Why the price smash affected GLD and SLV stocks differently

A number of bloggers have observed the difference between GLD's gold stocks and SLV silver stocks in response to the April price smash. Sharelynx is reporting the following changes over the past four weeks:

GLD down 3,031,042oz (-8.23%), current stocks 33,811,468oz

SLV down 341,111oz (-0.10%), current stocks 335,666,675oz

Sharelynx also tracks all the other major ETFs, COMEX, TOCOM, Sprott, BMG, Central Fund, Bullion Vault and GoldMoney reported stocks. The change in the total of all those over the past four weeks is:

Gold down 5,576,479oz (-6.12%), current total 85,565,264oz

Silver up 912,541oz (0.11%), current total 855,911,574oz

Whether you look at GLD vs SLV or total gold stocks to silver stocks, silver is basically holding even with gold taking a 6-8% hit. The explanation I think has a lot to do with who is investing in GLD vs SLV (or gold vs silver more generally).

 

Latest figures from Reuters has GLD's ownership by institutions at 51.3% while SLV's is 19.6%. Deutsche Bank notes that "one-third of institutions holding bullion will probably keep it. We expect that the bulk of the drawdown comes from institutional investors rather than retail investors".

So GLD/gold holdings have dropped primarily due to institutional liquidations whereas SLV/silver holdings has held up because there are more individual "buy and hold" investors in SLV/silver.

My thesis is sort of supported by looking at Bullion Vault's numbers, as Bullion Vault is primarily a retail product (average account is $50k link). For gold over past four weeks they are only down 1.6%and for silver they are up 1.1%, which is very different to the general trend.

The investors in the Sprott funds are the strongest hands of all, with PHYS and PSLV showing zero change in ounces held (that is a joke, BTW).

 

PS - a couple of interesting facts from the Sharelynx numbers:

 

1. Both GLD and SLV have a "market share" of publically reported stocks of 39%

2. Ratio of silver oz to gold oz is almost exactly 10:1 (ie for every ounce of gold held, 10 ounces of silver are held)

3. Ratio of silver to gold by dollar value is 0.16:1 (ie for every dollar invested in gold, only 16 cents is invested in silver)

Not much of a case

I stopped following blogger Dave in Denver when he wimped out of publishing a critical, but civil, comment of mine on his blog. Thankfully my readers persevere with him and have let me know he recently made the following post:

"A reader alerted me to the fact that Bron Suchecki, one of the proprietors of the Perth Mint - the notoriously untrustworthy and fractional bullion account seller - made the claim that there's plenty of 400 oz. gold bullion bars to be had on the world market. This is contrary to every news report and first-hand accounting of shortages that have been presented over the last week.

So I have this question for Bron: If there's plenty of 400 oz. gold bullion LBMA-standard bars available, how come it's taking the United States Government SEVEN YEARS to send just 300 tonnes of the said 400 oz. gold bars that it owes back to the German Government and its citizens? Tell me Bron, if you can find an ample supply of bars, how come the Federal Reserve and the U.S. Treasury can not? How come the Chinese Gold and Silver Exchange Society is now forced to back-order bars from Switzerland? LINK

I rest my case."

Lets cut to the chase. In this Market Watch article, James Turk is quoted saying:

"The problem retail buyers are finding is that the stock of small bars and coins quickly flew off the shelves, so premiums have been rising because the fabricators have not been able to produce enough new supply to meet demand,” said Turk. The situation has benefited GoldMoney because it sells individual interests in large gold bars, he said.

The reason GoldMoney has benefited is because they are able to sell gold without the high premiums that are affecting non-400oz bar retail sized products. One can confirm this by looking at their site for their buy/sell prices.

Here is the problem Dave. If 400oz bars are not so easy to find as you have so emphatically "rested your case", then how can GoldMoney sell its 400oz bar backed product without any premium beyond their normal pricing? They don't seem to have a problem acquiring 400oz bars.

Since you are certain you are right Dave, then the only logical conclusion is that Jame Turk is lying, and that GoldMoney must be running a fractional reserve operation. Personally I think GoldMoney is telling the truth and it is you that is wrong. I look forward to you denouncing James Turk as an untrustworthy and fractional bullion account seller.

I suppose also that Bullion Vault are lying when they say that "we can assure you that the spot price is the price of physical gold and silver in large-bar form right now, just as always. We go on settling physical gold and silver bars daily, picking up real physical bullion and moving it to accredited storage outside the banking world." No problem for them to obtain 400oz bars.

Interesting also that the Sprott Gold Trust, which the Fed or anyone else of size can redeem for physical, has been recently trading around (and below) spot as one can verify from the chart at their Net Asset Value page. Logically, since you are right Dave, the Sprott Gold Trust must be a fraud as well because the reason Fed is not printing money to buy up shares in the Trust and redeeming for physical is because it doesn't have the metal. Such buying action would prevent it from trading at a discount to NAV.

Finally, for those who don't consider me untrustworthy, the Perth Mint is not aware of any premium being paid for the standard 400oz bars. We have heard that 99.99% purity bars are getting a sub-one dollar premium, which makes sense as they can directly melt them down and convert to kilo bars for Asia where 99.99% purity bars are getting a premium. Interestingly, we have confirmed that the bullion banks aren't paying a premium to obtain 99.99% 400oz bars (or 99.50% 400oz bars), which is not indicative of desperation for physical on their part.

Dave seems to think that these facts are contrary to reports of shortage. The reason they aren't is because those reported shortages are for smaller fabricated forms, of which production capacity limitations are a major driver. I have not seen one report of any premium on 400oz bars and Dave doesn't provide one either, just some theory about the Fed and Germany.

The only factual backup for his claim is an article from IB Times which does not mention 400oz bars at all. What is does say is that “The premium on gold in Hong Kong and Singapore is as high as $3 per ounce, an 18-month high.”

While I agree that physical demand has really jumped up quite a bit (see here) if it was really as desperate you make out Dave surely the premium would be much more than just $3 an ounce? It is ironic that the link Dave provides as proof counters his point. It is typical of his shoot first, think later approach.

I think I'll rest my case here and let the reader decide.

With that out of the way, I would like to add my own speculations on the US-Germany redemption issue. I would suggest an alternative possibility, being that Germany does not want to incur expensive shipment costs (and risk) moving such a large amount of metal in a short period of time. It is also possible that they are wanting to obtain the physical via a loco swap, which would also reduce/eliminate shipment costs and risk if it was done advantageously over time. I was going to suggest that Germany may be waiting for leases to mature and then loco swap, but it seems they recently stopped leasing, so that theory is not valid.

The fact is no one knows the reason and my, and Dave's, reasons are both speculation. It is why I consider using a speculation/theory as proof of one's position to be not much of a case.

There is one final thing I am very confused on. You will note Dave refers to me as a proprietor of the Perth Mint. The definition of proprietor is "One who has legal title to something; an owner. One who owns or owns and manages a business or other such establishment." 

I thought everyone knew the Perth Mint was government owned. But then this means that Dave doesn't understand the definition of proprietor. Someone commented on this and Dave's response was:

"Yes I know exactly who and what he is, you dingus. I was using the term "proprietor" euphemistically. I guess they haven't gotten to that part of your lesson on Sesame Street."

OK, so Dave knows the Perth Mint is not privately owned, but then the definition of euphemistically is "The act or an example of substituting a mild, indirect, or vague term for one considered harsh, blunt, or offensive." As in saying "economic with the truth" instead of "liar". Both say the same thing.

So what exactly is the harsh, blunt or offensive term that has the same meaning as "proprietor"? I am totally at a loss understand what the point/insult is supposed to be. Or is it possible Dave doesn't understand the meaning of euphemistic? Dingus indeed.

Questions from TF Metals Report readers

Have got engaged in some discussions on TF Metals Report. Since I've spent a bit of time responding, may as well share with readers of this blog here in one convenient spot and for my easy of reference in the future.

Link

victori: "I guess Bron Suchecki will make no mention of this in his blog (unless he's got something bearish to say?)"

Do you actually read my blog, this is what i said on April 22, so ZH is 8 days late: "The most interesting thing about this price drop is the reaction of retail clients, who have gone crazy like its 2008. The Perth Mint's bullion website has been having traffic problems and we've had lines at our Perth retail outlet. Depository buying is relatively more subdued, but still the volumes are up."

Purplefrog: "he lumped registered and unregistered together to make his point about how much Comex still has. I guess that is the same as allocated and unallocated. Am I correct in viewing those two categories as totally separate?"

Registered and eligible are both physical real metal, neither are unallocated or paper. While eligible is not "registered" for delivery, I included it because the fact that the owners keep it in COMEX deliverable form and in COMEX warehouses means they have an eventual intent to sell it back into the futures market. If they took it off eligible there would be costs to get it accepted back as eligible.
The recent moves in JPM's vault from eligible to registered demonstrate this.

Nick Elway: "If the physical-paper price connect becomes glaringly obvious, will Bron then be able to admit it?"

I am very interested in a physical-paper disconnect. It was the key part of my pesentation at the Gold Standard Institute seminar in 2009 on COMEX, see here http://goldchat.blogspot.com.au/2010/07/degrees-of-distrust.html and it is intimately linked with backwardation in gold. In the blog you linked to the quote from Jim Sinclair tells you what market to watch for the paper physical disconnect, and it ain't 1oz coins. Or do you disagree with Jim Sinclair?

Link

Adolf_Hitler: "You wrote:"While eligible is not "registered" for delivery, I included it because the fact that the owners keep it in COMEX deliverable form and in COMEX warehouses means they have an eventual intent to sell it back into the futures market."

SLV has allegedly 15.001,355 ounces of silver in JPM NY, which is a COMEX warehouse. So you seem to admit that SLV or JP Morgan, which is the custodian bank of SLV, wants to dump the SLV silver into the futures market, AKA, make delivery?
https://ebts.jpmorgan.com/metalicsWebApp/ebts_downloads/BONY_SLV.pdf

If so many people want to sell physical silver in the futures market, then why is the level of registered silver so low? It's now 45,945,448 ounces. That's equal to the level of Sept 2006.
The ratio of registered vs eligible is now 1:2.6. That's equal to the level of Q1 2001. "

SLV itself doesn't buy or sell metal, it is the Authorised Participants (AP) who do that. If there was selling of SLV by investors, then the AP's would buy those shares, tender the shares to SLV for physical ex-NY and then sell futures against that physical, which they would deliver into the future. This is just an arbitrage and explains why SLV would hold metal in a COMEX warehouse as it makes the arbitrage of keeping SLV's price in line with silver prices easier.

Any amount of SLV stocks in COMEX figures would overstate the coverage ratio as SLV stock is not available to the market, unless SLV holders are selling.

With your registered vs eligible ratio what you are missing is that it is just a book entry to change eligible to registered. So if you just look at registered and go OMG its about to run out, you will get caught because it is so easy for the seller (who has been "hiding" their intention to sell by hold eligible) to instantly switch to registered. That's why I prefer to look at both together.

Link

Adolf_Hitler: "3. You wrote “Any amount of SLV stocks in COMEX figures”(eligible silver) would overstate the coverage ratio as SLV stock is not available to the market, unless SLV holders are selling.” And you also wrote “I prefer to look at both (registered silver and eligible silver) together.”

These 2 sentences contradict each other. You want to include the eligible silver to calculate the coverage ratio. And you also admit that including SLV silver, which is eligible silver, will overstate the coverage ratio."

They do not contradict each other, I admitted that any inclusion of SLV stocks is overstatement however that doesn't mean you throw the baby out with the bathwater and completely ignore ALL eligible as you want to, particularly when the SLV stocks are potentially in play if their is net selling of SLV. Eligible + registered it not perfect, but better IMO than just using registered.

I side with the Doc on this issue, we'll just have to agree to disagree, see http://silverdoctors.blogspot.com.au/2011/08/q-with-doc-whats-difference...

"The most emphasis on COMEX silver inventories is placed on registered, as technically, this is the only silver that is available for delivery to longs. Theoretically, if 34 million oz worth of longs stood for delivery in September, the COMEX would default, as only 33 million ounces of registered silver remain.

In actuality however, I believe that the TOTAL silver inventories are what matters. Eligible silver supplies meet exchange requirements- they are simply not currently offered for sale by the owners. Clearly this silver would become available at a certain price. I also believe it likely that the owners would likely be strong-armed or forced into converting their eligible supplies into registered should things become desperate for the cartel."

Link

Nick Elway: "Thanks for your link http://goldchat.blogspot.com.au/2010/07/degrees-of-distrust.html from 2010. While your Phases 3 and 4 of distrust didn't envision the recent paper price drop I would guess today's removal of gold from "the system" puts us in your Phase 4 of distrust.

The quote of yours that I commented on was your words "I have been trying to kill this[physical-paper disconnect] meme ever since it first appeared in 2008" http://goldchat.blogspot.com.au/2013/04/chill-out-dudes.html

If you've been publicly and forcefully trying to kill an idea for 4+ years then I wonder (cognitive dissonance effect) what would be your threshold to admit the idea has some validity? If the Perth mint was having to pay 10 per cent over the London fix to source bullion would that be enough? Would 50 per cent be enough? When would you quit trying to kill the meme and instead support the meme? Does the Perth mint count as a large enough buyer for its purchasing experience to be a valid measure?

In summary, if it isn't revealing a trade secret, can you tell us if the Perth mint has (or has not) had to pay more than x percent premium for bullion for minting in the last 2 months? At what x would you consider there is a physical-paper disconnect?"

The meme I've been trying to kill is the idea that the price of retail coins/bars is indicative of a physical-paper disconnect, not the idea of a physical-paper disconnect for wholesale forms of metal. This may not have been clear as I assume readers of that blog post are familiar with my prior posts on that matter.

We are currently not paying any premium for raw gold or silver. I don't think there is a specific level which constitutes a physical-paper disconnect. A few dollars wouldn't but $10 over spot would. What I am looking for is desperation by bullion banks when they are bidding for our excess (above coining and small bar needs) refining output, which could be indicated not just by what premium they are willing to pay, but say us being contacted by counterparties we don't normally deal with, wanting 400oz bars for shipment into London rather than kilo bars to Asia etc. Other factors would be backwardation.

I wouldn't say we are in Phase 4 because backwardation isn't there as described. A lot of Fekete's work is based on backwardation rather than just price drops (or rises) as the key indicator of stress, so I would place more emphasis on backwardation.

Link

Fred Hayek: "You seem to present a false dichotomy, the ETF's have either everything they say or nothing. Why? This is silly. There are as many intermediate possibilities as there are putative holdings. Only if you pretend that one must accept a false dichotomy of possibilities, all or nothing, does Andrew Maguire's thesis make no sense."

I get the distinct impression from Andrew Maguire's work that he believes the ETFs have the metal, which is why I presented it as binary. Anyway, I don't see a partial coverage theory as making much sense. I mean, if you can get away with 80% cover when the auditors come around (the same auditor who does GoldMoney), then why hold 80%, why not 70% or 60% etc? And once you have whatever fractional amount in the vault, then would each additional ETF share sold or bought not require any physical, in which case my point is valid that those sales or purchases don't have any impact on physical price.

Strawboss: “defined a falling level of inventory in GLD as being in level 4 (the worst), implying that it signals a severe lack of trust on the part of investors to have their gold held by a counterparty. Would like to hear your thoughts on the recent GLD drawdown and what it means in terms of "trust in the system".”

Those phases were just a theory so I’m not saying it will play out that way, however, the phase 4 I suggested included ETFs balances declining AND persistent backwardation and at longer maturities. As we only have backwardation in the near contract, I’d say we are still in 2^nd phase maybe moving to 3rd.

When I hear of 99.99% purity 400oz bars in London attracting a small premium, which is very unusual, then it tells me we are in a very interesting market situation. I would note that I’m not hearing that the bullion banks paying a premium to get 99.99% purity 400oz bars, so it is not a real squeeze yet.

TF: “Though your questions strike me as disingenuous”

I don’t play games, everything I do is straight up.

TF: “The reason I use "inventory" is the misleading assumption placed by others in the media and financial services that the gold "owned" by the fund is actually the sharholder's. Meaning, who owns the GLD's gold? From where did it come? From whom is it leased/loaned/hypothecated/rehypotecated etc?”

How the metal in the ETFs was sourced does not affect the ETF Trust’s title to it - the metal in ETFs is not encumbered. I address that idea here http://goldchat.blogspot.com.au/2010/08/gld-leasing-and-encumbrances.html

TF: “The scam of it all is the very misleading assumption that every ounce in the world is 1:1...that every "owner" of an ounce is the only person/entity with a claim on that ounce. This is why I use the terms "alleged" and "inventory". You, of all people, know that this is how the current, fractional reserve bullion banking system works, yet you come here and set up this simple, straw man A/B argument in an attempt to accomplish what?”

The metal in the ETFs is allocated, not unallocated. Unallocated is fractional, not allocated. As specific bar numbered allocated metal is not leased (as per my link above), then leasing/hypothecating does not give allocated multiple claims.

For allocated to have multiple claims requires the custodian to fraudulently give the same bar number to multiple people. No doubt you consider that a reasonable possibility. I consider it unlikely. Why? Because why would a bank engage in a straightforward case of criminal fraud/stealing which requires a large number of employees to be complicit in (vault staff, internal auditor, external auditors, risk & compliance department, traders) and thus have a high chance of being found out when that bank can engage in far more profitable manipulations of a virtual financial engineering nature where there is sufficient vagueness as to valuation and risk of the financial instrument that can be debated with auditors and accountants and thus give room for excuses for the few traders involved?

Consider the recent ABN Amro story which I blogged on here http://goldchat.blogspot.com.au/2013/04/chill-out-dudes.html which many think is a case of default on allocated gold. Sorry, not true, as when you read the conditions of those accounts and on page 6, section 4.3 it is clear it was an unallocated account. That is how the game is played. Why worry about having to shift the same bar around for multiple clients when instead you can use shifty wording in an agreement and rely on idiot clients who don’t read what they are signing?

Tabberto: “but you clearly doubt the manipulation/JPM meme”

I believe in manipulation but not suppression. One is short term, the other long term. Many of the manipulation and suppression theories are simplistic comic book stuff. Often why people consider me anti-manipulation is because I critique these theories. Doesn’t mean I don’t believe others, like this http://goldchat.blogspot.com.au/2009/06/death-of-gold.html : “To kill gold you don't manipulate its price, you manipulate its volatility.”

Tabberto: “Am baffled as to why you would frequent such an establishment as this if that is your view”

I have TF’s posts in my RSS feed, but don’t follow the individual comments as I’ve got a couple of hundred RSS feed to scan through each day. However, people often email me about specific comments which is how I find out about them.

Tabberto: “high-horsing over specific language while ignoring elephants in the room dilutes valid contributions, we may all be guilty of this but I felt I would point it out (as exemplified by your nitpicking over language both with Turd and Maguire previously).”

I nitpick because if ones starting point or fact is wrong, then the whole conclusion can be wrong. Getting the details right is important. The ABN Amro story is a good example. Because few have bothered the research the story it is now accepted by many as a case of allocated default. What that has done is just missed the real story of default on unallocated obligation to deliver physical (indicating fractional backing) and educating people on checking the terms of their storage agreements.

Tabberto: “Do you think that the investigation into Silver manipulation by the CFTC is still 'ongoing' only because despite there being no evidence someone forgot to advise the public? Do you think it is beyond the CFTC to understand the subject?”

I consider it completely ridiculous that it has taken this long and that makes the whole affair suspicious IMO.

Tabberto: “Do you think Bart Chilton of the CFTC is imagining things when he says its happening, or maybe he wants to be loved by the Goldbug crowd?”

Consider that the CFTC has to deal/manage/politic two types of market participants – producers, who want prices to be high and consumers, who want prices to be low. I have seen the theory that Bart’s role is to play to or appease the consumers, which in the case of PMs means they want high prices. I really don’t know if this is the case or he is just straight up. Either way he is often very careful in what he says, and keep in mind the difference between manipulation and suppression. Bart talks of manipulation, not suppression.

Tabberto: “Do you recognise that placing and then immediately pulling 'fake' trades on a non-collating platform as a market signal would constitute market abuse or manipulation?”

Yep. Manipulation is a continuum with differing views on what constitutes unlawful or unethical behaviour. Traders I’ve spoken to see most of it as just part of the “game”, like a boxing match to see who is stronger. I tend more towards the ethical end but not naïve to think that you can walk in and put all your (price) cards on the table and not get screwed.

Tabberto: “Do you feel there is any issue with price discovery overall in Precious Metals?”

Not generally. Then again, Perth Mint has never traded on COMEX. We shop around each week to find the highest bidder for the 5 to 6 tonnes of gold we refine, which mostly goes into Asia. If a bullion bank want a few $100 million of gold, they have to pay up. Can't get any more free market/brutal price discovery than that.

Tabberto: “Do you think that the London Gold Pool did actually exist in the 1960s and if it did why on earth would it not be operational now when it is needed more than ever?”

Yes it existed but that is ancient history – we were on a gold standard then and that was just what is now called FX and reserves management. I think the central banks these days are no so aligned in their interests that they would be willing to co-ordinate on gold, the game now is the value of your fiat vs other country’s fiat.

Tabberto: “Do you think the huge volumes in short timeframes on COMEX are pure and natural stop-tripping long-puking or do you believe that there is collusive shorting taking place that helps turn a sell-off into a waterfall??”

No it is suspicious and regulators should be looking into that as it is not rational selling behaviour, unless you are trying to hunt for stops, which is “trading” as discussed above.

Tabberto: “Do you consider the ETFS joint-custodying and then mixing bars up at HSBC (we all know that GLD/SPDR and ETFS were co-mingled as it was proven through Pythonesque means) to be a problem or maybe a good thing?”

I don’t think many vaults these days operate on a physical segregation “cage” type basis for numbered bars. It is just not practical and provides no additional safeguards. If there is a pallet with 32 x 400oz individually numbered bars on it then you know from your computer records which person owns which bar and you can pull that bar out at any time. How does putting each bar on 32 pallets or in boxes and recording in the computer that bar #1 in box #1 belongs to client A and bar #2 in box #2 belongs to client B etc make it any more “allocated” than recording in the computer that bar #1 on pallet #1 belongs to client A and bar #2 on pallet #1 belongs to client B etc? It doesn’t.
But that sort of physical segregation makes running the vault a lot more complicated and take up a lot more space, increasing storage costs without any increase in allocation-ness.

Tabberto: “are you happy with open pallets a la SPDR as the correct way to custody Gold in light of the above? A Genuine query of someone who should know about good practice.”

See comments above. That is how all vaults are operated. Are you saying the pallets should be covered up somehow? What exactly is the problem you have with this way of storing?

victori: “Your Conclusion: "That tells me there isn't any stress in the wholesale markets." Versus Jeff Clark's conclusion: "...You should know that supply among wholesalers is as every bit as tight as the retail side..." How do you explain this differing conclusion between you and Jeff Clark?”

Jeff Clark was talking about wholesalers dealing in 1oz and other retail forms. I’m talking about wholesale forms and quantities, that is, 1 tonne lots of gold kilo bars or 400oz bars.

As if the rays of the sun were turned into solid form

I did an eight minute interview today on local Perth radio on the Perth Mint and gold. Got a bit poetic towards the end on why primitive man was attracted to gold, which a few collegues thought was funny as I'm supposed to be the analytical numbers person. My inner goldbug coming out.

 

You can find the mp3 of the interview at the corporate blog.

COMEX stock drawdown: single most important metric to watch

To understand what is going on with COMEX stocks, don't look at the stock level - it will lead you astray. You need the metric I presented at the Gold Standard Institute's 2009 seminar; one which Professor Fekete thought was the single most important metric to determine stress in the market. The second thing you need to do is put recent market action in historical context.

Firstly, lets review some historical stock levels for gold and silver for some key years - the 1980 peak, the 2001 bottom, 2012 and now. There is only one place I know that has that data going back that far, and it is www.sharelyxn.com. It is a lot easier to follow by looking at the charts of the stock levels, which are available for gold and silver if you have a subscription. If not, then just sign up for a free trial, it will be worth it just to see the charts I'm talking about.

The table below shows the average total (registered + eligible) COMEX stock in millions of ounces for each of those years.

Year	Gold	Silver
1980	3.5	80
2001	1.0	100
2012	11.0	140
Now	8.0	166

First thing to notice is that even after the big gold drop being talked about, the total gold stock is still massively up on the 2001 bottom and the 1980 bull market. Not surprisingly, given the behaviour of SLV's holdings, COMEX silver hasn't dropped.

However, the stock figure by itself doesn't tell us much, as how can we compare the 1980s with today when we have a much larger economy. The important metric is to compare stocks in relation to open interest. If stocks decline but open interest declines as well, then the stock drop is to be expected.

Thankfully Nick at Sharelynx calculates this for us - what he calls Owners per Ounce, or Stocks Cover and you can find the charts here. It is just open interest in ounces divided by stock in ounces. I like to invert it, which gives you a percentage indicating how much of the open interest is backed by stock, a sort of fractional reserves figure. The table below has those approximate figures I've eyeballed from Nick's charts.

Year	Gold	Silver
1980	13%	10%
2001	9%	28%
2012	26%	22%
Now	19%	21%

So even after that COMEX stock drop in gold, we still have a coverage ratio that is way above that which applied in the 1980 bull and which is not down much on 2012. The current coverage of around 20% also needs to be kept in context of the percentage of open interest which stands for delivery, which for gold and silver over the past five years averages between 2% to 4%. So it looks like COMEX has plenty of stock on a historical basis. It is when that percentage coverage gets a lot closer to the average standing for delivery rate that we can consider COMEX under stress and at risk of cash settlement. We aren't close, no matter how the much the pumper sites like to hype the recent stock declines.

And for those who will say what about if everyone stands for delivery, well consider that while most of the shorts don't have the metal, most of the longs don't have the cash. We know this because of all the talk about margin calls causing people to have to sell. Think about that - if they couldn't meet the margin calls, then it means they didn't have the money to stand for delivery.

Chill out dudes

OK, it is all getting a bit silly out there on the gold interwebs, particularly in respect of the supposed physical-paper price disconnect. I have been trying to kill this meme ever since it first appeared in 2008 but it seems the idea of production capacity shortages seems too difficult for many to get.

The "real" price of gold isn't what you pay for a 1oz coin on eBay. As Mish says "Premiums on small denomination coins is not the same a general premium on physical gold itself." But don't take his or my word for it, here's what Jim Sinclair says:

"For many retail investors around the world they are dialed into the paper market in various exchanges. The second market is a small one, but popular among retail investors, and that’s your corner or even major coin dealers. But neither of those are in fact the real gold market, which is the cash market for gold. This is the cash market for 400 ounce deliverable fine gold bars. That represents the true price of the market on any given day. ... for the physical market, not the coin dealers, but the real market, the 400 ounce deliverable market and Asian type settlement ..."

So what is going on in this real market? Well, don't look to Jim Willie who thinks that "those who purchase metals in bulk are having to pay $2000 or more an ounce for gold in the Asian markets". I work for the Perth Mint and we sell tonnes and tonnes of gold kilo bars into Asia every week and we'd be lucky to get a few dollars of premium above the so-called fake paper spot price. That tells me there isn't any stress in the wholesale markets. So COMEX and LBMA aren't going to be failing any time soon.

Then we have the ABN Amro story with John Embry claiming that "the Dutch Bank ABN AMRO came out and literally said that if you have allocated gold with us, you can’t have it. That, to me, is a default". Sorry, not true, thanks to About.Ag who found this link to the English translation of the conditions of those accounts and on page 6, section 4.3, it says:

"1. You have no right to the physical precious metals which you invest. However, under certain conditions, you can physically obtain the precious metals. ... 3. You cannot always physically receive the precious metal. ... In that case, you therefore have no rights or receivables vis -à-vis DBN or the bank."

Sounds like a classic bank unallocated account, which unlike the Perth Mint's, is not necessarily backed by physical. So it is not a case of default.

Final example is Bill Downey's claim that "the London physical platform that buys and sells physical gold gets locked up. The system freezes". When I told Dan at The Fundamental View that there was no "the" London platform, he followed it up and discovered that:

"The screen shot in the article is not of a "physical" market but just a trading platform from a bank (one of many, each BB has their own platforms) for trading spot unallocated XAU/USD FX pair. The post made it seem (to the unaware) that this was "the" London platform. – Mr. Downey acknowledged this error in his email to me. ... His articles made it seem as though the system “shut down and locked people out from placing orders”. To his credit, Mr. Downey admitted to me that this could not be proven and that this was simply speculation on his part. He did admit that orders could still be phoned in."

Simply speculation on his part. This price drop seems to have resulted in a lot of that. Look, it is great news that retail investors have gotten a bit smarter and are buying on price drops rather than chasing the price up like they have in the past, but it does not portend the end of the (paper gold) world, yet.

If you want to be a little smarter, consider what I said to Ed Steer today, "buyers really need to go for the cheapest physical they can and be a bit more flexible on who makes it...or go from coins to bars. Paying high premiums just because you want a certain brand or bar size, just means your money buys less ounces, which takes less ounces off the market."

I note that Sprott's gold trust is trading pretty much at spot. So if you are a suspicious goldbug, which is why you want physical, then doesn't it make a lot more sense to buy the trustworthy PHYS at spot and then when this rush dies down, to sell your PHYS and buy physical coins/bars at more reasonable premiums? Funny how none of the physical pumpers mention this. That's because they can't make money off exorbitant fabrication premiums if you buy PHYS rather than their coins.

Like the post title says, Chill Out, and think a bit deeper about the memes being pushed on you. To help with that, suggest reading this speculation that Andrew Maguire is a US Federal Reserve double agent. That site is a joke by the way, for those without a sense of humour, although the question of why Andrew hasn't produced a CV to stick in Jeff Christian's face is valid and something that puzzles me and some on this Kitco forum thread.

Bringing forward demand

The most interesting thing about this price drop is the reaction of retail clients, who have gone crazy like its 2008. The Perth Mint's bullion website has been having traffic problems and we've had lines at our Perth retail outlet. Depository buying is relatively more subdued, but still the volumes are up.

It is an encouraging sign as usually retail business is only strong when there is a clear upward trend in the gold price. Maybe they have learnt something fom our Asian and Indian friends, who are much more canny buyers.

I was talking to one of our coin dealers a few days ago and he said about a 3rd of business was newbies. At this time my question is whether the price drop has just brought forward

1. New investors who were thinking about buying
2. Existing holders who were looking to top up

But both had not previously acted as the price was going sideways. If we are just sucking demand from the future then this demand will fade. I think this is probable as there has been no change in the underlying fundamentals, no event that would freak people out to buy gold suddenly (Crypus and Boston I don't think would have that effect).

We will need to keep an eye on retail demand to see if it continues. If it does then we should get a repeat of 2008 when coin distributors started to look further afield to overseas mints for coins. Given the Perth Mint's distance and higher quality/higher fabrication price, we should be the last to start to run out of production capacity. If we report these sort of problems then you know the retail demand is serious.

If they didn't warn, then don't listen

So every gold commentator has an opinion on gold's drop. My question is if they didn't warn you beforehand about the risk of a big drop, why pay attention to what they have to say about it after the fact? That is my response to Gordon's comment.

I find it particularly amusing that those who purport to have inside information on the physical market or contact with deeply embedded kingpins did not warn their readers that the market setup was weak, that central banks would not be buying aggressively on the dips and in increasing size at $x price. Yet their followers still think they are gurus.

I could say that they either knew and traded against you, or that their contacts are no good, or that their contacts knew but fed them wrong information (ie they are being played) because their contact knows they have a wide audience and wanted to trade against the guru's followers, or that they are just frauds and don't have any contacts and just make up those stories as it sounds a lot sexier than just saying "my opinion is". I think the most likely answer is just that the gold market is an opaque over-the-counter market where participants only have a view of (their) part of the market.

From my part of the market weeks before the crash the Perth Mint was getting a strong bid from bullion banks for our refining output as kilo bars into Asia. I only really watch those premiums as they are for tonnes at a time and we are about 10% of new mine production. So if you asked me I would have said the physical market was looking good.

So the drop was leveraged paper longs head-to-head against paper shorts. Yes the shorts don't have the gold, but obviously the longs don't have the cash either, otherwise they wouldn't have had any problem meeting margin calls and being ready to stand for delivery.

This is a case of the tide receding and finding out who is swimming naked. That is, we now know that when gold was $1900 it was composed of $1300 of strong hands and $600 of speculative weak money. That is the lesson to remember for next time gold has a run - ask yourself how much of the price is strong and how much speculative.

But why listen to me? I didn't warn you beforehand.

Precious metal commentary: propaganda, porn or entertainment?

I'm still alive. Haven't blogged for a while due to a lot of work on, primarily on a few Perth Mint Depository related business initiatives as well as trying to get up a research section on our perthmint.com.au site.

One of the more radical blogs I follow is Unqualified Reservations. His recent post on propaganda is a worthwhile read for those interested in social media manipulation and the state of precious metal "commentary".

Below is a quote from a book by Jacques Ellul that Unqualified Reservations refers to. I've edited it and changed a few words to make it read like it applies to precious metals:

Investors are faced with choices and decisions which demand maturity, knowledge, and a range of information which they do not and cannot have. The individual wishes to be conversant with economics and precious metal markets. He wants to form an opinion on them. But in reality he can't. He is caught between his desire and his inability, which he refuses to accept.

For no investor will believe that he is unable to have opinions. Public opinion surveys always reveal that people have opinions even on the most complicated questions, except for a small minority (usually the most informed and those who have reflected most). The majority prefers expressing stupidities to not expressing opinion: this gives them the feeling of participation. For this they need simple thoughts, elementary explanations, a "key" that will permit them to take a position, and even ready-made opinions.

As most investors have the desire and at the same time the incapacity to participate, they are ready to accept a propaganda that will permit them to participate, and which hides their incapacity beneath explanations, judgments, and news, enabling them to satisfy their desire without eliminating their incompetence. The more complex, general, and accelerated precious metal market phenomena become, the more investors feel concerned, the more they want to be involved.

And the investor does not want information, but only value judgments and preconceived positions. Here one must also take into account the investor's laziness, which plays a decisive role in the entire propaganda phenomenon, and the impossibility of transmitting all information fast enough to keep up with developments in the modern world. Besides, the developments are not merely beyond man's intellectual scope; they are also beyond him in volume and intensity; he simply cannot grasp the world's economic and political problems.

Faced with such matters, he feels his weakness, his inconsistency, his lack of effectiveness. He realizes that he depends on decisions over which he has no control, and that realization drives him to despair. Man cannot stay in this situation too long. He needs an ideological veil to cover the harsh reality, some consolation, a raison d'etre, a sense of values. And only propaganda offers him a remedy for a basically intolerable situation.

Following that quote, Unqualified Reservations observes that "the modern propaganda addict (we cannot call him a victim) experiences political authority ... entirely as porn. That is, as a simulation entirely without substance."

Simulation entirely without substance. Exactly what a lot of precious metal commentary is - Propaganda/Porn. Maybe to be less harsh I should say a lot of it is Entertainment (making it amusing to read them ranting against the main stream media when they themselves engage in the same dumbing down).

All very dangerous to your financial health, unless you know you are consuming entertainment. But how to identify it? I'd suggest asking: what do you associate the word "propaganda" with? I'd say Emotion. Propaganda is emotive, angry, fearful, blindly patriotic. Not rational or calm. That is one of its "tells".

Al Korelin Interview

Did an interview with Al Korelin on the weekend. Covered China, the challenge ETFs present to gold mining shares, World Gold Council's purpose in creating the ETFs and institutional demand the Perth Mint is seeing and how we are only in phase two of a bull market.