The ADP employment survey came in at +200k, which was above expectations of +190k. Nonetheless, in the wake of recent drops in producer and consumer sentiment there is perceived to be some downside risk.

Just today, Chicago PMI for September unexpectedly fell to 48.7, well below expectations of 53.4. Indications from U.S. industry have been presaging recession; not exactly an environment where any central bank — and particularly not one that is historically dovishly biased to begin with — would be considering a rate hike.

In a recent blog post entitled Yellen Stumbles (sign-up required), Westshore’s Jim Rickards takes Fed chair Janet Yellen to task for her intellectual dishonesty with regard to inflation expectations versus inflation reality.

Yellen contends that inflation expectations remain anchored around 2% and any deviation from those expectations are presumed, at least by her and the Fed to be “transitory.” Rickards on the other hand says, “it seems as likely that expectations will converge to reality rather than reality converging to expectations.”

One hardly knows where to begin in describing the flaws in Yellen’s analysis. Her model is entirely theoretical with no substantial empirical proof. The “forecasts” she relies on have been erroneous by orders of magnitude for years. — Jim Rickards

Fed forecasts do indeed seem to be based more on hope than reality: We’ll put rates at zero for nearly a decade and expand our balance sheet by $4 trillion and hope that garners at least 2% inflation. So far, not so good.

Given the Fed’s persistent failure on the inflation front, I’m inclined to concur with Rickards when he says, “The Fed will be no closer to raising interest rates in October or December than they were in September.” I believe that to be true regardless of what the jobs data say at the end of the week. However, if the data miss expectations it is certainly likely to sway many more investors to start thinking the same.

Withdrawals of gold from the Shanghai Gold Exchange—a barometer of Chinese investment and retail demand—have reached 1,891.9 tons so far this year, 560.9 tons more than during the same period last year and 281 tons more than the comparative period in 2013.

Chinese consumers, seeking a safe haven as stocks tanked, have ramped up gold buying earlier than normal.

Typically, most Chinese gold buying takes place between the Golden Week holidays in October and Chinese New Year in February, because of festival buying and gifting of jewelry.

This time, however, China imported a net 53.9 tons of gold from Hong Kong in August, more than double the imported quantity in the same month last year, according to a Commerzbank report.

“This strong rebound surprises us. Normally the summer-season demand is slow,” says Helen Lau, analyst with Hong Kong-based Argonaut Securities. “But investors are liquidating their stock positions and investing in gold.”

…“We have seen a devaluation in the Chinese currency, which has likely contributed to increased demand in China. We are also probably reaching the point where seasonal buying is returning in the Chinese market,” says Ryan Case, Hong Kong-based head of institutional sales at Bullion Capital, a gold exchange.

[source]

PG View: Investors believe gold will “become more expensive when the U.S. Federal Reserve raises rates”? Really? Because I thought everyone was expecting gold to fall in value when the Fed raises rates because the opportunity cost of owning gold . . . blah blah blah . . . gold doesn’t pay any yield . . . blah blah blah.

Apparently analysts are now thinking we need to put that first rate hike behind us “will remove the uncertainty on gold’s outlook.” What’s interesting is that gold did actually rise quite substantially (82%!) during the last Fed tightening cycle. Not that anyone is expecting a “tightening cycle” per se, in fact once the Fed pulls the trigger they may be one-and-done.

Nonetheless, the more salient part of this article has to do with ongoing robust Chinese demand. See yesterday’s DMR for some further enlightenment on both the demand piece and perhaps more importantly on where the supply is coming from.

“You’ve got excess supply of almost everything in the world.” – Gary Shilling

[video]

PG View: A couple things that aren’t in oversupply at this point, and are perhaps teetering on the edge of the other extreme; gold and silver.

Given the current rangebound nature of the market, and my ad nauseam coverage of the ebb and flow of Fed rate hike expectations, let’s use the DMR today to examine some of the yeoman research work done recently in the area of gold supply and demand:

First, Ronan Manly of BullionStar wrote a piece early in the month entitled: How many Good Delivery gold bars are in all the London Vaults?….including the Bank of England vaults in which he reports evidence of a rather significant outflow of good deliver bars from London.

According to Manly, as recently as April of 2014, the LBMA’s vaulting page reported “In total there is approximately 9,000 tonnes of gold held in London vaults, of which about two-thirds is stored in the Bank of England.” That’s a figure that the LBMA has apparently been using since 2011.

Earlier this year, the same page reported a significantly lower figure: “In total it is estimated that there are approximately 7,500 tonnes of gold held in London vaults, of which about three-quarters is stored in the Bank of England.”

In an LBMA presentation by CEO Ruth Crowell just 3-months ago, one of the slides stated that “There are ~500,000 bars in the London vaults, worth a total of ~US$237 billion.” That is the equivalent of 6,250 tonnes gold.

In other words, 2,750 tonnes of gold — nearly a third of the total reported in April 2014 — may have been removed from London vaults over the course of the last 4-year. Manly details some caveats in his blog post, but that is pretty startling outflow even if the reality isn’t exactly spot-on.

In a follow-on post, Manly aggregates as much information as he could gather about which central banks are housing their gold in London: Central bank gold at the Bank of England.

However, the real burning question of course is; where did all that gold go? If you’re a regular visitor to this site, or follow the gold market even casually, you probably have a pretty good guess . . .

The flow of physical gold from weak hands in the west to strong hands in the east has been well documented in recent years. One of the more dogged investigators of this ongoing phenomenon is Manly’s colleague Koos Jansen.

From Koos’ post on 25-Sep entitled The London Float And PBOC Gold Purchases:

We don’t know exactly when in 2011 the LBMA measured there were 9,000 tonnes of gold in London, but it doesn’t really matter. In the chart above we can see that the most significant movements since 2011 have taken place in 2012 and 2013. If we measure the flow of gold from the UK between 2012 and 2014, the net outflow is 970 tonnes. So it’s not that important when in 2011 the 9,000 tonnes were counted by the LBMA. What is important is that since 2011 not more than 997 tonnes of non-monetary gold has left the UK, according to official trade statistics.

Nick Laird and I noticed that although the total amount of physical gold in London fell roughly 2,744 tonnes (9,000 – 6,256) over four years (graph 1), only 997 tonnes were net exported as non-monetary gold (graph 4). This makes me wonder where the residual 1,747 tonnes (2,744 – 997) went. Possibly, this gold has been monetized in the UK and covertly shipped to a central bank in Asia, for example China. I don’t have rock hard evidence, but it fits right into the wider analyses.

Furthermore, from 2006 to 2011, the UK was a net importer every year. If the 9,000 tonnes estimate by the LBMA was hopelessly outdated, say, it was from 2008, this would increase the “missing gold” even more (as net export over the years would have been smaller than 997 tonnes).

What stands out for now is, (i) the LBMA has stated there were 9,000 tonnes of physical gold in London in 2011 and (ii) gold trade provided by HMRC reflects all physical movement of non-monetary gold in and out of the UK. Both these handles have nothing to do with complicated rules on changes in ownership of gold in London (that I’m aware of). Therefor we must conclude 2,744 tonnes left the UK since 2011, but only 997 tonnes was seen leaving as non-monetary gold. Where did the residual 1,747 tonnes go?

The supposition is that those 1,747 tonnes went to the People’s Bank of China. “Did the PBOC covertly buy 1,747 tonnes of gold in London?”, asks Jansen.

You may recall that this past July, China reported that it increased its gold reserves by 604 tonnes to 1,658 tonnes. The 57% increase was viewed as wildly disappointing, leading to speculation that the figure was grossly understated.

Many expected that Chinese gold reserves had at least doubled in the 6-years since they last reported. However, Bloomberg Intelligence estimated that China had tripled its gold reserves to 3,510 tonnes. Add the 1,747 tonnes missing from London to the most recent 1,658 “official” figure from China and you get to 3,405 tonnes. Interesting . . .

Video/You Tube/ 9-29-2015

“It’s not will it happen, but when it will happen.” – Carl Icahn

MK note: I would like to add my endorsement of Carl Icahn’s video presentation to Pete’s (below).  The title for the video is “Danger Ahead” and in it Icahn delivers a chilling analysis of where the actions of the Federal Reserve, Wall Street and America’s major businesses are likely to lead us.  He also offers some ideas as to what can be done to alter the financial situation, i.e., “the dysfunction,” as he calls it, prominent in Washington and in America’s corporate boardrooms.  Icahn notes that financial leaders in 2007 and 2008 did not warn the people and he wants to make sure that this time around financiers in the know, people like himself, fulfill their responsibility to get the word out and give investors time to act.

This is the man Donald Trump has named publicly as his choice for Secretary of the Treasury if he is elected president.  Icahn came out recently as endorsing Trump for president.  In this video he says Trump will wake up the country as to what’s going on and likens him to Teddy Roosevelt – someone who is not afraid to say “this is complete bullshit.”

If you decide to take Icahn’s advice to prepare, you should not just consider what you might want to sell, but what you might want to buy.  If gold and silver come to mind, so should USAGOLD.  Helping investors properly balance their portfolios is is what we are good at.  Call the Trading Desk to have your questions answered, receive the proper advice for your particular situation.

This made me think of whether there is a pattern visible on the charts that could link the current physical gold shortage to the famous gold shortages of the 30s and 70s. During those famous gold shortages, there were gold promises/obligations in existence that would never be settled. They have still not been settled, and have been instrumental in pushing gold prices much higher.

[source]

In a new video titled “Danger Ahead,” the billionaire Wall Street veteran lays out the major problems coming out of both Washington and Wall Street to argue that what’s coming next will be “very dangerous and could be disastrous.”

…For the financial markets and the economy, Icahn says the core problem is the Federal Reserve and its ultra-easy, zero-interest-rate policy. While Icahn credits the Fed with getting us out of the most recent crisis by using these policy tools, he also argues that it was the Fed that got us into that crisis to begin with.

Icahn observed that while low rates are intended to boost business investment, in reality they have actually led corporate managers to employ financial engineering and accounting shenanigans to boost earnings per share.

[source]

PG View: Icahn does an excellent job of explaining how companies engineered their stocks higher, thanks in large part to cheap financing courtesy of the Fed, even as the economy remains soft. He also explains why it’s not sustainable . . .