04 May 2015

Silver investors corner the market, not JP Morgan

Have a post up on GoldCore's Friday article asking whether JP Morgan was cornering the silver bullion market, noting their Comex warehouse stocks of 55 million ounces and claims by Ted Butler that they “may be holding as much as 350 million ounces of physical silver.” My short answer: I don’t think so. Investor interest in silver in the face of falling prices is a global phenomenon, not a JP Morgan one.

01 May 2015

10 year Price vs Sentiment Map for Gold

Earlier this year Societe Generale mapped asset classes in a matrix according to popularity and profitability over the past few years. It got me thinking about applying the same idea to gold to show how its sentiment had changed over the past 10 years, which I've done and posted up on the corporate blog http://research.perthmint.com.au/2015/05/01/10-year-price-vs-sentiment-map-for-gold/. Hopefully we can move from the "Sad" to "Happy" quadrant.

Who buys or sells (to China) matters

I have a post up about an article Steven Saville of The Speculative Investor wrote in January saying that “focusing on the changes in gold location is pointless if your goal is to find clues regarding gold’s prospects.” While I get what he was trying to debunk, I think he has thrown the baby out with the bathwater in doing so.

29 April 2015

The power of gold and rebalancing in a portfolio

Have a post up on the corporate blog on the permanent portfolio and specifically the Australian fund Cor Capital which has implemented the strategy. It shows a safe and consistent return that I think argues well for the strategy's inclusion in retirement accounts. Read more here.

28 April 2015

Moving to new corporate blog

I have been very busy over the past few months, a few projects coinciding, and also working to set up a blog for myself at the Perth Mint - research.perthmint.com.au hence the lack of posts. I've moved the content from the Research section of the Perth Mint to the blog to seed it but the first real post on the new London fix is now up.

I will be trying to maintain a daily schedule and part of that I will go back over this blog and revisit/rewrite some content that is evergreen in nature and worth bringing to new readers' attention, after around 7 years and 450 posts otherwise useful material can get lost. I also plan to redo my most popular post on gold confiscation, incorporating a lot of material gathered since I wrote it as well as comments from those I've discussed the issue. Putting together all of my fractional reserve bullion banking posts is also probably worthwhile, so much misinformation on that topic.

The new corporate blog will be where I will put most of my serious or sensible stuff, but this blog will remain for truly personal commentary on the PM markets that the Perth Mint just can't host. This blog has been an awkward blend of personal and work which necessarily restricted overly blunt and pure opinion content (yes I have been restrained), but I hope to make the distinction clearer so that this blog has the "space" where I can rant a bit more.

I'm not sure exactly how personal I can be, given the recent case of Scott McIntyre, who was sacked for comments "calling Australia’s involvement in the World Wars an 'imperialist invasion of a foreign nation'." The excuse given for the relevance of the sacking was "It’s not tenable to remain on air if your audience doesn't respect or trust you.” Is this justified only because he had a public role, would someone without any public facing role saying the same thing which it is then discovered who he/she works for be justification for sacking. Seems a restraint on free speech to me, no matter what he said. In such cases where is the line between personal and work life, effectively there is no work/personal split and work dominates your entire life. I suppose as I have a public profile and represent the Perth Mint, I operate under the same expectation. Might just need to have a detailed read of our social media policy.

Maybe just easier to start a new anonymous blog so I can rant away.

31 January 2015

Repatriation Update

Ronan tweets that FRBNY Dec withdrawals were only 10.31t. As we were expecting 42t, Victor suggests only three options:
  1. US gov't tells lies
  2. Bundesbank tells lies
  3. US gov't loco swapped part of their gold to London so the Bundesbank could get LGD
I think a swap is the most likely and as Ronan notes such loco swaps between central banks occur often. The question is whether it was the US or Germany or Netherlands that requested the swap and who else was on the other side of the swap - I'd agree Bank of England is best candidate.
 
A possible rework of the repatriation schedule from my last post is below.
 
Month Germany NetherlandsTotal
Feb 14 10.31 10.31
Mar 14 9.58 9.58
May 14 5.16  5.16
Jun 14 5.16  5.16
Jul 14 24.31  24.31
Aug 14 15.47 15.47
Sep 14  7.377.37
Oct 14  41.9941.99
Nov 14 5.1641.9947.15
Dec 14 10.31 10.31
Total FRBNY85.4691.35176.81
Swapped 31.6531.65
Repatriated85.46123208.47
 
The numbers can work with Germany not doing a swap and it being the Netherlands that did the swap but you can mix up the numbers any way. Koos reported that the Netherlands started in October which if true means they must have swapped something as only 99.45t came out of FRBNY over the last quarter and even if you include the 7.37t as a late Sep shipment for Netherlands, which could be consistent with a general statement about an October start, they still had to swap circa 31.65t.

On the side of Germany having done a swap is their reporting of them utilising BIS' "expertise", as the BIS is involved in facilitating transactions in the gold market.
 
The 10.31t figure for Dec gives both Koos and Boehringer something to question the two governments about who swapped - either way Germany or Netherlands has not fully explained that they did not physically repatriate ALL of the gold from the US. Hopefully they can get to the bottom of who misrepresented by omission.

21 January 2015

German repatriation - trainspotters only

Quite busy at the moment with a few projects deadlining at the same time, hence the lack of posts. This is a quick post which is deliberately trainspotting detail so no critiques I'm ignoring the big issues. Koos notes that:
 
"January till November 2014 the FRBNY was drained for 166 tonnes, if we subtract 123 tonnes The Netherlands got out that leaves 43 tonnes for Germany. The fact Germany claims to have repatriated 85 tonnes from New York in 2014 means they must have pulled 42 tonnes from the Manhattan vaults in December. By the end of this month (January 2015) the FRBNY will release the foreign deposit data of December and we’ll see if the numbers match."
 
So given the data from FRBNY, how can we construct 123t and 43t (or 85t for the year). I found it interesting that in Koos table 5.16t is repeated three times, that the Feb 2014 10.31t is basically double 5.16t and that the Aug 2014 15.47 is basically 3 times 5.16t. So working from this I get the following breakdown of the FRBNY withdrawals.
 
 
I cannot find any other way to get 123t and 85t. I find it very interesting that Nov 2014's 47.15t less 5.16t exactly equals the Oct 2014 41.99t and the balancing shipment for Germany for Dec 2014 has to be 41.99t. This cannot be coincidental. Issues:
  • Is it possible given the somewhat random nature of 400oz bars (assuming that is what Germany and Netherlands are getting) that every shipment exactly equals 5.16t or multiples thereof? (I note that the figures are rounded to 2 decimals, so there could be some small variance if it was shown to 3 decimals).
  • 5.16t means over 400 bars that every bar is overweight. I haven't had time to check the US Mint bar list (see here and here) to see whether their distributions shows this tendency to overweight.
  • Maybe the coin melt or whatever non standard bars Germany and Netherlands are getting are exact weight bars, hence the identical shipment weights?
  • If Germany has been doing 5t every month or so, why the rush to do 42t in December? Would it have not been easier to just do a few 10t months and spread the work out.
  • Note that in the Bundesbank release they say that "As soon as the gold was removed from the warehouse locations abroad, Bundesbank employees cross-checked the lists of bars belonging to the Bundesbank against the information on the bars removed" so that is a lot of work for December - 3360 bars to check - rather than just 400 or 800 bars per month.
  • Why would the need the expertise of the BIS?
  • Why do you need to do a "spot check" if Bundesbank employees are cross-checking every bar anyway.
  • What was the "spot check" - given point above it isn't a check of the weight and bar number on the bars to the bar list as that is already being done.
  • It can't be an assay check as they would have said that explicitly and in any case if anyone should help with that it should be someone from the refinery doing the reprocessing, not the BIS.
  • All I can think is it was weighing the bars (that weren't being reprocessed) on a scale to check the weight was correct to the bar or bar list. Do you really need the BIS to help with that?
I'll just reiterate what I said on 20 January 2014 and 21 January 2014, it is all one big central banking club and as Jim Rickards said, it is all just a "political sop to agitation in Germany's parliament" and there isn't any concern on Germany's part as to whether the US has their gold, and if there is, they can't be seen to be concerned, lest the Narrative of Central Bank Omnipotence be questioned (even more so after SNB dropped its peg).

15 January 2015

Straining at gold gnats while swallowing central bank camels

Chris Powell characterised my post on marginal miners as "straining at gnats while swallowing camels". It is an accusation of hypocrisy, that I'm being "very strict and precise in smaller matters of the law, but careless and loose in weightier matters" (see here for an explanation of Chris' use of Matthew 23:24). I'm entitled to a defend myself I guess.
 
Firstly, Chris said my post "argues today that gold's price is being kept down in large part". In large part? The very title of my post said "Gold price may be affected" and I said "this may crimp increases in the gold price" I think that is enough "may"s to qualify my statement and make "large part" an unfair representation of my post.
 
Chris goes on to say that I "overlooking central bank 'production'" and that it is "exceedingly hard to get respectable people to discuss that part of the market". In other words, that I focus on smaller matters while ignoring weightier matters. I assume that Chris is not arguing that gold commentators are only allowed to post on central bank camels and cannot post on smaller gold gnat issues. Therefore I guess he is commenting on my overall 6 plus years of commentary on this blog.
 
Certainly I do focus on detailed technical issues - that is where my expertise lies. It is also partly because that is an area few cover, while almost all other blogs cover GATA's central bank camels extensively enough, so I look to offer something different to those who are looking for a gnat level understanding of the gold market. But Chris' point is that "respectable people" aren't discussing it. Now I don't take it he means the majority of gold commentators are not respectable, but that the mainstream doesn't consider them respectable and will only listen to those it considers respectable.
 
I'm guessing that Chris' comment is that given I work for the Perth Mint that makes me respectable in the eyes of the mainstream. Unfortunately I don't think the mainstream would consider what I say on gold to be respectable and would consider me hopelessly conflicted as my employer makes money from selling gold and thus from a higher gold price.
 
In any case, when it comes to central bank camels I think I have looked at these weightier matters, and in a far more considered manner than many. For one, I did a 10 part series on fractional reserve banking (starting here) with this one specifically on the role of central banks and how "central bank lending of gold allows the bullion banking system to expand gold credit and this extra supply suppresses the price". I doubt that can be considered shirking from the matter. Consider also these selections from my blogging history (with select quotes):
  • Central Bank gold reserves transparency: So if it is good enough for the Reserve Bank of Australia to report this level of detail with respect of its gold reserves, I think it is fair to say it should be good enough for other central banks
  • The Bundesbank & the Narrative of Central Bank Omnipotence: central bankers use ... use public statements to play the Common Knowledge Game and drive market outcomes by proxy."
  • Central banker pop quiz on gold: that was just to scare people off investing in gold, because do you really think we don't understand gold when we employ over 300 Ph.D. economists and have written hundreds of papers on gold
  • Why gold's contango suggests central bank interference: the fact that gold has been in contango for "essentially all of the last 25 years strongly suggests central bank interference with the gold market
  • Reserve Bank of Australia Gold Sale: governments will want to be re-elected. Rather than take the tough decisions, they will turn the inflationary tap back on. For that reason, I believe that gold will again have its day.
  • Counter to Ben Bernanke's The World on a Cross of Gold: Bernanke’s words, much like Temin’s and Eichengreen’s, contradict his argument. If central banks could absorb and sterilize gold, “reflecting conscious Federal Reserve policy,” the central bank, not the gold standard, was running the show
  • To roll or not to roll, that is the central bank's question: Moves to return gold are eminently sensible, of course: what is the point of a country having its gold out of its immediate physical control if everything goes to hell. That is really the whole point of having gold reserves.
  • The death of gold: the theory of suppression of the gold price misses the point. To kill gold you don't manipulate its price, you manipulate its volatility
  • Central Bank Selling: The end result will be gold in the hands of individuals and what I call “the decades long privatisation of gold” will be complete. As per Professor Fekete, the power over the money “supply” will then be in the hands of the average person, where it should be
And finally, Australian Gold Confiscation, where I drew attention to a previously ignored mechanism by which the Reserve Bank of Australia could enact confiscation in Australia. I would argue the above is plenty of drawing attention to camels, particularly for someone who whilst speaking on this blog personally, still works for a government where politically neutrality on policy matters is expected.
 
Tone is very hard to get in the written word, so let me say I'm not at all fussed by Chris' comments - I can take as good as I can give - and I don't expect Chris to have read all of my 450 blog posts and understand where I'm coming from. Hopefully, Chris, you'll reconsider your J'accuse?

13 January 2015

Gold price may be affected by marginal miners not going to company heaven

Izabella has a post on FT Alphaville on the changing structure of the oil market. The point of interest for me is that the speed with which shale oil can be developed, as well as shut down and restated, means that "the clearing price of oil in a shale world needs to be much, much lower to dissuade unnecessary investment, and also needs to rise much less significantly to encourage it when it is necessary".
 
The take away for the gold market is that the run up to $1900 no doubt resulted in a lot of marginal gold mines being developed that probably shouldn't have been. At current prices these are not profitable on an all in basis but they are holding on as prices do cover marginal cash costs. We need a much, much lower price to really kill this potential supply but this hasn't happened - we haven't seen large numbers of bankruptcies or care & maintenance mothballing occurring. The fall in the oil price will probably give these mines some breathing space.
 
As the money spent on developing these mines is a sunk cost, the problem is that they will stay around and we only need the price "to rise much less significantly to encourage" them to continue producing gold on a cash costs basis. The result is that this may crimp increases in the gold price compared to the situation where a lot of the sub-standard projects would have been cleaned out and the potential for increased supply on any price increased would have been muted.
 
Rick Rule has been talking about how few listed junior miners are worth investing in. Unfortunately the oil price drop may mean that the others don't "go to company heaven" resulting in a sideways gold price as they keep on producing any time the price shows strength and affecting the marginal supply/demand balance.

12 January 2015

Why asian gold contracts/exchanges haven't been able to crack the London market

The idea that gold would be released from its manipulated western shackles if only a physically settled Asian gold market could be established had its fullest expression in the 2011 Pan Asian Gold Exchange (PAGE) hype/meme. PAGE failed because of the political naivety of its exponents that "there can only be one" in the Chinese gold market, namely, the Shanghai Gold Exchange (SGE).
 
In 2014 there was a flurry of activity in Asia with the SGE International Board, Singapore Exchange's (SGX) gold kilobar contact and now, the CME's announcement of a loco Hong Kong kilobar gold future contract.
 
The future for CME's new contract doesn't look bright, with Reuters noting that the "25 kg contract on the Singapore Exchange and the three new international contracts on the Shanghai Gold Exchange have failed to garner significant trading volumes." As Silver Watchdog tweeted, SGE announced they would be exempting international members and customers from all fees for six months "with a view to encouraging international members and customers’ participation in trading and delivery activities on the International Board". Not exactly something you need to do if your contract is successful.
 
The CME's new contact seems pitched a little better than the SGX's, being in lots of one kilo (versus SGX's 25 kilos) and in USD per ounce (vs USD per gram). I would note that CME's Comex contract, while for 100oz, can be settled in three kilobars (although it is a 99.5% purity contact compared to 99.99%) and this similarity would be behind the CME's promoting of it "providing spreading and arbitrage opportunities with other world gold markets virtually 24 hours a day", which seems a pitch directly targeted towards traders, not physical users.
 
However, no matter how well the contract specifications are designed, I think CME's new contract will go the same way as SGE and SGX and the reason is hinted at in the blurbs for the two contacts:
  • SGE: "there is an increasingly compelling need for a transparent and centralized Asian price discovery platform for the kilobar gold market"
  • CME: "will offer a liquid and cost-effective price discovery tool and a precise risk management instrument that accurately reflects the underlying kilo gold market in Asia"
A compelling need for price discovery by whom? The problem is that these exchanges are only looking at one side of the market - the demand side. Certainly importers, distributors and manufacturers large enough to trade a kilo contract would want more transparency on kilobar premiums. But it takes two to tango and these new contracts have little appeal to the supply side (which is not miners, BTW).
 
The mistake of the exchanges I think is that they thought that if they created a contract which appealed to the demand side, which is composed of many firms, that the supply side, which is composed of refiners but primarily bullion banks, would follow. The problem is that the supply side is dominated by a handful of firms and the banks, who intermediate most of the supply to consumers, are quite happy with an opaque kilobar premium market. Why would the banks want to disintermediate themselves out of this position?
 
The only way to break this would be for an exchange to get all of the demand side to insist on only buying via the exchange. Given the large number of participants, this is next to impossible as the bullion banks would hold out until defectors looked to get a jump on their competitors. I would note here that many of the consumers are also looking for finance/delay settlement with their purchases, something the exchanges don't offer. Bullion banks advantage is they can provide both physical and finance in one deal.
 
If we ignore the asymmetry of the number and size of the suppliers versus the consumers, there is also the practical realities of the kilobar market where demand at the various locations changes frequently. After doing a deal with a consumer, bullion banks can ship the physical from a refinery direct to the consumer. The exchange contracts however require physical to be shipped to their warehouses for settlement, and from there we have another shipment leg to the end consumer. This is not as efficient as an over the counter (OTC) trade where metal can be directed quickly to where it is needed. It is funny that in the CME's new contract FAQs that they acknowledge this sort of market structure when they say that "with OTC clearing through CME ClearPort, you can continue to negotiate your own prices privately and conduct business off exchange" yet the contract they propose works against the current kilobar market structure.
 
The exchanges were given a hint of the problem by this comment made at the LBMA Singapore conference (I didn't catch the person making it) "whether a benchmark can compete or become established depends not just on its volume but also whether there a big enough premium/discount due to fundamental difference between the location and existing benchmark locations from a physical point of view". The brilliance of this comment is that the person making it knew that the loco difference between London and these Asian markets just isn't big enough to suck liquidity to the new venues - and knew that the exchanges didn't know.
 
The current OTC kilobar market is highly efficient with the spot price being traded basis the liquidity and depth of the London market and just the kilobar premium being negotiated separately on a client by client basis based on location/shipment cost, finance and purity (99.50% and 99.99%). Trying to compete against that while imposing a need to ship into a warehouse instead of directly to client, and require exchange settlement and clearing (with margin), while the client still has to deal with the bank anyway for finance, is a hard ask.
 
In the end China is probably best placed to win this game as they can force all of their consumers to trade through the SGE but as Adrian Ash at BullionVault noted "only a truly liberalized gold trade, with foreign cash and gold flowing in...and out...right alongside China's domestic flows will challenge London's 300-year old dominance." And that is still some way off.