Imminent De-Dollarisation Ultimately Good for Gold Prices
Gold and silver refuse to sink below their established lower consolidation levels, despite dollar strength. As can be seen in our headline chart, silver has enjoyed a decent bounce since 1 May, and gold has held firm at $1300, up 5% from the December low. Since last Friday, gold is up $8 in early European trade this morning (Friday) at $1323, having spiked down to as low as $1304 on Wednesday. Over the same time-scale, silver is up 23 cents on balance at $16.75.
Rather than get hung up on short-term uncertainties, I shall devote the rest of this report to the medium-term outlook: we should occasionally lift our eyes from our desks to see what is actually going on around us.
This week, President Trump finally announced his decision to withdraw from the Iran nuclear deal, and to reimpose sanctions. The sanctions are so far only a threat, and Trump is liable to change his mind with little or no warning. But it seems his objective is to force regime change by crippling the economy. He has already succeeded in driving the currency lower, disrupting internal trade.
Regime change will suit Israel and Saudi Arabia, but importantly give America a stronger foothold in the region, which is why it will not be permitted to happen. China, Russia and Iran are key partners in the economic integration of the Asian continent, and all three countries are adamant in their desire to banish the US dollar from their trade.
In his speech, Trump said “Powerful sanctions also go into full effect”. There are two problems with this new policy. First, it is not supported by America’s NATO allies, which have substantial business interests at stake, and second, since the last set of sanctions Russia and China have developed independent bank settlement systems, and importantly an oil future denominated in yuan. Turnover in this contract has nearly doubled over the last week to 166,162 contracts, and open interest is now 32,022 lots, representing 32,022,000 barrels of oil.
There can be little doubt this contract has attractions for Iran, allowing it to avoid using “Satan’s money”, but the question is, what does she hedge into? The answer is likely to include the one form of money that cannot be adulterated by America, and that’s physical gold, which she can do through deliverable yuan contracts in Hong Kong and Dubai.
America is unlikely to succeed in its attempt to bring down the Iranian theocracy: after all, it has been trying to do so since 1979, and only managed to make the theocracy more entrenched. If Trump does not back down, he will only accelerate Chinese and Russian plans to eliminate the US dollar. If he does back down, he will have demonstrably lost the gambit, increasing anti-American, anti-dollar cohesion in the Asian powers anyway.
There may be a face-saving deal in between these outcomes, but de-dollarisation seems certain to accelerate as a result of Trump abandoning the nuclear deal and will backfire on the US dollar, which is ultimately good for the gold price. – Alasdair Macleod
Turkish Gold Imports Triple As The Central Bank Diversifies Out Of Dollars
Turkish gold imports surged due to a sharp increase in investment demand as well as renewed Central bank purchases. While the Chinese and Russian governments have been adding gold to their official reserves over the past several years, Turkey added 86 metric tons to its official holdings in the last seven months of 2017.
According to the 2018 World Gold Survey, Turkish official gold holdings reached a new record high of 565 metric tons (mt) last year as the government decided to replace a significant amount of its Dollar reserves with gold. And, this continued even in the first quarter of 2018. Information from the World Gold Council’s Demand Trend reported that Turkey added another 30 mt of gold to its official reserves in Q1 2018.
If we look at the chart below, we can see just how much gold Turkey imported in 2017 versus 2016:
Turkish gold imports more than tripled from 106 mt in 2016 to 361 mt in 2017. Again, the large increase in Turkish gold imports was due to a 60% increase in investment demand and the 86 mt purchase by the Central bank. With the addition of the 30 mt of Central bank gold purchases in Q1 2018, official Turkish holdings are now nearly 600 mt.
Of the total 366 mt of Central bank gold purchases in 2017, Russia (224 mt) accounted for 61% of the amount while Turkey (86 mt) acquired 23% and Kazakhstan (43 mt) at 12%. The remaining 4% was split amongst Columbia, Mongolia, Indonesia, Jordan, and Thailand (Source: GFMS 2108 World Gold Survey):
What is quite interesting about the increase in Turkish gold demand and imports is how it compares to the United States. In 2017, Turkey imported 361 mt of gold versus 255 mt for the United States. Thus, Turkey, whose population is one-quarter of the United States, imported 100+ mt more gold. Of course, most of the U.S. gold imports are refined and then exported to Switzerland, United Kingdom, China and various other Asian and Middle Eastern countries.
Furthermore, as U.S. gold investment plunged by 55% in 2017, Turkish demand for gold bullion surged by 60%, mainly due to an increase in official coin purchases. According to the 2018 World Gold Survey, Turkish official coin sales jumped to 38 mt versus 22 mt in 2016. Thus, the Turkish population consumed more than three times the 13 mt of U.S. official gold coin sales last year.
Now, if we look a the major foreign holders of U.S. Treasury securities, Turkey has been liquidating its Dollar holdings by $16 billion since its peak in October 2017:
You will also notice that Russia has also been liquidating U.S. Treasuries by approximately $11 billion since its peak in November 2017. However, Russia wasn’t selling U.S. treasuries to purchase gold; rather they were diversifying out of Dollars and into IMF Bonds (Source: Russia says it will sell some U.S. Treasuries, buy IMF bonds). As Russia sells U.S. Treasuries to purchase IMF Bonds, it also added another 42 mt of gold to its reserves in Q1 2018.
While there are countless reasons why Russia is adding gold to its official holdings, the most important reason is quite simply, because IT CAN. The majority of countries are running massive trade and balance account deficits and cannot purchase gold. Russia is one of the few countries that export a great deal more oil than it uses domestically which is part of the reason it enjoyed a $115 billion trade surplus last year (Source: Russia: Trade Balance – Statista)
Yes, the U.S. Govt could print money to purchase gold, but it’s not quite that simple. First, there are no western central banks buying gold. They just can’t. Most of the Central Bank sold into the market has come from the IMF and western central banks. Second, for a western central bank to start purchasing gold, it would be seen as a huge RED FLAG to western fiat currencies.
Lastly, gold is a barometer for the US Dollar. If the U.S. Government started printing money to buy gold, just think about how that would not only impact the price but market sentiment. Western central banks will continue to liquidate gold until the financial markets and the fiat monetary system disintegrate.
When we start to see more countries like Turkey adding to their gold reserves, it’s a clear sign that all is not well in the global financial markets. – SRSroccoreport
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