29 May 2009

Dark pools

From a recent Zerohedge blog post:

James Brigagliano, co-acting director of the SEC's Division of Trading and Markets, said dark pools could impair price discovery by drawing valuable order flow away from the public quoting markets. "To the extent that desirable order flow is diverted from the public markets, it potentially could adversely affect the execution quality of those market participants who display their orders in the public markets," he said.

To remedy this, the SEC, Brigagliano suggested, may impose post-trade reporting requirements on dark pools. "While full pre-trade darkness is an important element of the business models of some dark pools, it does not appear that some form of improved post-trade transparency would be likely to interfere with those business models," he said. "Indeed, uniform and accurate trade reporting practices could help establish a fairer playing field because those dark pools that report their volumes accurately won't be disadvantaged in comparison to those that inflate their volume."

I wonder if the SEC's interest in transparency extends to the gold market? One very simple transparency measure would be to breakdown central bank gold holdings into

a) physical bars under the control of the central bank;
b) physical bars on deposit with outside counterparties;
c) unallocated deposits with outside counterparties; and
d) leased out.

For more information on the games played by central banks on reporting their gold "holdings", see Golden Sextant's Déjà Vu: Central Banks at the Abyss

28 May 2009

Mark Creasy on stocks and flows

In an interview with Tim Treadgold for the Eureka Report, Mark Creasy makes a point about watching the stocks, not flow, of gold:

Scrap gold, and even mine-supply, aren’t really the big players in the (gold) market. There’s about 160,000 tonnes of gold in existence, and the world produces about 2000 tonnes of freshly-mined gold a year, and about 1000 tonnes is generated as scrap. The total amount of mined gold and scrap is less than 1% of the overall gold market. The mine supply isn’t all that important in the gold price. It’s all about sentiment. The people who will influence the value of that 160,000 tonnes are the biggest shareholders, and they are the central banks, which own about 30,000 tonnes.

Gold is a bit like a company which has a dominant shareholder. If everyone believes the dominant shareholder is selling the price drops like you wouldn’t believe. A major influence is how people see the biggest shareholders handling their gold.


The best way is look at gold is not on the peripheral, say the scrap market or even mine supply; it’s to ask what are the big shareholders doing. In the past we’ve seen big holders such as the Bank of England and the Swiss National Bank selling, and people think we’re out of this. When they see a big new buyer, people want in.

Now Mark's point that the flows are peripheral is not to say that they do not have an influence on the price. In the long run, if we have passed a "peak gold" moment (a subject of an upcoming post) then flows reduce and stock levels out which, in the face of increasing demand, is bullish for price. Significant changes in flows can also tip the balance of the buying and selling volumes of the holders of the 160,000t stock.

Probably the biggest influence classical "flow" supply/demand analysis by WGC and GFMS has on price is via perception of its effect on price rather than any actual effect due to the physical volume of the metal. Consider that Mark's point about stocks has one problem - how do you measure the position of gold "shareholders"? How much volume of gold will be bid and offered to the market at each price level? Even if you can poll all the holders, the so constructed supply/demand curves of the "stock" will change over time in response to events. This is Mark's "sentiment".

Now why "flow" supply/demand is so dominant is due to the fact that it is (relatively) nice and easy to measure. Sentiment is not. Therefore there is a bias towards the numbers, the measurable 3000t flow and away from (or complete disregard for) the unmeasurable 160,000t stock.

As Richard Maybury notes in his recent article:

... it is so important to see the economy not as a machine but as an ecology. Machines don't feel, they don't have fear, or joy, or optimism. But people, biological organisms, do have feelings. They do fear, and their fears can change instantaneously. The human ecology, especially these days, is driven very largely by emotions.

As an investor it is important to remember that while "flow" supply/demand numbers from WGC or GFMS do have an effect, it is not the entire story and one should be cautious of the resulting mechanistic analysis. If "fears change instantaneously" then the movement of the 160,000t stock will overwhelm the annual supply/demand balance.

There is a bit of circularity or feedback in that perception of annual flows impact sentiment of the holders of stock. Also note that instantaneous change can occur either way - if fear decreases then supply of the stocks will push the price down.

Big upward price moves will occur when the sentiment that gold stock holders have is what is commonly called "strong hands" coincides with "weak hands" of holders of dollars. Focusing on annual mine supply or a drop in Indian jewellery demand isn't going to help you identify that move.

26 May 2009

Predicting the gold price

Some useful observations on the gold market in a recent Unqualified Reservations blog entry:

One trivial example of a liquid, functioning prediction market that does not, and cannot, produce accurate predictions is the gold futures market. The gold futures market is a large, active and efficient market in future gold, but in hindsight it demonstrates little or no predictive power. The cause is not at all obscure: since both gold and dollars can be stored at minimal cost, a variety of arbitrage strategies bind the gold futures market to the much larger dollar-futures market (ie, the market for loans). The price signal is real, but it is conveying much more subtle data than the market's net opinion of whether gold will go up or down.


Again, the market for future gold does not function as a prediction market, because it is bound by arbitrage to the market for spot gold and the market for future dollars. At least one of these so-called markets is substantially the product of official intervention.

21 May 2009

Carnival of idiots

Who knows what Coldplay are really singing about, but these selected lyrics from their song Violet Hill seem relevant to our current situation:

When the future's architectured
By a carnival of idiots on show
You'd better lie low

Was a long and dark December
When the banks became cathedrals
And the fog became God

I don't want to be a soldier
Who the captain of some sinking ship
Would stow, far below

20 May 2009

Silver premiums and fake spots

Interesting resurrection of a Kitco post from October 2008 about silver premiums. There was a lot of heated words and a bit of sillyness. In October 1000 oz bars were quoted @ 69 cents and 1 oz Eagles @ $6.99. Now it is 19 cents and $1.99.

For those who would only trust physical, the smart play was 1000oz bars @ 69c. I'm not sure what the buyback discount is in the US, lets say 1% under the so-called "fake" spot. So sell the 1000oz bar and lose 15c and then buy Eagles at $1.99. Total cost = 69c + 15c + 1.99 = $2.83, still way cheaper than $6.99.

Also, reading back over those posts there seemed to be a view that there was a difference between "industrial" silver (1000oz bars) and "investor" silver (1oz coins). In the Perth Mint's Depository by far the most popular physical form held in allocated storage by individual investors is the 1000oz bar, not coins, simply because it is the cheapest. From my point of view a 1000oz bar IS and investor product.

As to the view that COMEX is some sort of "paper" price "disconnected" from the "real" physical price. Arbitrage in the professional market keeps COMEX price in line with spot price for physical. The fact is that huge quantities of 1000oz physical silver bars change hands at this "fake" spot price.

It is interesting that commentators who were making a huge deal about the big premiums on coins and using this as proof of the fakeness of COMEX and that it meant the end of the world and silver was going to the moon etc etc are now very quiet about the reduction in premiums. If the low premiums are mentioned, it is as an aside and no conclusions are drawn. They really shouldn't have been making a case for investment in silver based on premiums (as that just reflects manufacturing capacity shortages) but on the spot price (which reflects real shortages of the underlying physical).

17 May 2009

A hedge against Government instability

From the latest Martin Armstrong piece (edited):

Currency = Shares in the political state
Bonds = Issued by Government are nothing more than a derivative option
Shares = In the corporate world are a hedge against domestic inflation
Gold = Is the hedge against Government instability

Currency is an instrument that represents the total wealth of a nation. It is nothing more than a individual common stock share whose value will rise and fall dependent upon how the world believes and trusts in the management.

So bonds are simply an option on the currency and you hope that the interest paid offset the depreciation in the value of the bond/currency for the duration it was held. Of course, buying government debt is the one bet you can make that is a guaranteed loss. It is only a question of how much capital you lose.

Shares/stocks of private corporations reflect a hedge against inflation. Most stocks will only keep pace with inflation that is real, not manipulated statistics.

Gold is just starting to come into its own. Its role is obviously not the hedge against inflation as is stocks, but the hedge against the instability of government. For when all else fails, gold becomes the only store of wealth.

16 May 2009

Westpac Breakfast

Went to the post Budget Westpac breakfast talk by their Chief Economist yesterday. Short summary: worst environment in 70 years; recovery will be patchy and slow (maybe 3 years); but much more is being done this time compared to 1930s; we will get out of it and then business as usual; Australia better placed than US/UK re debt as % of GDP but current account deficit one of the worst in the world; Western Australia will hold up, but it will feel bad because growth will drop from 5% to 1% whereas the other states have already had to deal with and get used to decline; thought the first home owner's grant will be our subprime as it is sucking in people who should probably not be given loans.

Interesting to hear this and feel the mood of the business guys there (I think 4 women in all). A big contrast to the views of the blogs I follow. There is still a bit of hope/expectation that this is a bit of a recession and just tough it out for a few years.

I feel we are at a pivot point, with Governments doing all they (think) they can to keep people believing it will just be a bump and people don't want to hear really bad news so they want to believe it but still will be scaling back spending, you know, just to be safe.

Martin Armstrong recently told the story of a Japanese investor who bought into the market just at the peak. He asked why he did it and the answer was that the investor's broker had been telling him to get in for 6 years and finally he thought he should. Martin then says it is when the last person has piled in that a bubble busts. I think it is the same on the way down - not until the last person has lost hope will the bottom be found. The green shoots are telling us we aren't there yet. There are still greedy people out there wanting to make up their losses, or optimists that think we are at the bottom.

The question is whether Governments can pull the confidence trick off and keep the green shoots alive. If you don't think this is at all possible, I would suggesting reading this post of mine from last year. I don't think it is possible, but I also never underestimate the gullibility of the average person and their unwillingness to face unpleasant realities.

11 May 2009

Boiler Room

Had a call today from a lady advising me that I would be getting a call in a couple a days from a "Commodity Advisor" with information about the gold market. She stressed that she wasn't selling anything. When I asked where she was from and she replied Hong Kong I knew it was a boiler room operation and she was pre-screening.

As one would expect, I had no luck trying to get her to understand that as I worked at a Mint, I didn't need anyone telling me about the gold market, I worked it in. I ended up saying don't get the Commodity Advisor to call me and hung up. In retrospect I regret that, as I now want to know what the scam was so I can share it with you. Hopefully they'll ignore my request and call back.

First time I've ever received or heard about this sort of thing for gold. A sign of the times that gold is going mainstream, now that the cold calling scammers are on to it?

07 May 2009

All Ordinaries Fair Value 1,700 to 2,300

From the latest Leithner Letter:

Given how we came to this pass, where Australia now stands, what the government is doing to us and what may lie before us, it’s difficult to conclude that stocks are cheap and easy to believe that they remain dear. True, the AOI is less overvalued now than it was, but “less overvalued” is not the same as “undervalued.” Accordingly, Leithner & Co.’s plans include the possibility that an environment marked by recession and stagflation (like the one that plagued the early 1970s to the mid-1980s) prevails during the next several years. In such a climate, the fair value of the All Ordinaries Index would be ca. 1,700-2,300. That implies a fall of ca. 70% from the Great Bubble’s maximum and the harshest bear market in Australian history. Furthermore, taking 2,000 as the AOI’s “bottom” and assuming a long-run growth rate of 7.5% per annum, ca. 17.5 years will pass before the Index returns to its Bubble maximum of ca. 6,850. If so, this will be the most fraught recovery in Australian history.

The newsletter is worth reading for the detailed analysis behind that conclusion - it is not just some number picked out of the air or drawing some trend line on a graph. It is not coincidental that the Directors of Leithner & Co are Austrians (as in economics).

06 May 2009

The War on Gold

Next to the Perth Mint's CEO office is an old bookcase filled with many dusty titles from CEOs past. The title "The War on Gold" on the spine of one of them caught my eye today. Published in 1977 by Antony Sutton, it is a bit of a depressing read as little seems to have changed - consider these statements from its back cover:

* The US debt pyramid - what do municipal bonds, domestic bank, and other institutional failures mean for the price of gold?
* Confidence in the monetary system - is panic just around the corner?
* Manipulation of the market price - how long can the US Treasury keep the price of gold down?
* Gold and freedom - why totalitarians always forbid the private ownership of gold.

Same issues being discussed today, over 30 years later. Anyway, I found Mr Sutton's glossary amusing. He prefaces it with the statement "Common words or phrases used by money manipulators, and their meaning is laymen's language." Some selections:

* A Crisis in Confidence - general public discovers it has be conned by politicians and bureaucrats.
* Run on the Bank - general public discovers it has been conned by the bankers.
* Hoarding - precautionary saving of wealth (usually gold) by individuals.
* Reserves - precautionary saving of gold by Governments.

03 May 2009

Government Issued Bullion

Tarek Saab, President of GoldandSilverNow, has posted an opinion on investor preference for Government issued bullion over private mints. Tarek favours private mints and discusses some of the arguments put forward for Government coins. As seems to be my habit, I offer come comments:

"If one doubts the integrity of our politicians and the financial system, why demand a coin issued with the full faith of the same architects manipulating it? ... Instead of blindly accepting the markings on any coin, buyers should always be cautious."

I agree with the last sentence, but the rest of the argument can easily be turned on private mints - greedy "private" banks, Enron, etc, there are plenty of examples of privately run companies that have defrauded consumers. The only thing that matters is the test of the market. I would suggest that investor preference for Government coins is probably because of decades of coins that have been of stated purity - can Tarek name one case of underweight or under purity coins? I think this proves that no matter what idiots are running the Government, they have not stooped to interfering with the integrity of their mints.

Of course, this is not to say that debasement cannot happen and investors should be alert to this. I think it is worth noting that the people running Government mints, just like their private counterparts, take their reputation seriously. All of them are part of the Mint Directors Conference and it is a small industry. It is my view that none of them would take kindly to politicians telling them to debase their coins - it would be an affront to their integrity and irreparably damage their reputation and career in the industry. If it was done, I would not be surprised to see whistleblowing, but if not certainly to see resignations, which is what I would suggest investors watch out for.

I think it is also improbable that politicians would bother to debase their precious metal coinage. Considering how little is produced, what would be the amount of money saved? Certainly it would be difficult to underweight the coins as this is easily detected, so reducing the purity would be how it is done but there is a limit to this. Again, this argument can also be turned on private mints - it could be argued that the profit motive provides more temptation to mint owners to save a few bucks by having slightly under purity coins.

In the end, I this the point Tarek is making is a double edged sword. Yes, politicians lie and are hard to trust, but if you are so poisoned by this lack of trust that you question all Government agencies, then I doubt that you will trust a profit seeking private owner of a mint.

"worried about dealers recognizing private-issue bullion"

On this point, Tarek is correct. Any decent bullion dealer should know all the products out there and their reputation. If the private coinage has a good name, a dealer should be willing to buy it back. Some may be conservative and buyback at bit of a discount, but this may also reflect the fact that there are not as many willing buyers. In any case, investors should always consider their exit strategy and on that basis ask those to whom you hope to sell, what they will pay for private issued bullion, then you will have no surprises.

"The face value of these coins is already inconsequential."

True, but I think when someone says a coin is legal tender, it is just a way of saying they are Government issued and guaranteed.

"The availability of government bullion rises and falls dramatically with market conditions."

So, this is because demand rises and falls and the same applies to private mints, probably more so as being profit focused they are less willing to sit on unsold stock. Tarek's statement that dealers were put on waiting lists (and some Mints have moved to rationing instead of extending lead times) also applies to some private mints. I think the problems that Government mint have experienced reflects the fact that investors prefer their product over private mints, hence they have excessive demand. It would be my view that if demand shifted to these private mints then they would also experience availability issues. Northwest Territorial Mint is an example as they have had the same lead time blowouts as Government mints.

"Considering the risk involved with the default of any business in our present economic situation, and beyond that, the risk involved with the default in each business’ bank, I find it mystifying that investors would harbor the risk of floating hard-earned cash for lengthy periods of time."

How is this an argument against Government mints? It is private enterprises that are failing and need Government bailouts. This is more an argument against leaving your money with private mints. Anyway, in this current market, any mint would have to be spectacularly mismanaged to lose money making coins and bars, so I don't really think this is a big risk.

"many customers purchasing U.S. Eagles are now being asked for their social security numbers ... the threat of a 1936 gold confiscation lingers like a bad toothache"

I doubt it is just about whether you are buying US Eagles, anti-money laundering rules would generally require identification of any bullion purchase - bar or coin, Government or private. It is how you buy it, not what you buy that matters. If your worried about confiscation, do it under the reporting threshold for cash and don't have it mailed to you (otherwise records exist at the courier companies). It is also worth noting that is confiscation occurs, whether it is legal tender, privately issued, bars or coins, is not going to matter - they ain't going to leave any loopholes.

One final point. Don't take my comments above as an argument against private mints. The fact is that Government mints are generally conservative organisations and are thus a bit more cautious about making capital expenditure decisions to ramp up production in the face of increased demand. Private mints provide welcome flexibility and are probably more likely to want to take a risk on gearing up to meet demand. This is needed - as I point out in this blog, the industry as a whole was/is not ready for any significant increases in demand for gold coins. If gold ownership is to be more widespread, we need more capacity, and quickly as the rush could come any day if people lose confidence in the modern experiment with fiat currency.

I'm a firm believer in free and fair competition and certainly some Government mints could do with it and some will fear it, too bad. Let me close with a plug for the Perth Mint. Of all of them, the Perth Mint is probably best placed because while it is owned by a Government, is not subsidised and does not have a circulating currency business to help with cross-subsidising its products. Therefore it has had to survive by competing with private and Government mints and so is ready for the challenge.