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Gold may regain its luster

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Saturday, March 22, 2014, 9:00 p.m.
 

It was suspected and litigation alleges the gold market is being manipulated by major Western central banks, led by the Federal Reserve.

Despite the great power of central banks, however, it appears that gold is starting to rise for fundamental reasons of demand.

AIS Capital Management LP filed a class-action, antitrust lawsuit in federal court in New York against five international banks: the Bank of Nova Scotia, Barclays Bank, Deutsche Bank, HSBC Holdings and Societe Generale. The suit alleges that these banks conspired to manipulate the price of gold for their own gain and follows announcements of official investigations in the United Kingdom and in Germany regarding the London Gold Fix.

Like the London Inter Bank Offered Rate, or LIBOR, used to base key international interest rates, the London Gold Fix forms the spot price benchmark for major gold transactions. The LIBOR scandal rocked the financial world.

But Germany's senior securities regulatory agency declared gold manipulation as “worse than LIBOR.”

Gold trading long has been shrouded in mystery. In 2009, China's central bank disclosed that its gold holdings grew by 75 percent from 600 to 1,054 tons, or metric tons.

According to Gold Field Mineral Services, the world's total gold production for 2013 was 2,765 metric tons. Subtracting China's and Russia's “non-exported” domestic production from the 2,765 metric tons left some 2,142 metric tons of newly mined gold available worldwide last year.

Adding China's last three years' annual aggregate production of 1,320 metric tons to its declared holdings of 1,054 metric tons indicates China's holdings are at about 2,374 metric tons. This makes China one of the world's largest holders, yet it imports on a large scale.

According to the Hong Kong Census, China imported a net 1,781 metric tons via Shanghai and Hong Kong. Adding this to China's domestic annual production of 440 tons suggests China accumulated at least 2,221 metric tons last year, or more than 80 percent of total worldwide production of 2,765 metric tons.

Combining China's aggregate domestic production and known imports suggests it has more than 4,155 metric tons. Assuming the United States owns all the gold held by the Fed, this makes China the world's second-largest owner.

United Nations, International Monetary Fund and Bloomberg statistics show that demand for gold from surplus nations, net changes in central bank holdings and jewelry demand totaled 3,401 metric tons in 2013. Added to China's imports of 1,781, this amounted to total demand of 5,182 metric tons.

Gold recycling and net sales from gold exchange traded funds yielded 2,261 metric tons, making a total 4,403 metric tons available worldwide in 2013. That means gold demand of 5,182 metric tons exceeded supply by 779 metric tons.

From where did the extra gold come? Did central banks secretly lease gold to buyers? Is China the world's largest “owner,” as opposed to “holder,” of gold?

Clearly, higher gold prices owe something to Ukrainian tensions and depressed interest rates. But growing awareness of shortages and a decline in the power of Western central banks to suppress price point to a resumption of the bull market.

John Browne, a former member of Britain's Parliament, is a financial and economics columnist for Trib Total Media. Contact him at johnbrowne70@yahoo.com.

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