1.

Gold Market
Two key issues:
Price followed by 99%
As we are price takers, the price is important for profits
But the price action distorts perception of gold market
For planning over the longer term be careful: current
price setting mechanism appears to be unstable

Flow of metal
Key to understanding the market

David Jensen, P.Eng. : dbjensen@telus.net ph. 604.269.0380

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 1. Gold Market

Gold Price
Bear Market

35% decline
since 2011

25% decline
in 12 months

Run Ethel!

David Jensen, P.Eng. : dbjensen@telus.net ph. 604.269.0380

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 1. Gold Market

Nice Bear

David Jensen, P.Eng. : dbjensen@telus.net ph. 604.269.0380

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 1. Gold Market
Why is the price mechanism distortive?
Because of how it sets price and what is actually traded
Not price discovery by buying & selling gold but buying & selling
gold instruments most only theoretically backed with gold
Historically dominant Western gold market LBMA London Bullion
Marketing Association
Trades 290 million oz. of gold each day (source goldcore.com, FT.com);
3.5x annual global gold mine production each day
HFT algorithms + bot trading + archaic A.M. & P.M. Gold Fix
Unallocated gold instruments @ 100:1 paper to gold leverage
Gold market flooded by fictitious gold to manipulate gold price
New York Comex Gold Market
90 trading position claims for every ounce of gold in vaults
Primarily cash settlement not gold delivery
David Jensen, P.Eng. : dbjensen@telus.net ph. 604.269.0380
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 1. Gold Market
Daily LBMA Daily Gold Fix - steam power in the digital age:
5 Banks: Scotia Mocatta, Barclays, Deutsche Bank, HSBC, Societe Generale
Chat to set the price during 30 minute period in a.m. & p.m. price fixing
All the while the HFT bots trade 10s of millions of ounces
November 19, 2013 LBMA Gold Fix under investigation by UK probe (bloomberg.com)
December 13, 2013 Deutsche Bank under investigation by German authority BaFN for gold fix
& manipulation (FT.com)

David Jensen, P.Eng. : dbjensen@telus.net ph. 604.269.0380

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 1. Gold Market
Physical Market Where its at

In a nutshell, physical gold is disappearing

Shortages and inventory draw-down
Meantime, the gold price has declined 35% in 2 years
Report from the largest Swiss refinery:
At this Swiss refinery there have been several times this year on which
they were unable to source gold, this shocked me. Theyre bringing in good
delivery bars, scrap and dore from the mines, basically all they can get their hands
on. This gentleman has been in the business for 37 years, he was there during the
last bull market in the late seventies. I asked him when was the last time this has
happened, that he was unable to source gold, he said never. And I clarified it, I
asked: let me make sure if I understand what youre saying to me, in the last 37
years youve worked in the gold industry this has never happened? He said:
this has never happened
(source ingoldwetrust.ch)

David Jensen, P.Eng. : dbjensen@telus.net ph. 604.269.0380

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 1. Gold Market
Wheres the Gold Going?
A large part to China:
Estimated 2,197 tonnes
physically delivered in 2013
on Shanghai Gold Exchange
+ 500 tonnes est. Chinese
Gov purchase (off-mkt.)
Delivery > Global gold mine
supply of 2,600 tonnes p.a.
+ Rest of world demand on
top of Chinas
SGE Strategic Move A Real
Gold Exchange:
Serialized bars : 1x ever
through SGE
Must deposit gold bars to
sell gold contract no
paper gold fraud

David Jensen, P.Eng. : dbjensen@telus.net ph. 604.269.0380

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 1. Gold Market
Hong Kong -> China Gold Imports
On 24 month Decline of Gold
Price:

Are the hedge funds, HFTs

and algos currently having a
field day with this worn out
trade paying any attention to
the steady drain of physical
gold on which their
speculations are based? As is
usually the case in a
temporarily successful
momentum trade where
almost the entire universe is
aboard, the answer is probably
not.

John Hathaway
Tocqueville Funds

David Jensen, P.Eng. : dbjensen@telus.net ph. 604.269.0380

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 1. Gold Market
Disappearing inventories in the West

David Jensen, P.Eng. : dbjensen@telus.net ph. 604.269.0380

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 1. Gold Market
Worlds visible gold inventories being rapidly withdrawn from financial system:

David Jensen, P.Eng. : dbjensen@telus.net ph. 604.269.0380

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 1. Gold Market
John Hathaway of Tocqueville Funds re. Gold Market:
We have an inexplicable discrepancy between whats happening in
physical markets and paper markets. Dec 13, 2013, KWN.com
Net: New price regime for physical gold will likely be end result
Finite supply of physical gold vs. very high volume paper gold supply
China may break paper market either way, higher prices
Physical being withdrawn at an unprecedented pace; diminished supply
Ultimately price premia over paper price with trend continuation
Paper market can reach point of market disregard for paper signal
Western gold market failure & Western financial system crisis
New physical gold exchanges in 2014 to augment Shanghai:
Moscow, Singapore, Thailand, Dubai, South Korea developing rapidly
Decline of NY / London paper markets

David Jensen, P.Eng. : dbjensen@telus.net ph. 604.269.0380

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 2. Gold Mining Industry Trends
Production Cost Profile for Worlds 13 Largest Gold Miners:
Price of Gold Set Below Price of Production by Paper Gold Trading

Source: theaureport .com

David Jensen, P.Eng. : dbjensen@telus.net ph. 604.269.0380
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