It is a pleasure to speak again at the Empire Club.
I have always believed that the future price of gold is best understood through long-term irreversible trends. Today's macro trend changes are part of a looming tectonic shift that started decades ago, and have not been adequately reported by the mainstream media.
Since the 2008 financial crisis, the Bank for International Settlements (BIS) introduced new banking rules, to be implemented by 2019, which stipulated that “gold bullion held in own vaults or on an allocated basis can be treated as cash and therefore risk-weighted at 0%.” In addition, the US Federal Deposit Insurance Corporation (FDIC) adopted a new rule on August 30, 2012, that stated “gold bullion held in the banking organization's own vaults, or held in another depository institution's vaults on an allocated basis, can be rated zero percent risk.”
It will be interesting to observe how the Canadian securities regulators reconcile the paradox of forcing retail gold bullion mutual funds to be rated as HIGH-RISK assets using standard deviation, while central banks and commercial banks are allowed to rate their gold bullion holdings as RISK-FREE assets under Basel III.
Under the Gold Shariah Standard, which was adopted at the end of 2016, gold trading has been approved in the $1.88 trillion Islamic finance business.
Another monumental change is the growing importance of the Shanghai Gold Exchange (SGE). The contracts on the new exchange will be physically settled and will be traded between bullion banks, refiners, producers and trading houses. In China, gold is money and is accepted as such by the general population.
Gold trading in London and New York is really the trading of large quantities of synthetic derivatives of gold, which are completely detached from the physical markets but which are distorting the price of gold. These derivatives are fractionally backed gold positions, of which about 99% is cash settled.There is no purchase of physical gold. While the ratio varies, it is typically at least 100 ounces of paper gold for every ounce of physical gold. Synthetic paper gold absorbs demand that would otherwise have flowed into the limited physical gold supply resulting in a much higher price.
In contrast, the Shanghai Gold Exchange is a physical spot price exchange that requires the seller to actually own the physical gold that they are selling; what a novel idea. Physical delivery is the norm, not the exception. The uncontrolled naked shorting of futures contracts, so prevalent on the COMEX, is not allowed.
Sergey Shvetsov, Deputy Chairman of Russia's central bank, recently said that “the major gold-producing nations are tired of an international gold price that is determined in a synthetic trading environment having little to do with the physical gold market.”
