Wednesday, April 30, 2014

Eastbound and Down

"Gold is so old. Such a rich history.
An educated western mind cannot begin to understand it!
We live in a time of closed thought and controlled perception.
How could we have known that two thirds of humanity
would still think of gold as wealth?
It’s not that they are right or wrong to think this way,
it’s that we want them to work for us! That is the problem!
And when they worked for us we paid them!

And who in the hell would have thought that they would have
used so much of that pay to buy gold! Some bought in tiny amounts
and some bought in large amounts. This started with the new
world trading order that came into being about six years ago.
By now that gold is so spread out it would take 20 years
and 5 small armies to get it back, I think."

Much of the Western gold flowing eastbound to China and down to the Middle East and India passes through Switzerland on its journey. And just last week, Switzerland released its import-export numbers for the first quarter of this year (h/t Flore). More gold flows into Switzerland than out, probably because Switzerland is a good place to store gold, but most of it just flows through. Currently, according to the data, gold exports are about 80% of gold imports. Last year it was 90%, and the year before it was 70%. But what's most interesting is where the flow comes from and where it is going.

More than 50% of the flow, about 270 tonnes in the first 3 months of this year, or 90 tonnes per month, originated in the UK. Projected annually, that's about 2,150 tonnes per year flowing through Switzerland, of which half is coming out of London. For comparison, 2013 was a little higher with 2,777 tonnes flowing through Switzerland, and 2012 was a little lower with 1,570 tonnes, which was down from 2011's 1,819 tonnes.

I can't tell how much of the 2,777 tonnes came out of the UK last year because Switzerland only started including information on its trading partners in 2014, but if it was close to 50% like this year, that would be about 1,390 tonnes. Adding the first quarter of this year's 270 tonnes, that would be about 1,660 tonnes drained from London in 15 months. For comparison, GLD was drained of about 560 tonnes. If all of that gold drained from GLD made a stop in Switzerland to be recast as kilo bars, then one could imagine GLD accounting for roughly a third of the London drain.

Frank Knopers made this nice chart yesterday, for his Market Update site, of where the gold flow is coming from:

But what's more interesting than where it's coming from is where it's going. 438 of the 537 tonnes, or 82% of the gold that flowed through Switzerland in the last three months, went to Asia, India and the Middle East. 281 tonnes, or 52% of the flow, went to Hong Kong and mainland China alone.

Apparently Mr. Chang still likes his gold, very thank you. So not much has changed, except that structural support is now negative, for the dollar and for gold. By the way, did you know that the same year the CBs ended their 21-year gold selling spree, Saudi Arabia made the single largest one-off purchase of gold by a CB? I guess that whole "special-deal-to-buy-time-for-the-dying-$IMFS" thing is over. It's almost as if no one is trying to buy time anymore, so maybe something really big has changed. Meanwhile, the physical is loaded up and truckin', eastbound and down.


Thursday, April 17, 2014

YOY Structural Support Now Negative

A number of people have emailed me asking for my thoughts on Belgium's recent "buying spree" in USG securities. Here is one of the emails:

"What do you make of the treasury buying out of Belgium? Seems like maybe someone isn’t yet ready for the transition? Really curious to see who it is."

I don't know who it is, but I thought I'd explain which part of the data that I like to watch. Two years ago I used the term "willy-nilly support" to contrast what was happening at that time with the "structural support" of previous decades. Here's a quote from that post:

"In fact, even though it is true that some combination of Japan, oil exporters, Caribbean banking center, Taiwan, Switzerland, Russia, Luxembourg, Belgium and Ireland (to name a few) managed to cobble together the necessary support last year, the dollar is now living off of a willy-nilly support system rather than the "structural support" it enjoyed for the last 30 or so years."

This Belgian buying smells worse than "willy-nilly support" to me. What I watch is the "structural support", defined as the storage of homeless dollars in central banks around the world. Here is FOA from 10/5/01:

"The game is to let the US economy suffer from its own bloated expansion by moving slowly away from supporting foreign dollar settlement with CB storage. This is more than enough to end the dollars timeline…"

To see this "structural support", I look at the "For. Official" line in the TIC data sheet of Major Foreign Holders of Treasury Securities from the US Treasury. "For. Official" means "Foreign Official" as opposed to foreign private holders of Treasuries. So this line shows how many homeless dollars the various central banks around the world are currently storing:

Notice that I highlighted $4069.2B for February 2014, and $4100.4B for Feb. 2013, a decrease of $31.2B over the last 12 months. If that doesn't make the hair on the back of your neck stand up, consider this:

On 1/1/14 I posted my New Year's Day post in which I observed, shockingly, that the year-over-year (YOY) increase of the past four years had dropped from a 3-year-average of +$422B to only +$24B for 2013. As shocking as that sounded on New Year's Day, we are no longer even in positive territory. Now we are negative YOY for the first time. For comparison, you can find older versions of mfh.txt here.

Here's what it looks like when we compare the previous three years with the past 12 months:

2010: +$456B (over 12 months)
2011: +$426B (over 12 months)
2012: +$386B (over 12 months)

Last 12 months: -$31.2B

At the beginning of this year, we were at about +$24B. As of the end of February, we have dipped into negative territory. This means that the rest of the world (ROW) is not only no longer "supporting foreign dollar settlement with CB storage," they are now, at least as of February, beginning to kick those homeless dollars out of the comfortable CB vaults and onto the street.

When I wrote my New Year's Day post, I estimated that the YOY for 2013 would be +$24B. It was an estimate because only the data through October was available at that time. When the actuals came in around mid-February, it turned out that my estimate was high. The actual came in at +$22.2B, compared to +$386B the previous year, and also compared to -$31.2B now.

Anyway, whoever is standing by the dollar, he smells fishy to me. My chart in the New Year's post would now look like this, with that last red dot more negative now than it was positive at the beginning of the year: