March 10, 2023: Global News Roundup
All that glitters is not gold—Australian doping scandal, central bank stockpiling, US dollar in decline
This post was originally published on IPEwithSBB.org.
The Global News Roundup collects news stories from entirely international (non-US) media sources on variety of pressing global issues and events.
This week, news of a gold “doping” scandal flooded Australian media, sowing distrust across global gold markets. The doping story and subsequent “cover up” was unearthed by the Australian Broadcasting Corporation (ABC), which obtained leaked internal documents from the Perth Mint. The Perth Mint is the world’s largest processor of new gold and the only mint globally with a government guarantee—it is owned by the government of Western Australia via an entity called the Gold Corporation. The Mint not only processes new gold, it also serves as a depository institution for owners of gold all over the world (it’s a “massive, commercial safe deposit box”, as one expert put it). The Shanghai Gold Exchange (SGE)—which is the largest buyer of gold from the Perth Mint—is the world’s largest gold exchange by spot trading volume (i.e., gold paid for ‘on the spot’ for immediate physical delivery) and requires sellers to comply with its very high purity standards (these standards are a big reason why the SGE has a good global reputation).
“Gold doping is a somewhat accepted practice in the industry and is not illegal, but is high risk for refiners, as it lowers the quality of bullion by adding impurities like silver or copper”, reported ABC. Apparently, the Perth Mint has been doping gold bars since 2018, in a bid to reduce costs. Mere months after deciding to do so, Mint staff “identified concerns that silver and copper levels may have exceeded those allowed by the SGE”. But the Mint did not notify the SGE, nor did it stop doping. Three years later, in September 2021, the SGE reported to the Perth Mint that two gold bars it had tested for purity contained too much silver and did not comply with the Exchange’s standards.
In response to the SGE’s concerns, the Perth Mint opened an internal investigation, which concluded that the consequences for the Mint would be severe should the SGE go public with its concerns about the bars’ purity. “If SGE – Gold Corporation’s pre-eminent exchange client – had made public that they had issues with Gold Corporation bars, the impact of negative public statements on the business could be very significant,” stated an internal document uncovered by the ABC Four Corners investigation. The internal investigation discussed in the leaked documents (which included purity tests, or assays) also found that, “[It wasn't just one bad batch…most of the gold bars during the three-year doping program were potentially non-compliant with Shanghai standards.” And, while the Mint ceased the doping practice in September 2021 following this discovery, it “did not share this information with its largest client”.
Western Australia’s Premier Mark McGowan stated that he only learned about the doping this week. “The Premier added that the odds of Gold Corporation, and by extension the taxpayer, could be forced to buy back the 100-tonnes of alloyed bullion, were “extremely unlikely,” reported the ABC. If they are recalled, the bars would have to be shipped back to the Mint, melted down and recast without the impurities, and then re-sold. For Australia, furor over the scandal seems to be partly stemming from the fact that the Mint took such a large risk to save a mere $600,000 (the entity does some $20 billion in business each year). The opposition party in Western Australia has already called for a royal commission to investigate.
Making matters worse, the Perth Mint was already under investigation (since August 2022) for potential violations of money laundering and counter-terrorism regulations before this new scandal erupted. (Allegations that the Mint was serving as a tax haven bank for organized crime syndicates surfaced in 2020.) Also in 2020, the Perth Mint made headlines when it was blacklisted by HSBC and JP Morgan following allegations that the Mint had purchased gold from a “convicted killer” in Papua New Guinea and that the gold’s supply chain involved toxic levels of mercury as well as child labor. Then in 2021, Canadian gold trading firm Kitco reported that the Mint had insufficient physical gold to cover client investments, a claim the Mint denied.
After the ABC story broke on Monday and whipped around international media, the SGE on Wednesday denied the report and cast doubt on the ABC’s journalistic standards: “The relevant media failed to fulfill their responsibility to review the content, resulting in dissemination of inaccurate content on the Internet, causing serious damage to the reputation of the Shanghai Gold Exchange,” the exchange said in a statement on its website, according to Reuters. Clearly concerned about the SGE’s global reputation and legitimacy, Chinese state media amplified the SGE’s claims that the ABC story was not true.
The scandal—involving possible bad dealings between the world’s largest processor of new gold and the world’s largest spot gold exchange—comes at an interesting time for gold in the world economy, and this broader context is part of the reason why the Perth Mint story piqued my interest. In January, the World Gold Council’s annual report detailed the massive increase in gold purchases worldwide in 2022, led by central bank acquisitions and retail investor purchases: “[A]nnual gold demand (excluding OTC) in 2022 increased by 18% year-on-year, hitting 4,741t – the highest annual total since 2011. Boosted by a record fourth quarter, demand for gold was propelled by hefty central bank-buying and persistently strong retail investment.” The Council’s data indicates that China, which increased its gold purchases five-fold between the early 1990s and 2013, was the largest purchaser of gold in 2022 (and has been since 2013), followed closely by India. China is also now the world’s largest producer of gold. The graph below from the World Gold Council shows the size of the Chinese and Indian gold markets as a share of the total world market. (See also my prior post from January on global “metal mania”, here.)
(Image: “Chart 4: China and India have become the dominant gold markets.” From the World Gold Council, Thirty Years of Gold Demand Trends, January 2023, p. 5, report can be downloaded here).
In June 2022, 74% of central banks reported to the World Gold Council that they had higher levels of gold held in reserve than they did five years ago. Central banks reported that they were acquiring more gold mostly “as a buffer against balance of payments crises” and “as a backstop for the domestic financial system”, but also for “capital gains on total reserves” (the World Gold Council’s June 2022 report on central bank gold holdings can be downloaded for free here, you just have to register). (See also my prior post from November that discussed mystery gold “whales”, which turned out to be the Chinese central bank.) Among other implications, increasing use of gold to insure against balance of payments crises signals an growing desire among central banks to diversify foreign exchange reserves away from US dollars and dollar-denominated assets.
The chart below, drawn from the June 2022 report, depicts central bank survey responses to the question about why they have decided to hold gold relative to other assets. Notice that gold’s performance during times of crisis, utility as an inflation hedge, and lack of default and political risk are among the top reasons cited by respondents.
(Image: “Chart 6: How relevant are the following factors in your organisation’s decision to hold gold? (Q4)”, From the World Gold Council, 2022 Central Bank Gold Reserves Survey, June 2022, p. 4, download available here).
But also notice that, beyond the balance of payments crisis context, acquiring gold explicitly as “part of de-dollarization policy” was sufficiently significant a rationale to make it into the top survey responses, with 9% of respondents saying gold was “somewhat relevant” in this context and another 11% saying it was “marginally relevant”. While the report does not identify specific respondents, these findings are consistent with the rumors about a Chinese gold standard over the past several years (here; also, here and here, from American media…my apologies), recent Russian moves to buy gold at a fixed ruble price (see also here), and with the efforts of smaller economies such as Zimbabwe’s to bring gold coinage back into regular circulation. Along similar lines, the Monetary Authority of Singapore (MAS) made its largest gold acquisition since 1968 (44.6 tonnes, representing a 29% increase in total gold reserves). The image below of a torn US dollar lying atop a gold foundation adorns a showcase in the office of Singapore’s sovereign wealth fund, celebrating the country’s first major gold purchase in 1968. (By this time, a lot of the world had lost trust in the US gold standard that was established in the wake of WWII, and by 1971, the US had suspended the dollar’s convertibility to gold entirely).
(Image: “Showcase in the GIC (Sovereign Wealth Fund) Office in Singapore commemorating Singapore’s first gold purchase of 100 tonnes in 1968 – “A Torn Dollar Bill And Gold For Singapore".” From BuillonStar, 03/08/2023, here).
In other gold news, survivors of the recent earthquake in Turkey and Syria are searching through the debris and rubble to find their gold savings. The Brazilian government is implementing new policies to crack down on illegal gold mining, much of it occurring in the Amazon and/or on indigenous lands. Indian officials arrested members of an international gold smuggling syndicate this week. And, 18 one-kilo bars of pure gold were found hidden in an airplane toilet on a flight from Dubai to Delhi, in an apparent attempt to evade taxation.
Things I’m keeping an eye on:
1. US pivot to China: I wrote about this last week, about how the US is turning away from Ukraine and toward more direct confrontation with China. This week’s news contained a rather perfect symbol of the pivot, with US House Speaker Kevin McCarthy announcing a meeting with Taiwanese President Tsai in California and, just a couple of days later, rejecting Ukrainian President Zelensky’s invitation to visit Ukraine. As I noted last week, declining public support for the war is a major factor pushing the US and EU to reconsider their role in Ukraine. McCarthy is thought to have rejected Zelensky’s invitation because of growing concern about the extent of US military aid for Ukraine. I think it is significant in this context that Western media this week ran stories (beginning with the New York Times) quoting anonymous officials who said that pro-Ukrainian forces may have been responsible for the Nord Stream explosions. Looks to me like this could be the beginnings of an exit strategy for the US and Europe, particularly if new information somehow surfaces that the saboteurs had support from the Ukrainian government in Kyiv (which would especially anger Germany and work to reduce support for the war in Europe). Also significant is the very loud warning China gave the US this week (“Hit the brakes!”), as well as continued Russian advances around Bakhmut in eastern Ukraine.
2. The EU is flirting with a new natural gas procurement scheme involving joint negotiations and purchasing, in other words, a buyer’s cartel. As I’ve noted in prior posts, global energy markets are increasingly plagued by political risk, more heavily regulated, and more fragmented, especially since the Ukraine war began last year (e.g., here, here, and here).
3. El Salvador: I discussed President Nayib Bukele and the Salvadoran economy earlier this year (here). Bukele’s approach to law and order, which I noted in January reminded me of past policies implemented by former Filipino President Duterte, made international headlines this week when El Salvador opened a gigantic prison to house alleged gang members. Bukele claimed it to be the “largest prison in all of America”, and it will eventually house 40,000 inmates.
4. The BRICS and the dollar: Interesting that the world’s largest consumers and producers of gold, China and India, are also the most powerful members of the BRICS organization that is actively pushing back against US and European dominance in world affairs. The organization is constantly publishing news articles that trumpet the decline of the dollar and detail BRICS activities and agreements toward this end. Here’s one from this week, about how Russia-India oil trading is undermining the dollar’s supremacy.