  For investors with an appetite for risk, the really big paydays will come from speculating in the best of the best junior miners”. I could not put it better!

Richard Poulden

Chairman

Wishbone Gold Plc

About the Author:

Richard Poulden has founded or co-founded successful companies in healthcare, retail and natural resources and in all these sectors he has executed successful strategies for growth by acquisition.

Mr Poulden is Chairman and CEO of Wishbone Gold Plc, Deputy Chairman of PCG Entertainment Plc and Chairman of Black Swan Plc. In addition to the foregoing, Black Swan is an investor in a range of sectors and companies covering financial services, foreign exchange trading and electricity transmission.

He is a regular interviewee and speaker at events such as the UK Investor Show. He is resident in Dubai, and frequently in the UK, Australia and Asia.

  • Source: Worldgoldchartsrus.com
  • LIBOR London Interbank Offered Rate
  • Paper money or coins of little or no intrinsic value in themselves and not convertible into gold or silver, but made legal tender by fiat (order) of the government. Source: Financial Times Lexicon.
  • Rick Rule, Doug Casey, Jim Sinclair all have good views on this
  • “The Hows and Whys of Gold Price Manipulation” Jan 17,2014
  • COMEX is commodities futures exchange, part of the New York Mercantile Exchange, which trades derivatives rather than physical product
  • The London Bullion Market Association; the largest market for physical gold in the world
  • Ibid, Note 5

Investing

Northern Trust: Outsourcing Accelerates Through Pandemic as Investment Managers Seek to Improve Margins, Enhance Business Resilience, and Future-Proof Operations

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Northern Trust: Outsourcing Accelerates Through Pandemic as Investment Managers Seek to Improve Margins, Enhance Business Resilience, and Future-Proof Operations 10

White Paper Sees Increase in Managers Outsourcing Middle and Front Office Functions to Achieve Optimal Business Structures

According to a white paper published today by Northern Trust (Nasdaq: NTRS), investment managers of all sizes and strategies have been prompted to undertake a comprehensive review of their operating models as a result of the Covid-19 pandemic which has accelerated existing trends that are compounding cost pressures. This has led increasing numbers of managers to outsource in-house dealing and other functions, such as foreign exchange and transition management, hitherto seen as core.

While cost savings remain a core driver, and indeed are one outcome of outsourcing, costs are no longer the only focus. Far from being solely a defensive reaction to increased pressure on margins, the white paper (‘From Niche to Norm’) describes outsourcing as part of the target operating model, or moving toward the ‘Optimal State’ for many investment managers, and  explains how the focus “has expanded to the variety of other potential benefits offered – enhanced capabilities, improved governance and operational resilience.”

Gary Paulin, global head of Integrated Trading Solutions at Northern Trust Capital Markets said: “The pandemic has challenged a range of operational assumptions. Working from home has, for example, questioned the need for a portfolio manager to be in close proximity with the dealing desk. Previously considered essential, the pandemic has effectively forced firms to ‘outsource‘ their trading desks to remote working setups and the effectiveness of this process has disproved the requirement for proximity, in turn, easing the path to third-party outsourcing. Many investment managers are actively considering outsourcing to a hyper-scale, expert provider as a potential, cost efficient solution – one that maintains service quality and, hopefully, improves it whilst adding resiliency.”

Northern Trust’s white paper compares outsourced trading to software-as-a-service stating: “instead of carrying the cost and complexity of running an in-house solution, firms move to an outsourced one, free up capital to invest in strategic growth and move costs from a fixed to a variable basis in line with the direction of travel for revenues.” 

Guy Gibson, global head of Institutional Brokerage at Northern Trust Capital Markets said: “The opportunity to deploy capital to build new fund structures, develop new offerings, focus on distribution and enhance in-house research has been taken up by several of our clients to the benefit of their investment approach, and to the benefit of their investors.  Additionally, in the last two months alone, many firms have recognized that outsourcing to a well-capitalized, global platform has enabled them to take advantage of cost-contained growth opportunities in new markets.”

A further development, which has echoes of the journey the technology industry has already undertaken, is the move towards ‘whole office’ solutions, which represent the next potential wave in outsourcing.

According to Paulin; “recently we have observed a growing number of managers wanting to outsource to a single, hyper-scale professional service provider who can do everything, everywhere. This aligns with Northern Trust’s strategy to deliver platform solutions for the whole office, serving our clients’ needs across the entire investment lifecycle.”

The white paper can be downloaded here.

Integrated Trading Solutions is Northern Trust’s outsourced trading capability that combines worldwide locations and trading expertise in equities and fixed income and derivatives with access to global markets, high-quality liquidity and an integrated middle and back office service as well as other services, such as FX. It helps asset owners and asset managers to meaningfully lower costs, reduce risk, manage regulatory compliance and enhance transparency and operational efficiency.

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How are investors traversing the UK’s transition out of lockdown?

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How are investors traversing the UK’s transition out of lockdown? 11

By Giles Coghlan, Chief Currency Analyst, HYCM

Just when we thought we had overcome the initial health challenges posed by COVID-19, the UK Government has once again introduced lockdown measures in certain regions to curb a rise in new cases. This is happening at a time when the government is trying to bring about the country’s post-pandemic recovery and prevent a prolonged economic downturn.

This is the reality of the “new normal” – a constant battle to both contain the spread of the virus but also avoid extended economic stagnation.

Of course, no matter how many policies are introduced to spur on investment, traders and investors are likely to act with caution for the foreseeable future. There are simply too many unknowns to content with at the moment.

To try and measure investor sentiment towards different asset classes at present, HYCM recently commissioned research to uncover which assets investors are planning to invest in over the coming 12 months. After surveying over 900 UK-based investors, our figures show just how COVID-19 has affected different investor portfolios. I have analysed the key findings below.

Cash retreat

At present, it seems that by far the most common asset class for investors is cash savings, with 78% of investors identifying as having some form of savings in a bank account. Other popular assets were stocks and shares (48%) and property (38%). While not surprising, when viewed in the context of investor’s future plans for investment, it becomes evident that security, above all else, is what investors are currently seeking.

A third of those surveyed (32%) said that they intended to put more of their wealth into their savings account, the most common strategy by far among those surveyed. This was followed by stocks and shares (21%), property (17%), and fixed interest securities (17%).

When asked about what impact COVID-19 has had on their portfolios throughout 2020, 43% stated that their portfolio had decreased in value as a consequence of the pandemic. This has evidently had an effect on investors’ mindsets, with 73% stating that they were not planning on making any major investment decisions for the rest of the year.

Looking at the road ahead

So, it seems that many investors are adopting a wait-and-see approach; hoping that the promise of a V-shaped recovery comes to fruition. The issue, however, is that this exact type of hesitancy when it comes to investing may well slow the pace of economic recovery. Financial markets need stimulus in order to help facilitate a post-pandemic economic resurgence, but if said financial stimulation only arrives once the recovery has already begun, the economy risks extended stagnation.

It seems, then, that there are two possible set outcomes on the path ahead. The first is a steady decline in COVID-19 cases, then an economic downturn as the markets correct themselves, followed by a return to relative economic stability. The second potential outcome is a second spike of COVID-19 cases which incurs a second nationwide lockdown – delaying an economic revival for the foreseeable future. At present, the former of these two scenarios is seemingly playing out with economic growth and GDP steadily increasing; but recent COVID-19 case upticks show that it’s still too soon to be certain of either scenario.

A cautious approach, therefore, will evidently remain the most common investment strategy looking ahead. But investors must remember that, even in the most uncertain times, there are always opportunities for returns on investment. Merely transforming a varied portfolio into cash savings risks a long-term decline in value.

High Risk Investment Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. For more information please refer to HYCM’s Risk Disclosure.

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Hatton Gardens 5 top tips for investing in Diamonds

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Hatton Gardens 5 top tips for investing in Diamonds 12

By Ben Stinson, Head of eCommerce at Diamonds Factory

Investing in diamonds can be extremely rewarding, but only if you know what to look for. For investors who lack experience, finding your diamond in the rough can be quite daunting.

For even the most beginner of diamond investors, the essentials are fairly obvious. For instance, you need to ask yourself will the diamond hold its value over time? What’s the overall condition of the stone and the jewellery? Is there history behind the item in question?

Although common sense plays a big part in investing, people often need insider tips and tricks to go from beginner to expert. Tony French, the in-house Diamond Consultant, at Diamonds Factory shares his professional knowledge on the 5 most important things to look for when investing in diamonds.

1: Using cut, weight and colour to determine value

Firstly, consider the shape, colour, and weight of your diamond, as this can play a pivotal role in guaranteeing growth in the value of your item. Granted, investing trends change with time, but a round cut of your diamond will almost always be the most sought after. The cut of your diamond is incredibly important, as it can influence the sparkle and therefore, the overall value. It’s a similar story for the intensity of some colours, such as Pink, Red, Blue, Green etc. Concerning weight, the heavier (bigger) stones will generally increase in value by a bigger percentage. Collectively these factors also contribute to the supply and demand aspect, which will determine their high price, and will ensure your item is re-sellable.

2: Provenance

Looking for significant value? Well, aim to own jewellery or diamonds that come from an important public figure. If you’re lucky enough to own a piece that has significant history, or was owned by a celebrity or person of interest, it’s an absolute must to have concrete evidence of this. Immediately, this proof will increase an item’s overall value, and there’s a good chance the stardom of your item might drum up interest amongst diehard fans, increasing the value even further…

Equally, it’s possible to proactively bring provenance to unique diamonds of yours. For instance, you can offer to loan bespoke, or unusual pieces for film, theatre, or TV performances – then it can be advertised as worn by xyz.

3: Find the source

Ben Stinson

Ben Stinson

Establishing your diamond’s source is one of the most important things you can do when investing in diamonds. If you’re starting out, try to purchase diamonds that have NOT been owned by too many people, as the overall value of the diamond will reflect multiple ownership. Alternatively, I’d always recommend buying from suppliers like ourselves or other suppliers and retailers, who buy directly from the people who have had them certified.

Primarily, this will allow you to have a greater degree of transparency, which is crucial when buying such a valuable item. Next, you should immediately see an increase in value of your diamonds, as identifying a source will allow traceability and therefore, market context.

4: Certification

Linked closely with my previous point, is the requirement to ensure that your diamonds are certified by a credible lab, and you have the evidence to prove so (a written document with specific grading details about your diamonds) – this will remove any doubts of impropriety.

It’s essential to remember that not all labs are the same, and many labs are better than others. Both the AGS (American Gem Society) and GIA (Gemological Institute of America) have great reputations and are world renowned. I’d recommend doing your own research into the labs, and when you’ve found the pieces that you’d like to invest in, then make an informed decision based upon your findings. Ultimately, proving certification will make your stones easier to insure, and deep down, you can have peace of mind knowing you have got what you have paid for.

Don’t forget to keep this paperwork in a safe location as well – you’d be surprised how many people we’ve met who have lost, or forget where they’ve placed it.

5:  Patience is a virtue…

If the market is strong, it might be tempting to look for an immediate sale once you’ve purchased a high value item. However, I suggest holding onto your diamonds for some time before even thinking about selling. More often than not, an item is more likely to increase in value over a few years than a few days – try and wait a little longer!

Equally, I would encourage having your diamonds, or jewellery professionally valued regularly. If you don’t have the knowledge to make a rough judgement on how much your pieces are worth, a consultant or expert can provide both a valuation, and contextualise that amount in the wider market. From there, you should be empowered with the knowledge to decide whether to keep or sell.

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