Fraud at Commodity Exchanges - International Edition

Fraud seems to be standard operating procedure at commodity exchanges around the world.  First let's go to England where the London Metal Exchange (LME) is "under fire"

"Without doubt, the main focus of most market participants will be the London Metal Exchange’s review of its under-fire warehousing system. . . . . Together with several warehouse owners, the exchange is at the sharp end of regulatory scrutiny and legal action for long wait times to deliver physical metal."http://www.ft.com/intl/cms/s/0/33684eb0-2ec5-11e3-be22-00144feab7de.html#axzz2h390mI7r

Moving on to India.  The National Spot Exchange Limited (NSEL) is under investigation by the Economic Offences Wing (EOW) of the Mumbai Police

". . . it emerged that clients of the brokers had been allowed to take out unregulated longer-term forward contracts, rather than spot contracts in commodities such as sugar and wheat, the type of physical trade that the bourse was established to handle. As a result, questions arose over whether there was actual delivery of the commodities that were being traded."  http://www.ft.com/intl/cms/s/0/e2b9ef74-08c1-11e3-ad07-00144feabdc0.html#axzz2h390mI7r

 "Sinha, who is leading the EOW probe, admitted that in scale this was the largest he had handled so far. He added his prime objective was monetisation of the assets and tracing the money trail. But, he declined to dwell on the progress the probe had made on these fronts. The investigations so far by the Mumbai EoW have led them to offices and warehouses in 52 cities across 16 states and were conducted by 210 officers and 260 men."  http://economictimes.indiatimes.com/markets/stocks/market-news/some-nsel-brokers-may-face-criminal-charges-says-economic-offence-wing/articleshow/23617510.cms

"During the raids, it has emerged that 30 of the about 60 warehouses our teams raided were found to be empty. This indicates that certain traders allegedly connived with the NSEL officials and did not deposit physical stocks in the warehouses for money they received from the investors," the official told PTI.

"Another shocking thing is that four warehouses did not even exist, though they appear on documents seized from the NSEL and others," the official added.http://economictimes.indiatimes.com/markets/stocks/market-news/Economic-Offences-Wing-finds-half-of-NSEL-warehouses-empty/articleshow/23533792.cms

Gold and silver bullion e-series contracts caught up in NSEL investigation:

"MUMBAI: Bombay High Court today said it would pass order on October 7 on whether the settlement of e-series bullion contracts at the troubled National Spot Exchange Ltd (NSEL) should be aggregated with that of the paired contracts being overseen by the Forward Markets Commission."

"NSEL counsel said e-series bullion contracts involved 800 kgs of gold and 43 million tonnes of silver, estimated to be worth Rs 525 crores."
http://economictimes.indiatimes.com/markets/stocks/market-news/high-court-to-give-ruling-on-nsel-bullion-settlement-on-october-7/articleshow/23532733.cms?intenttarget=no

43 million tonnes of silver must be a miss print.  For comparison, silver open interest on the COMEX is about 18,000 tonnes.  Gold trading is probably minimal give recent severe government restrictions on gold importation.  

In the US, fraud is more sophisticated, as this example exposed by the NT Times shows:

"The Commodity Futures Trading Commission has issued subpoenas to Goldman and owners of other major warehouses as part of its inquiry into irregularities in the aluminum market that are believed to have cost consumers billions of dollars since 2010.""The subpoenas seek all internal documents, e-mails, correspondence, voice recordings and other records concerning the warehouse operations dating back to January 2010, according to two people familiar with the documents. The subpoenas also demand documents and correspondence regarding the London Metals Exchange, a private trade association that regulates warehousing. The subpoenas indicate that the federal inquiry has 30 “areas of interest.”"http://www.nytimes.com/2013/08/13/business/us-subpoenas-goldman-in-inquiry-of-aluminum-warehouses.html

Interestingly, a couple months ago JP Morgan announced that its commodity business is for sale.  The risk of fines must outweigh the profits.  http://online.wsj.com/article/SB10001424127887323608504579022852576701892.html

Demand for Gold by China and India Continues to Strengthen

China continues to import increasing amounts of gold.  This is gold for consumers and not for the China central bank.  The Chinese people are storing increasing amounts of their wealth in gold.
http://www.bloomberg.com/news/2013-09-05/gold-imports-to-china-from-hong-kong-climb-on-physical-demand.html

So far this year India has been trying to limit gold imports with increased tariffs and import restrictions.  In response there have been many reports of gold confiscated from smugglers at India's airports.  Now gold imports by Pakistan are increasing.  Much of this gold must be headed to India.
http://www.scrapregister.com/news/1589/indias-neighboring-nation-pakistans-gold-imports-raise-1533-yy-in-july-pbs

This reports suggests that the government will allow more gold to enter India soon.  This is very bullish for physical gold.  Although the situation is about as clear as the bureaucracy in a former British colony.
http://www.reuters.com/article/2013/09/04/india-gold-idUSL4N0H025C20130904  
Demand for gold in India remains very strong even though gold prices in Indian Rupees are at an all time high.  Or maybe, just maybe the devaluing Rupee is creating ever more demand for gold as savers flee the fiat.

There seem to be more market commentators lately who don't see the connection between demand for gold and confidence in a currency.  They believe that if price goes up demand declines as prescribed by all intro to economics textbooks.  Gold is a store of wealth not a commodity such as copper.  As confidence in fiat currencies is lost more investors move their wealth to gold and gold prices will increase.  Increasing gold prices may be interpreted as a sign that the fiat currency is devaluing and thereby stimulate more demand for alternative stores of wealth such as gold.  India has been exhibiting this feedback loop.

India Further Restricts Gold Imports to Protect the Rupee

The monetary situation in India is very interesting because of implications to physical gold demand and prices and as an example for when a currency begins to fail.  India has been steadily restricting gold importation for many months to protect the Rupee, which has depreciated almost 15% versus the USD in the last 3 months.  They started by increasing duties and now have outright outlawed gold coin and medallion imports.  India has been trying to stop gold imports without completely destroying the domestic jewelry industry.  I assume that medallions includes ingots or bars that an Indian jeweler would import.  So now the government has become so desperate to protect the Rupee that they are writing off the jewelers.  Silver jewelry is sure to become even more popular.

This move by the Indian government is a very bullish sign for physical gold and silver.  It shows the significance of gold in India.  Ever draconian measures emphasize the Rupee's accelerating devaluation, which will increase hoarding of the precious metals.  Imagine if your savings were in Rupees and the cost of living was inflating at 6%, and food prices were growing at 10%, and the US Dollar was strengthening 15%+.  Would you try to protect your wealth by investing it in an asset that cannot be printed?

If you believe that the US is heading down a similar road of dollar devaluation and cost of living inflation, then it would be wise to protect your wealth now before regulations are created to prevent it.

India Bans All Gold Coin Imports, Increases Capital Controls by Tyler Durden at Zerohedge

http://www.zerohedge.com/node/477636

Gold Bullion Stories That Caught My Attention This Week

Demand for Gold is Still Very Strong in Asia

Huge increase in gold being smuggled in to India.
http://www.scrapmonster.com/news/gold-replaces-narcotics-as-the-biggest-smuggled-item-in-india/1/9460

Vietnam's central bank sold 52 metric tons of gold to domestic (Vietnamese) banks and institutions since March 28th.  "the sales were aimed at boosting domestic supply and helping local institutions stock up on the yellow metal to pay back gold depositors who put their gold savings into banks some years ago."
http://www.individual.com/storyrss.php?story=180166988&hash=b3bc0b2b2aaab77de1c70c0e56cdaee1  Is there a gold run going on Vietnamese banks and institutions by depositors who now want to hold the physical in their hot hands?

Premiums for physical gold at the Shanghai Gold Exchange remain elevated
http://www.kitco.com/news/2013-08-07/kitcoNewsMarketNuggets20130807-kitco-market-nugget.html

If I were in China's position, I would create an alternative to the ever printing US Dollar.  The author describes what this alternative could look like and how it could be implemented.  At this point the only evidence of China pursuing such a strategy is that "Yao Yudong, a member of the People's Bank of China's Monetary Policy Committee recently penned an article in the China Securities Journal, in which he called for a new Bretton Woods system. This would help stabilise the global exchange rates. By implication, he is calling for a return to the gold standard."  Oh yeah and one more thing: China is hoarding gold.
http://www.nationmultimedia.com/opinion/Prepare-for-a-new-gold-standard-30212197.html


A New 'Supply' of 400 ounce Gold Bars?
It is not new gold.  But this is the first time that someone has redeemed units of the Sprott Physical Gold Trust (PHYS) for bullion.  
http://jessescrossroadscafe.blogspot.com/2013/08/nav-premiums-of-certain-precious-metal.html
The PHYS trust includes a process to redeem shares or units for bullion.  Redemption requests must exceed the value of one London Good Delivery Bar, which is about 400 troy ounces.  The recent redemption was for 8,292 ounces.  The trust held 11,616,833 ounces as of June 7, 2013.  
Was this just a skeptical investor or a test run for something bigger.  Perhaps this will eventually explain why the market value of the trust's shares has been trading at a discount to the market value to the bullion in PHYS.  Are the bullion banks suppressing the share price and purchasing more shares on the cheap so that they can get their hands on more bullion?  Are they that desperate?  

Battle for $1,300
And what a week for the gold price!!  It endured several smashes and dropped well below $1,300 a couple times.  But, the bulls pushed the price right back above $1,300 each time.  Hopefully this is the bottom and we can now start building.

Just one more thing . . . 

India's Actions to Stop Gold Imports: more duties and limiting financing

This article describes how India has increased the import duty on gold from 6% to 8%.  It is the second time in six months that India has increase the import duty.  The article also states that according to the World Gold Council, India could import as much as 400 tonnes of gold in the first three months of the current financial, a 200% annual increase.  

World gold production is about 2,700 tonnes annually and 2,100 tonnes excluding Russia and China.  China and Russia reportedly do not export any of their domestic gold production.  India does not produce a material amount of gold.  400 tonnes in three months is about 75% of annual world production, excluding China and Russia.  One might reasonably expect India's increased demand to elevate gold prices.

http://economictimes.indiatimes.com/markets/stocks/stocks-in-news/jewellery-stocks-tank-titan-industries-plunge-13-per-cent/articleshow/20555339.cms

India seems desperate to prevent an alternative to fiat currency.  In addition to increasing the duty on gold imports, the Reserve Bank of India (RBI) has "reiterated its strong resolve to contain the import of gold, by banning advances for the purchase of gold of any kind and reducing the limit up to which loans can be disbursed."  

http://economictimes.indiatimes.com/news/economy/finance/rbi-imposes-restrictions-on-lending-against-gold/articleshow/20553966.cms