China's Demand for Gold Has Trapped The West's Central Banks
Every once in a while, an Off the Cuff interview is so important that we decide to make it available to the entire public. This is one of those occasions.
In this week's Off the Cuff podcast, Chris and Alasdair Macleod build on the insights laid out in Chris' recent mega-report last week on gold: The Screaming Fundamentals for Owning Gold. And specifically, they delve deeply into the poorly-understood topic of why Chinese demand has become such a game changer in recent years.
In my opinion, this podcast offers the best clarity I've heard to-date in explaining:
- what the true measurement of annual Chinese bullion demand actually is (hint: it's even bigger than you imagine)
- what the implications of China's gold voraciousness will be
- why Western central banks had to smash the price of gold last April
- why Chinese demand exploded at these lower prices, putting the Fed and other Western central banks into a trap (kill the banks or kill their currencies)
- why the Fed is desperate to keep the price low for as long as possible (and why this suppression will fail)
- why the Eastern attitude towards gold will trump the West's
In regard to the last point, Alasdair pithily summarized a critical dynamic that, in my opinion, is as hugely important as it is under-appreciated:
In the rest of the world and particularly Asia, people do not think like we do. As far as they're concerned, gold is the only long term asset worth holding. It is the family pension fund. I like quoting the typical situation in India. I first went to India in 1965 and the price of gold at that stage in rupees was around about 170 rupees an ounce. Today it's about 100,000 rupees an ounce. And when you think that the young man getting married at that time -- he'll be a grandfather now -- he would have got a dowry from his wife's family which would have been in gold. His presents would have been gold. Every time they had children there would have been gold. Every time there's a festival there would be gold. Gold is the family pension fund. What other investment has gone from 170 rupees to 100,000 rupees over that period of time? Absolutely nothing! There isn't even an alternative like sensible equities or anything like that for them to play. Gold is the only way they can escape the devaluation of the rupee. And so no wonder it's so popular. That's the story all over Asia, by the way.
I think the financial press in the West, the mainstream media, basically they rely for their information on analysts in the bullion banks. And the bullion banks are always short. And so they always get a negative story. Universities teach people economics, the Keynesian variety and the monetarist variety. And there is an assumption that gold is no longer money. It is just a commodity with peculiar characteristics.
Now whether the West is right or wrong is not the point. The point is there are 4 billion people in Asia who have got a very old-fashioned view of gold, and they have become wealthy over the last twenty years. And their view is likely to prevail against the <1 billion of us in North America and Western Europe. I mean it really is as simple as that. It's not a question of Austrian economics, or Keynesian, or whatever. We're outnumbered.
To help drive this point home, consider this...
Click the play button below to listen to Chris' interview with Alasdair Macleod (54m:32s):
Chris Martenson: Welcome to this Off-the-Cuff. I have Alasdair MacLeod with me today and we are going to discuss one of my favorite topics, gold, particularly gold in China. It's an extremely important topic. Alasdair, so good to be talking with you today.
Alasdair MacLeod: It's very nice to be talking to you too Chris. Also, it's my favorite topic du jour as you might say.
Chris Martenson: We have a lot of jours wrapped together. So where do we start in this? Here's—you know where I'm going to start with this—I'm looking at a Forbes article that came out today and it's a reprint from Kitco News, some of my favorite people. I don't know if you remember but—I'm sure you do—but when John Nadler was there writing Kitco was presumably a gold company and related to precious metals and things like that. But for some reason they put out some of the worst, most bearish sentiment stuff I've ever read, constantly, on gold. And so they found a new guy who's, I think, taken Nadler's place—let me scroll to the bottom—Neils Christensen. Do you know him?
Alasdair Macleod: It sounds like he's related to you.
Chris Martenson: Awesome!
Alasdair Macleod: No, no, I don’t know him. But I think it can't have made an awful lot of sense for Kitco, I think, in the business having someone who is consistently bearish.
Chris Martenson: Yeah, well, here's this article, just came out today, and it's sort of a summary of what analysts are thinking. "Second quarter will not be a great time for gold prices" is the headline. And they go through all of these bearish sort of people who are saying—you know, they're just from banks, right? All western banks, saying, "well, typically this is a weak quarter and maybe gold's gotten ahead of itself. And it's sort of failed at this key thirteen hundred psychological area again and again." It's just they list all of these things, right? And I make it all the way through the entire article and you know what's interesting. Lots and lots of ways to tell me that gold is still down and strengthening the dollar's going to reduce the need for safe haven assets, blah, blah, blah, off we go. Not one word about China in here.
Alasdair Macleod: [Laughs] Well, there are two points about that. And I think your first point I would sum up by saying that when everybody's bearish actually what it means is that everybody who's got something to sell has already sold it and they're waiting for it to fall so they can buy it back. And I think that describes the position of a lot of the bullion banks who, in the run-up to the end of the first quarter, were pushing about stories, about shadow bank financing on the back of copper and gold implying that copper and gold are going to have to be sold because shadow bank financing was going to be unwound probably violently, and suddenly there would be a lot of stuff dumped on the market. I mean complete and absolute nonsense. But I was just interested in the timing of this, ahead of the end of the first quarter, when I have no doubt that bullion banks with short positions in the market would very much want to see bullion down. So I think that's the background there. And as regards China, I find it absolutely extraordinary that everybody is in denial. They seem to think that China's demand has only just overtaken India's at about a thousand tons a year. I've recently reworked these figures and I find it's nearly five times as much. I've identified 4,843 tons of demand in 2013, which is a staggering figure and it's so far adrift from what the analysts and the big banks are talking about as to—I mean are they giving disinformation or am I missing something?
Chris Martenson: Well, let's talk about how you got that information because that's critical, 4,800 tons is an extraordinary number. It's just, it's mind boggling. So how did you get that, knowing that gold information is hard to come by. The Shanghai Gold Exchange no longer prints in English as far I've been able to determine. So you need some translation skills there to read what's going on. So where do you get your data and how much confidence do you have in it?
Alasdair Macleod: Well, I have complete confidence in some of the data. The data which I have complete confidence in is what is actually being delivered by the Shanghai Gold Exchange into public hands. If I just may say a few things about that the Shanghai Gold Exchange publishes a monthly set of tables showing, amongst other things, delivery and also a weekly set, again, showing delivery. And that gives you the tonnage of gold delivered into public hands. Now, the reason this is important is that when it is delivered into public hands it is delivered out of the vaulting system. There is a system of something like forty-nine vaults that the SGE has authorized to hold gold. This makes—this allows us, and I'm sure you understand and I'm sure a lot of our listeners understand—allows gold to be fungible within the system so that if a kilogram of gold is delivered from one vault to somebody who wants to store it in another vault he can rely on the fact that that is as kilogram of gold as described because it's in the system, it's checked, and it's definitely gold. However, once it's delivered out of the vaulting system into a general public circulation, if it's going to come back into the vaulting system basically it's treated as scrap. And so there's some quite high scrap numbers—scrap tonnages—in China that we know of, as you rightly say about three or four years ago, we don't have more recent information. But what that refers to is not old gold because, of course, there is no old gold or very little old gold. And there's very, very little industrial gold. What it refers to is basically people taking profits or needing to raise money out of gold bars they have taken delivery of and is being remelted, you know, submitted back into the system for remelting. That is scrap. So this—we're talking—what we do know is that last year the deliveries from the Shanghai Gold Exchange alone were 2,197 tons. That is straight from the horse's mouth. That is a firm figure.
The other firm set of figures we have are Hong Kong's imports, exports, and re-exports. Now obviously being an island Hong Kong imports pretty well everything. Exports are goods that are—raw materials that are being brought into the island and turned into some other form. So typically with gold, gold would be imported, it would be turned into jewelry and then exported. Hong Kong tells you exactly where all the gold that they've exported actually goes to. So we can isolate, let's say, the gold that is processed in Hong Kong and exported back to the main land in China and to Vietnam and to Indonesia and to Japan, and so on and so forth. Re-exports, however, is gold that comes into Hong Kong, is cleared through customs, and then re-exported without any material change in its form. So typically this would be gold bars produced in the refineries in Switzerland for the Chinese market. So we can assume pretty well that everything that goes into Hong Kong and is re-exported onto the mainland is feedstock for the Shanghai Gold Exchange. So that's—those are the two sets of statistics which are absolutely firm. You've got Hong Kong and you've got the Shanghai Gold Exchange.
Chris Martenson: So then the Hong Kong data is going to be feeding into the Shanghai Gold Exchange so you wouldn’t double count those figures, right? I mean…
Alasdair Macleod: No, you have to net it out. I mean essentially you've got three sets of figures in Hong Kong. You have got the exports to China in sort of jewelry form or whatever, that doesn't go into the Shanghai Gold Exchange. You've got the re-exports which go into the Shanghai Gold Exchange. But you have also got to net out imports which come from China into Hong Kong because Hong Kong is a great jewelry processing center. It also has vaulting arrangements. Now, I don't know how much of it is jewelry and how much of it is vaulting. But what we do know is that there is no taxes on jewelry purchased in Hong Kong. So what happens is the people in the mainland do a day trip into Hong Kong, they shop for their jewelry, and then they go back. And that way they save themselves tax on jewelry. So quite a lot of—I think it's something like a net three hundred tons off the top of my head—of what came in last year has actually been bought by Chinese citizens and then walked back into the mainland. So those are the variables which we're playing with.
Chris Martenson: Okay, so let me put this in context then because Comex, that’s where, obviously, I think a great deal of the world's pricing of gold actually happens. You know, if there's a big smash of paper gold, futures sold in Comex, off it goes. Now the context I want to put in here, the staggering numbers you put forward—I'm looking at an article you wrote where you said there's an average of 212 tons of gold leaving just the Shanghai Exchange. This would be independent of any gold exports that in the form of jewelry that walked across the border, right.
Alasdair Macleod: That's correct. Yeah.
Chris Martenson: So 212—just to put that in context right now the most recent report I've pulled from Comex from the CME Group says the total eligible ounces of gold are 7,070,000. So there's 7.07 million ounces of gold eligible, ready to be sold out of Comex. And of course, a tiny, tiny fraction of that would ever get delivered. The average delivery month I'm looking at is between ten and fifteen tons with ten to eleven tons per month actually coming out of the Comex. Just to put that in context, a single month of Shanghai Gold delivery, Shanghai Gold Exchange deliveries, is equivalent to the entire current eligible stock in Comex.
Alasdair Macleod: Yes, that is correct. There is also, of course, a Shanghai Gold Futures Exchange where the numbers are, if you like, more in line with Comex's relationship between turnover and physical deliveries. I think the physical deliveries last year was something like under a hundred tons on that.
Chris Martenson: Right.
Alasdair Macleod: If I can just sort of continue with the breakdown on the numbers. I mean so far I think I've accounted between Hong Kong, the net position in Hong Kong, and Shanghai's—the Gold Exchange deliveries—works out short 3,000 tons. Now there is another figure in there which is customer vaulted gold. Now this is not delivered into the system. Obviously if you get a change in the amount of gold vaulted, you have got to put that into your supply—your demand figures, if you like. Now, what's interesting is that we have vaulted figures for 2009 and 2010 and 2011. And the relationship between vaulted and deliveries is surprisingly tight. It runs at a hundred and five percent down to ninety-nine percent. So it's almost one for one. So if you get an increase in the amount of gold delivered, you're going to get a similar increase in the amount of customer vaulted gold. Now to confirm this from what we know in terms of the number of gold account customers with the commercials banks they have increased pretty well in line with overall demand. So that tells us that there is—or it confirms that vaulted gold is increasing at a similar pace to deliveries. So in 2013 when the amount of SGE deliveries jumped by 1,058 compared with the previous year you can add a further 1,058 tons in the form of customer vaulted gold which is not delivered and, of course, not otherwise seen. So that's an extra thing.
The last element that we've got to look at is what happens to scrap and mine supply. Now here I've got some interesting information which I think is very, very important. Gold money obviously deals with both vaulting companies and also refiners. And I was lucky enough to interview—we haven't actually published the interview for various reasons, but I interviewed a director of a Swiss refiner and I asked him the question about Chinese gold and also Russian gold. And he said, "well, we do see Russian bars but I have never ever seen a Chinese 1kg .9999 bar from a Chinese refinery." And furthermore he added to me that he has a notice on the staff notice board that if ever one of these bars comes in, to let him know immediately. So he hasn’t seen one come in as if you like, refined. That's being delivered and it's coming back into the system and he's having to recast it. I asked the same question of vaulting contacts in Hong Kong. And again, the same answer. No, never seen one. Now there are two possible explanations. One is that customs between the mainland and Hong Kong—and they are, they don't like gold walking out of the country by the way, even into Hong Kong. The customs are so efficient that not one bar out of about two million, roughly, actually has made it across the border. The other possibility is that the government acquires all locally refined production of that particular type. There are also smaller bars, which presumably are more available, if you like, to the general public. But the standard one kilo four-nines bar: never, ever seen in circulation.
Now this indicates to me—I can't believe that the customs are a hundred percent efficient. That is an impossibility. But what it does indicate to me is that the government is taking—whether it's cleared through the Shanghai Gold Exchange or not is immaterial—but it is taking both scrap and also total mine output of 430 tons. Scrap is probably another 350 odd. So we've got a total—I estimated last year, 780 tons is being taken into government vaults, so you need to add that into the equation as well.
Chris Martenson: Well, that would make the government take more than all of the other central banks in the world combined.
Alasdair Macleod: Yes, I mean, well, 780 tons last year from its own production and from scrap—previous year was about 833 on my numbers. I mean if you take—since the Lehman crisis, or since the year of the Lehman crisis, the amount of gold that has been acquired or mined in China, and not left the country, comes to over 13,000 tons. It is quite a staggering figure.
Chris Martenson: That's huge. That's vastly more than the United States and Germany combined. It's about the same as both those, I guess, yeah?
Alasdair Macleod: Exactly! So I mean yeah. We're not talking monetary gold here, by the way. We're talking non-monetary gold. I mean the figures for 2008 are 1,382 tons. 2009: 1,112 tons, 2010: 1,732 tons, 2011: 2,256 tons, 2012: 2,331 tons, 2013: 4,843 tons. So you know, we're looking well over 13,000 tons.
Chris Martenson: This is just genius. So if I was China, say, and I wanted to get a lot of gold inside the borders of my country, which would be step one in this—in my evil plan, this couldn't have worked out any better because they've been able to acquire those 4,800 tons at fire sale prices at a huge knockdown sale compared to recent prices. How does that happen? That's amazing. That can—I mean it's just—well, first of all, it strikes me as an extraordinary strategic blunder on the part of the west. Or there has to be some secret deal that China said, "if you want us to hold onto our giant pile of reserves you're going to have to get us gold. And by the way, we don’t want the price going to the moon while we're doing that," or something. I can't make sense of this Alasdair.
Alasdair Macleod: Well, the answer is that we messed it up big time. 2013 was a pivotal year and I think—let me just take you through the events, if you like, that have really accelerated this mess. In 2013 we had the Cypress crises and that was in February/March. Bail-ins became obviously the way forward. Now this meant that every depositor in Europe suddenly thought, "my goodness, what's going to happen to my unallocated gold account with XYZ bank." And the result was that there was a run on some of these banks and ABN AMRO and Rabobank were unable to deliver gold to their customers and settle for cash instead. Effectively there was a run on those two banks, and they declared, if you like, the equivalent of force majeure. Now by April it was clear that this was a growing problem to the central bank community. So the decision was taken basically to remove from the market bullish expectations and to make everybody think that actually gold is in a bear market and therefore they ought to sell their ETF holdings and stop buying it. That was the important thing.
Chris Martenson: Now just to put context on this, you're saying that what was done by the banks in 2013 was an exact copy of what we know they did in 1998 for the same exact reasons which was there was a run on the bullion banks that was going to destroy them and so steps had to be taken to prevent that.
Alasdair Macleod: Yes. That's absolutely right. I mean these things happen from time to time. Of course, it's always behind closed doors. So you know, that's sort of—you know, you pick it up by seeing the signs rather than actually seeing physical written evidence. But basically that is what happened. And I mean I was talking to people in the market in London and they were telling me that they have—they were forewarned this was going to happen. Why were they forewarned? Because really what the central banks wanted was not just the central banks to sell their gold but everybody else to as well. And they succeeded in convincing everybody in the west that gold is in a bear market and that is why gold is where it is today. But you'll probably remember that when they hit the gold price in April actually what happened was that physical demand took off. And it accelerated so rapidly I think I'm right in saying that demand for American Eagles just went off the charts, you know, both gold and silver. And of course, the Chinese grabbed the opportunity with both hands as did the Indians but they managed to stop India buying more by putting in their place man, Governor Rajan, to head the Reserve Bank of India. And in heading that up one of his first actions was to introduce the eighty-twenty rule whereby anyone who is licensed to import gold had to export eighty percent of it. So you can see there were desperate attempts to try and control this situation. But if you're going to knock the price you've got to keep it there. And basically this means that they had to accelerate their leasing program to supply physical metal so that the price wouldn't rise. Otherwise they would have completely failed.
Chris Martenson: On that one point then, the 4,800 tons that you've identified, again, full context here, total mine supply in the world is 2,700 tons. I believe that is inclusive of China's figures. So that doesn't actually hit the world market but it's wrapped in your 4,800. So that nets out. So yeah. So this was the difference between 2,700 and 4,800 but those 1,800 ton—sorry, how much is that?
Alasdair Macleod: Yeah. I mean it's a huge…
Chris Martenson: 2,100 tons had to come from somewhere, right?
Alasdair Macleod: Yeah. Absolutely! Yeah.
Chris Martenson: Yeah. So where did—so that had to come from western vaults.
Alasdair Macleod: Yeah. This assumes that no one else in Asia is buying gold.
Chris Martenson: Correct. Or Russia or anywhere else. [Laughter]
Alasdair Macleod: I mean we're talking about a continent with nearly 4 billion people on it. And incidentally the idea that Indian gold demand has fallen off a cliff just because the government said so is completely wrong. It is presumably continued at a similar or maybe slightly lesser pace because there are huge premiums in the market but the amount of smuggling that's been going on is just absolutely phenomenal. So you know, the idea that the mixture of scrap and newly mined is in some sort of balance with global demand is completely mistaken. I mean if you look at non-Chinese mines you're talking about less than 2.5 thousand tons. Your 2,700 figure is I think the USGS number but the World Gold Council reports mine supply at around about 2,900 tons. So we've got 2,490 tons available to the rest of the world from non-Chinese mines. And I qualify that slightly because where the Chinese refiners can get a hold of gold from places like Mongolia, Kazakhstan or the rest of it, they take that in as well. And I'm not even including that. And you've got non-Chinese scrap which is probably about a thousand tons. You've got the ETF supplies which, last year, those net liquidation of 880 tons. You’ve got central bank buying, which goes against that. And that means that I think we have got a sort of total supply, notionally, of about 4,000 tons and that' incorporating World Gold Council figures against the global demand including China which runs at 7,600 tons.
So there is a deficit between supply and demand of just under 3,600 tons, which has got to be contributed from global stocks. Now given that everybody in the west is bearish and given that their interest in gold is predominantly in ETFs, this hasn't come from the private sector in the west. And I'm absolutely certainly it hasn't come from the other large holders who are the Arabs. I'm also convinced that quite a lot of gold production in places like Russia actually goes straight back into the Russian central bank's vaults. So the situation is: there has to be an enormous amount of supply from central banks' monetary reserves. So the leasing that's been going on must have accelerated it's pace very, very substantially. And if we want proof of this we need look no further than Germany's experience of trying to recall it's gold from the United States. It only got five tons last year.
Chris Martenson: Five tons….
Alasdair Macleod: I mean five—and the United States is meant to be storing 1,536 tons of Germany's gold. They can only give them five tons. I mean it's laughable.
Chris Martenson: Let me tell you one more kind of funny thing that just popped across my screens the other day. This is on March 29th. This is printed in the International—let me look and scroll up. This is, yeah, the Express Tribune, which is a subsidiary of the International New York Times. And the headline is, "Pakistan Refuses to sell $2.7 Billion-Worth of Gold, Says IMF." And the article goes on to note that the IMF has been leaning on Pakistan saying, "hey, you should be—" what they want Pakistan to do is to "achieve greater liquidity from its gold," right? And so they're asking Pakistan to put its gold into the safe keeping of the world's central bank system so that they can increase liquidity which means lease it out or lend it out never to be seen again potentially. And Pakistan is refusing. And so we get the IMF doing their—what was that, sort of like the henchman routine of the global banking cartel leaning on this poor little country that wants to hold onto some gold reserves.
Alasdair Macleod: Yeah, they're better to try it with a non-Asian country I think.
Alasdair Macleod: I mean you're right Chris. It just shows complete desperation, but there are—I mean there are very important implications for this because Frank Veneroso very, very famously made a speech in Lima, in Peru, I think in about 2000/2002, something like that. And he had analyzed and tried to quantify the amount of gold out on lease. And the number he came up with was somewhere between 10-15,000 tons. Now if you bear in mind that the total amount of country gold is around about 28,000 tons according to the IMF you can see that even by the year 2000 half of that had already gone. So given their attempts to try and control the market since, over the last thirteen years, and particularly what's happened in this last year, they must be really running out of anything left to lease. And I think that it means that a number of central banks are beginning to query the relationship they have on the central banking network with, say, the Fed and with the Bank of England and the Banc du France and anyone else who might store gold for them. And this idea that we're quite happy leasing our gold because the Bank of England is doing it for us—this is now I think being questioned, and I think it's being questioned very severely by quite a number of central banks who are going to be less compliant in this sense in the future. So that again I think is an additional problem to those trying to manage the gold price.
Chris Martenson: Well, it's—you know what's coming up here is this—it's like what you're saying, Alasdair, is that there's some relationship between price and demand. And as the price fell the demand went up and that this created issues. It's crazy talk. That sounds like basic economics to me.
Alasdair Macleod: Well yes. You're absolutely right, Chris. But if you're in capital markets and you understand that it's the trend that drives business rather than anything else, then it's very easy to make the mistake to think, "well, if we could persuade everyone that it is a bear market then they will sell on falling prices." Whereas actually, in economics, if you lower the price you increase the potential demand. And that's precisely what's happened because the rest of the world and particularly Asia, those 4 billion people in Asia do not think like we do. As far as they're concerned gold is the only long term asset worth holding. It is the family pension fund. I mean I like quoting the sort of typical situation in India. I first went to India in 1965 I think it was. And the price of gold at that stage in rupees was around about 170 rupees an ounce. Today it's about a 100,000 rupees an ounce. And when you think that the young man getting married at that time, he'll be a grandfather now, but he would have got a dowry from his wife's family which would have been in gold. His presents would have been gold. Every time they have children there would be gold. Every time there's a festival there would be gold. Gold is the family pension fund. What other investment has gone from 170 rupees and to 100,000 rupees over that period of time? Absolutely nothing! There isn't even an alternative like, sort of, sensible equities or anything like that for them to play. That is the only way they can escape the devaluation of the rupee. And so no wonder it's so popular. That's the story all over Asia, by the way.
Chris Martenson: Yeah. Well, you know, what's coming up to me—and I've written about this extensively actually—but in the west the propaganda against gold is really, really pernicious and pervasive. It's constant. The headlines are, you know—whenever gold goes down it's almost reported with glee above the fold in my Wall Street Journal online edition. It's just every time gold goes down they just can't trot out enough people to sort of dance on the grave of gold. And this has been going on for a very, very long time but the reasons you're talking about that the people of India have a certain context with—I was just talking with some people in Peru and I'm going to have an opportunity to go down and present in Peru. And they said "you'll be very welcomed down here because you're 40-years-old. You've already been through three currency destructions, you know, so you have experience with this" and China's the same thing. And this is the part that's really astonishing to me. I know a gentleman who deals in gold and he goes over and does trade shows over in China and this would be a standard tradeshow, right. There's all these people show up and you have your tables and you set up your wares and hopefully you have a good session and you sell out your wares at that show. He says that he sells out before the show starts. His door gets knocked on the minute he arrives and the demand is so strong for both numismatic rare pieces plus bullion that it's all gone before the show even starts, that the rest if just a formality. And so that's really what's going on over there. You wouldn't know that by reading western press. To read western press, gold is in a bear market. It's just—it's an awful investment. You should put your money in stocks and that's that.
Alasdair Macleod: Well, I think the financial press in the west, the mainstream media, basically they rely for their information on analysts in the bullion banks. And the bullion banks are always short. And so they always get a negative story. And there's also—universities teach people economics, the Keynesian variety and the monetarist variety. And there is an assumption that gold is no longer money. It is just a commodity with peculiar characteristics. So there's no understanding in the west of this at all. Now whether the west is right or wrong is not the point. The point is there are 4 billion people in Asia who have got a very old fashioned view and they have become wealthy over the last twenty years, and their view is likely prevail against the—I don't know, I mean less than a billion of us, if you like, in North America and Western Europe. I mean it really is as simple as that. It's not a question of is it Austrian economics or Keynesian or whatever. We're outnumbered. And you know, I mean as far as the Chinese government is concerned they have been actively promoting gold as an investment and I mean they've been pushing against an open door. And I'm interested in your story, about your contact who goes out to China. You know, in that context it's not surprising but, of course, as you say this gets no publicity over here whatsoever.
Chris Martenson: And so let's get to the punch line of all this. These figures you've come up with at 4,800 tons for China alone—we probably have to toss at least 2,000 tons for the rest of those 4 billion people not counted in China. And so we're looking at just a huge massive shift of gold from the west to the east. It's really a staggering number. The punch line for me is that from a fundamental standpoint—so I consider the flow of gold on one fundamental thing. I have a basic view which is that I don't believe the western central banks will be willing to physically part with their last ounce of gold. I just can't see that. They talk a good game and talk a lot of smack about gold but they never seem to really, truly, you know—they have big vaults full of it nonetheless. And then when I look at where we really are in the mine production—because I just caught a big report looking at demand and supply issues—but on the supply side, from 1999 to current there have just been absolutely no major gold discoveries to talk about. All the mines in operation were mining from discoveries of prior decades. And the average ore quality is falling dramatically. I think we're below 2 grams per ton on average worldwide and the mining costs are going up because that's a function, at least in part, of energy. So added altogether I see less mine output coming at the same time that I can only see demand increasing in the east unless, big caveat, there's some major economic dislocation. But barring that I can't see any other way than at some point the western nations are going to have to find a way to stem the flow of gold from their vaults, and there's only two ways to do that. One is to do it the wrong way, which is to make it illegal or declare force majeure or somehow renege on your obligations and refuse to sell it. Or two, you have to let the price rise.
Alasdair Macleod: Yeah. Now that's absolutely right. The problem they've got I think, Chris, is that the central banks decided in the wake of the Cyprus bail-in and the developments in the gold market that followed that, that they needed to change the sentiment in the market. They changed it in the west but what they did was they just triggered unexpected and enormous demand from the east. And they had to satisfy that demand otherwise they had to admit that the policy had failed and if the price started rising under those circumstances I mean it could have really rocketed well over two thousand dollars and that would have taken down a number of bullion banks. Of that there is very, very little doubt. So we're now in a situation where you have got a far greater shortage of physical metal. I mean how does the Bank of England or—not so much the Bank of England—but how does the Fed, for example, come clean—not that they ever come clean—and say "we've got no gold left," which is broadly I think what the situation is. There is no gold left. How do you admit it? And I suspect that they're scratching around for some way of dealing with this problem because it's not just the Fed. It's all the other central banks. And every time people like me write about this it gets more and more understood even amongst some of the smaller central banks. I mean some of them are on my circulation list. And I'm glad to say that they don't write—well, perhaps I should be worried—but they don't write back to me and say "McLeod you're talking absolute rubbish," you know. I wish they would because I really do see the potential for a huge great crisis in bullion markets because the gold is gone and the ability of central banks to bailout the bullion banks is very seriously compromised. And you know the problem is if you're going to declare a force majeure—well, you would have two effects. You would confirm the physical market is entirely in China's hands. And secondly, there would be a huge scramble for physical gold from all those people who thought they had gold through bank unallocated accounts.
Chris Martenson: And GLD potentially…
Alasdair Macleod: Well yes. I mean this is the thing that worries me because when things really do cut up rough you're looking at—I mean GLD, the custodians are banks. And you know, I think that it's not beyond imagination that the central banks might turn around and tell custodians how they are going to handle gold in their custody.
Chris Martenson: Well, it's very interesting, GLD: the main custodian is HSBC. The sub custodian that HSBC lists in their documents is the Bank of England. So imagine that, the Bank of England is a sub custodian in this story and, of course, the prospectus says that if GLD, under various and nebulously defined circumstances, it can always just true up in cash instead of gold.
Alasdair Macleod: I think we have to put the Bank of England thing in context actually because it was partly as a result of my digging around with the old FSA. They changed their prospectus to show that they work under what's called the NIPS code, which is the—I can't remember what NIPS stands for, but basically it's the dealing code, if you like, for bullion banks operating under the egis of the Bank of England. And the whole of the sort of the vaulting and clearing system all revolves around the Bank of England. This is not to say that gold is stored automatically by the Bank of England. That is not the case. I mean there is some, potentially, but I think the Bank of England is listed as a sub custodian, if you like, as part of, well, some gold could well end up there but I don’t think we're talking about very much of it.
Chris Martenson: Right, right. So the bottom line though is whatever's in GLD, when push comes to shove, you're not going to see gold coming out of that again. That's a lost game at that point when the jig is up I believe.
Alasdair Macleod: Yes. I think it's a risk. I mean really what you and I are saying is that there will be a complete abandonment by the authorities of property rights in that situation. Now that's a very, very strong statement to make. I think it is…
Chris Martenson: Well, it's not a strong statement post Cyprus.
Alasdair Macleod: Well.. yeah… I think that with a bail-in what you're doing is you're taking creditors, which is what depositors are, and what unallocated gold accounts are—you're taking those and you're writing them off in return for shares. Now it's different where something is held in custody where it is not on the bank's balance sheet. Now that is the situation, that is, that should be the situation with GLD's underlying bullion and SLV's underlying bullion as well, by the way. But GLD is the thing that worries us here. What we don't know is, if you really do get a real crisis, whether there will be some, if you like, invasion of property rights, which is really what it boils down to, on the basis that this is gold held within the system, it is within the banking system, and it has a better use, if you like, for the banking system than merely belonging to someone else. It is something that we just cannot envision at the moment but if things really do cut up rough, priorities change and suddenly property rights go out of the window.
Chris Martenson: Of course rules will be changed. And I was just doing a very nice podcast with Jim Rickards yesterday and he reiterated the point that the Federal Reserve is there to assure that the banking system is healthy, period. That's what they do, right?
Alasdair Macleod: Exactly! Exactly!
Chris Martenson: And that's the mandate actually of any central bank is to ensure the banking system is healthy. So it's not at all surprising for me every time I discover or hear about, well after the fact, that some bank or another got into trouble because it did something dumb. And you're talking about the bullion banks post Cyprus being one of these examples. And it doesn't surprise me at all to discover that rules were bent, optics were distorted, whatever needed to be done was done in order to preserve that bank rather than admit defeat and say, "yep, that was a mess-up and they're going to have to eat their losses here." That never happens. And we're so far into this though that—it was just in The Economist —this morning is the first time I saw it. It probably came out a few days ago—where The Economist itself is starting to say, "hey, wait a minute. This QE thing looks kind of permanent and it looks like it's—there's no way out of it. And it's actually enriching a few at the expense of the many. And there were no votes taken by the populous to go along with this." And so by the time, I feel, when you have a status quo defender like The Economist starting to say, "wait a minute, what are these banks really up to," you're pretty far along in this game. And what I love what you're doing is you're looking at what's happening in the game through the data we can have available to us—because, by the way, they never tell us this stuff. You have to go and figure it out for yourself. And there's been a massive—this looks like a failure to me. The amount of gold flowing into China feels like a failure of strategy and imagination by the west at best. Something worse and more nefarious on a darker slant. But what we can do about that is notice it and say, "huh, how might this resolve itself?"
Alasdair Macleod: Yeah. Absolutely! And I mean here we're now out of control of the situation. China is in control of the situation. And I think there are very good reasons why China wanted to do it. I mean bear in mind that China has got $1.3 trillion dollars-worth of treasuries. Now the idea that that is China's property is second to the fact that it is actually completely under the control of the US government. You know, China couldn't access that if it wanted. If it wanted to sell it, you know, there would be a bar put on it. So instead of that, actually, what China has is she's now got control over the gold market. Not only has she accumulated for herself, between herself and her citizens, a huge quantity, she has left the western central bank vaulting system bereft of its gold. And it can switch the value at any time it wants from its holding in US treasuries into gold just by jacking up the price to $10,000. So the idea that as a major creditor of the United States, China has got a problem is no longer true. And I think…
Chris Martenson: Well, probably just a little bit true but they're working on it pretty rapidly and it's amazing that we're just sitting here calmly holding gold under $1,300 an ounce or thereabouts while this all transpires.
Alasdair Macleod: Yeah, indeed. And also we must not forget that China is in a relationship with Russia through the Shanghai Cooperation Organization. And basically what this means is that China will never ever back the west against Russia. And we saw this over the Ukraine…
Chris Martenson: Sure, yeah, yeah…
Alasdair Macleod: …the Crimean situation. I think that when it comes to a financial war, and I think World War III is looking like it's a financial war, you know, it's Russia and China against the rest of us. And the one thing they control is gold. Now if Keynes is right, it doesn't matter. But the fact of the matter is there are 4 billion people out there who take a very different view and it bloody well does matter.
Chris Martenson: You know, if I put on my provincial, western, us-versus-them hat, I actually consider this to be a really, really awful strategic blunder. The whole idea first of selling your sovereign debt off to another country puts you at a bit—I know you say the United States controls the treasuries, that’s true, but there's a bit of risk in that. You're not as entirely under your own control as if your own populous owns your own debt. And the second thing is to allow the only non-fiat monetary asset to be trundling so briskly to the other corner of the globe. That feels like a real strategic error to me.
Alasdair Macleod: It's a huge error. But I mean how do you stop it now? I mean do you sort of say, "right, okay, well, we've completely mispriced gold. We're going to jack it up to stop these guys buying it. So we'll run it up to $1,800 or something like that." I mean you would immediately bankrupt most of the bullion banks, you know. And so you're stuck. There's nothing you can do. And if you show any sign that you are actually in trouble you're just going to make the thing a whole lot worse. And if you even turn around and try to ban gold ownership—I mean for a start in the G20 you wouldn't get an awful lot of support. But I can't see the German government turning around to German people who have had a complete hyper inflationary collapse for their grandfathers, and their fathers saw one at the end of the last war. I can't see them going along with it. I can't even see the Italians going along with it. I mean this is a very, very difficult subject to handle. And I just cannot—you know, there is no comparison with the situation today, between the situation today and the situation when FDR was around. You know, people are not sort of that patriotic nowadays. I mean if the British government turned around and told its people "you got to surrender your gold" I think they would get nothing. And I suspect the situation wouldn’t be all that different in America either.
Alasdair Macleod: It's a very different—these are different times. You know, everything is global. Everything is international. And you can't just sort of pigeon hole your people into your jurisdiction and say they will do as they're told. That is no longer an option. So the idea of banning gold ownership by dictate—that I don’t see happening again. But what I do see is that almost anything the west does now is going to make the situation worse for them.
Chris Martenson: Well, I guess they can just continue to lease and dump for a while longer and hope it all turns out, but this is really—this is where we're far enough into the story where I think that's where The Economist finally got around, which is like, "hey, wait a minute. Aren't we coming on our sixth year of this easing and where's our giant recovery?" You know, there's only so—I think they start these things, it's a crisis mentality. They say, "oh, we're going to have to start QE or we're going to have to bailout the bullion banks just this one time," but then it becomes your permanent policy by default because you have to continue it and then you don't know how to get out of it, and then it becomes entrenched and then nobody quite knows what to do about it at that point in time. That's kind of where I think we are with the gold story.
Alasdair Macleod: I think that's a very important point actually Chris because if you're a bullion bank the one thing you do know is that periodically when required the central bank will bail you out. That is basically the background against which you operate. The rest of the time you make lots of money and have loads of fun. And I don't think they've woken up to the possibility that that's no longer the situation.
I did want to also say something about all the QE. What's becoming more evident I think is that some of the countries which have majored on QE, I mean like the Fed and so on and so forth, are finding it's not working and they're slowing down. And they're looking for the baton to be picked up by someone else. And it's interesting that—I think it was last week for the first time there was talk coming out of the European central bank that they may well indeed indulge in QE to the tune of about a trillion Euros. I don't know that they can even do that legally, but there is the hope that—the ECB is going to pick it up. You've got Lagarde at the IMF saying she sees "low-flation," you know, and wants lots more inflation. You know, this is—they are in desperate straits. "I mean for goodness sake, we've done enough QE. It's your turn to do some QE." That's really what they're saying. And Japan, I mean it just doesn't work. That's a separate story and I can spend an hour telling you exactly why it won't work. But I think you probably already know that.
Chris Martenson: And it's already in place. I mean I was absolutely shocked. It was last week I believe that Spanish ten year treasuries were priced out at a lower yield than US ten year treasuries. Are you insane? There's already plenty of QE operating in Europe. They just don't call it the same but there's no other explanation for that, right? You've already got interest rates slammed down to zero or close thereabouts even in a country like Spain, which by every large macro measure I look at is a complete economic disaster that's still unfolding at this point. And how you price out a ten year at less than—what is it, one and three-quarter points or something? That’s just—its nuts, nuts, just nuts.
Alasdair Macleod: It is. It's complete nonsense. I mean the idea that the principle is ever going to be returned is absolute nonsense. And really if Spanish debt, and for that matter, all government debt—if it was properly priced, it would actually reflect the fact that there is going to be a day when the whole thing defaults. So what rate of interest do you require to compensate for that? And unfortunately you then get into the sort of story where, well, the higher their interest rate the sooner the default is going to be. So it's going to be higher yet. So you know, it is crazy and I sort of often just sort of—I'm puzzled as to how this situation continues. And I think it's partly the way banking rules are set through Basel III and all the rest of it, giving no hair cut at all to government debt. I think that's part of the story. You've got all this money, if you like, drilling around the banks and it's got to go somewhere. So it goes in there because it's sufficient from a balance sheet point of view. But I think also that countries like France who are demonstratively bust, if you like, and Italy as well—they do in theory have very substantial gold holdings. And I wonder to what extent that is being pushed out as collateral or even leased to raise money for those countries. And whether the sale of gold has been partly responsible for the very low interest rates on the bond yields.
Chris Martenson: Probably. There's a whole lot of nefarious stuff in the gold world that I don’t understand yet. I've been puzzling for a while and I've gotten no answers even from some fairly well placed people which is exactly where did all of Saddam's gold go and Khadafi's gold, and so on and so forth?
Alasdair Macleod: I can give you a fair bet. It's in China, China or India.
Chris Martenson: Right. I think it looped through London, went to Switzerland and ended up in China. That's my guess.
Alasdair Macleod: We might argue about the route but I think we know the destination.
Chris Martenson: Well indeed. Alistair I could talk to you all day long and we will probably continue after I hang up on the recording, but it's been so good talking to you here.
Alasdair Macleod: Oh, it's been great fun. And the reason I enjoy doing this is I know that you place a huge emphasis on educating people about actually what's going on and what they need to understand about looking after themselves financially. And I'm very, very happy to be part of that process.
Chris Martenson: Well thanks. It's really important work. And as an ending point, is anybody else really looking at the China—which large bullion bank is analyzing the China data the way you do?
Alasdair Macleod: There's no bullion bank analyzing it the way I do. There is one other individual who's from the Netherlands, a guy who blogs under the name…
Chris Martenson: Koos
Alasdair Macleod: …of Koos Jansen, yes, that's it.
Chris Martenson: Yeah
Alasdair Macleod: And indeed, you know, I am in touch with him and I've found he's been very helpful to me and hopefully I've been of some use to him. But other than that, no, I don’t think anyone. I mean it was him who sort of pointed me in the right direction in terms of understanding the weekly and monthly Shanghai Gold Exchange reports. And after I wrote that article he came—he managed to find a Shanghai Gold Exchange 2011 report which gave me an extra couple of figures which interestingly, showed that I was underestimating the amount of customer vaulted gold for 2011. So it's nice to know one's on the slightly cautious side rather than saying, you know, being accused of hyperbole.
Chris Martenson: Well, very good. You've made me more interested in gold now. I didn't know that was possible. And one other place you might want to peak that's kind of fun is to look at the—from the BEA, the gold import/export numbers for the United States. There's a fairly hefty gap there on a yearly basis measuring twenty-some billion dollars-worth of gold that goes somewhere.
Alasdair Macleod: Yeah. Well, the largest mining countries in the world at the moment are the city of London [Laughter]. That's a well kept secret, and also they seem to have enormous gold mines in Switzerland. I'm not quite sure how they manage that.
Chris Martenson: Well, we'll keep a close eye on that, that sort of fill-in place you speak of, so. Alright, well, very good Alistair. And thank you so much for your time today.
Alasdair Macleod: It's very much my pleasure Chris.