FOFOA, New Vaults and physical/paper price
A couple of weeks ago FOFOA made the following statement:
Do you remember the stories about HSBC clearing out space in their vaults, or JP Morgan building new vaults? What could be the explanation for this if the aggregate gold stock is so stable? Then it occurred to me that unallocated storage is much more space-efficient because the gold sits stacked on pallets. Allocated gold often gets put into cubby holes to assist in recordkeeping. That takes up much more space. So the process of allocation after many decades of non-allocation requires an expansion of vault space. This is how I now interpret these stories.
I left a comment suggesting other reasons for new vaults:
1. Investment's share of demand vs jewellery/industry is much higher now compared to past, thus more going into vaults rather than around necks.
2. ETFs and others (eg Goldmoney) share of investment demand vs coin/bar is greater compared to past, thus more going into vaults rather than backyards.
3. Industry consolidation during gold bear market meant vault closures and thus increase in utilisation of remaining vaults, leaving less spare capacity to absorb above factors before new vaults were needed.
Just to clarify that last point, say there were 10 vaults with capacity of 100oz but each was only holding 60oz. Total spare capacity is 400oz. Then you have 3 vaults close during gold's bear market and metal is moved into the remaining 7 vaults. You now have 600oz in 7 vaults, leaving only spare capacity of 100oz.
Another point is that allocated metal is not "often gets put into cubby holes". Allocated does not rely on physical segregation by client. For example, you can have a pallet of 32 x 400oz bars with 32 owners of each specific bar number on that pallet. My guess is that except for all but the most paranoid client (mostly likely central banks), most allocated at bullion banks is held this way, rather than piles segregated by client.
I also forgot to mention that my guess is that the amount of physical supporting unallocated metal accounts with bullion banks has increased, that is the fractionalisation has declined. This puts further pressure on vault capacity.
Evidence for this is that whereas unallocated accounts were free a number of years ago, there is now a small fee on unallocated. My guess is that the physical turnover/redemptions have increased in line with a more busy gold market and thus bullion banks have needed to hold more physical to back their unallocated to deal with day to day fluctuations.
Of course it could just be the banks going for a fee grab if they felt their clients would just accept it.
And while I'm doing posts on my comments on FOFOA's blog, here is another for those who don't follow the FOFOA blog comments closely - and I can understand that considering some posts get 400+ comments (link here):
Re 1) [major refiners would start posting their own price for physical gold, having their own auctions, making the trading volume public], that is what the Perth Mint already does. The 5 tonne or so per week we refine is currently auctioned. Settlement can be full cash, but mostly is done in London paper gold plus a cash premium. I just watch this premium, it will tell me when paper gold has really disconnected.
BTW, miners sell their metal to us either for cash or swap for paper gold (which they then on trade).
The system will break when miners find few willing to take their paper gold or the price offered is much lower than what we will pay. And in that situation we will always be after to better the offers they get because we are getting better prices for the real physical at the other end.
Because the Perth Mint stands as intermediary between physical buyer and physical seller, the miner is always informed as to the real price of gold.
We are not reliant on the London market to tell us the price, we make a Perth price every day. However currently London is a convenient settlement mechanism for us the miners and the buyers, but it is just to help the flow.
Do you remember the stories about HSBC clearing out space in their vaults, or JP Morgan building new vaults? What could be the explanation for this if the aggregate gold stock is so stable? Then it occurred to me that unallocated storage is much more space-efficient because the gold sits stacked on pallets. Allocated gold often gets put into cubby holes to assist in recordkeeping. That takes up much more space. So the process of allocation after many decades of non-allocation requires an expansion of vault space. This is how I now interpret these stories.
I left a comment suggesting other reasons for new vaults:
1. Investment's share of demand vs jewellery/industry is much higher now compared to past, thus more going into vaults rather than around necks.
2. ETFs and others (eg Goldmoney) share of investment demand vs coin/bar is greater compared to past, thus more going into vaults rather than backyards.
3. Industry consolidation during gold bear market meant vault closures and thus increase in utilisation of remaining vaults, leaving less spare capacity to absorb above factors before new vaults were needed.
Just to clarify that last point, say there were 10 vaults with capacity of 100oz but each was only holding 60oz. Total spare capacity is 400oz. Then you have 3 vaults close during gold's bear market and metal is moved into the remaining 7 vaults. You now have 600oz in 7 vaults, leaving only spare capacity of 100oz.
Another point is that allocated metal is not "often gets put into cubby holes". Allocated does not rely on physical segregation by client. For example, you can have a pallet of 32 x 400oz bars with 32 owners of each specific bar number on that pallet. My guess is that except for all but the most paranoid client (mostly likely central banks), most allocated at bullion banks is held this way, rather than piles segregated by client.
I also forgot to mention that my guess is that the amount of physical supporting unallocated metal accounts with bullion banks has increased, that is the fractionalisation has declined. This puts further pressure on vault capacity.
Evidence for this is that whereas unallocated accounts were free a number of years ago, there is now a small fee on unallocated. My guess is that the physical turnover/redemptions have increased in line with a more busy gold market and thus bullion banks have needed to hold more physical to back their unallocated to deal with day to day fluctuations.
Of course it could just be the banks going for a fee grab if they felt their clients would just accept it.
And while I'm doing posts on my comments on FOFOA's blog, here is another for those who don't follow the FOFOA blog comments closely - and I can understand that considering some posts get 400+ comments (link here):
Re 1) [major refiners would start posting their own price for physical gold, having their own auctions, making the trading volume public], that is what the Perth Mint already does. The 5 tonne or so per week we refine is currently auctioned. Settlement can be full cash, but mostly is done in London paper gold plus a cash premium. I just watch this premium, it will tell me when paper gold has really disconnected.
BTW, miners sell their metal to us either for cash or swap for paper gold (which they then on trade).
The system will break when miners find few willing to take their paper gold or the price offered is much lower than what we will pay. And in that situation we will always be after to better the offers they get because we are getting better prices for the real physical at the other end.
Because the Perth Mint stands as intermediary between physical buyer and physical seller, the miner is always informed as to the real price of gold.
We are not reliant on the London market to tell us the price, we make a Perth price every day. However currently London is a convenient settlement mechanism for us the miners and the buyers, but it is just to help the flow.
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