26 May 2011

We are flies in a bullion bank web

I left this comment on the FOFOA blog:

Your point about bullion banks having the best intel is important. Bullion banks are like spiders in the center of a web. They can feel the twitching of the flies in the web and determine the mood of the market better than anyone else and often in advance of others.

For example, if Mints are starting to see an increase in demand and begin running down stocks, they will start to take delivery ex-bullion banks, who as a result now have intel that retail demand is picking up before anyone else sees it in reported coin sales.


London Banker has expressed this idea much better than me in this post:

Over the past 25 years the financial markets of the world have become highly concentrated in the intermediation of a handful of firms, and regulation has been harmonised in the interests of these few firms. ...

Sadly, these few global firms have been for some time in "a conspiracy against the public", and have subverted the organs of public governance and the infrastructure of the financial markets to their purposes. ...

Four global banks are intermediaries in 85 percent of OTC derivatives transactions. The same banks dominate prime brokerage. The same banks own large equity interests in the now demutualised exchanges, clearinghouses and even warehouses of the global markets. Naturally, the same banks dominated underwriting of securitised assets. The implications have scarcely been grasped of what this portends in terms of the information asymmetries and the opportunity to manipulate markets without risk.

Each of these roles gives these few banks a view into the positions of market investors. They know who owns what, using what leverage, under what terms, and trading in which markets. Knowing that, the manipulation of prices to impoverish investors and enrich the ruling banks is child's play with a bit of ill-transparent HFT through proprietary dealing desks and connected hedge funds aligned with the firms. ...

The only resilient solution is local, transparent markets with disintermediation of the controlling banks. Eliminating the information asymetries which allow them to see everyone's positions, leverage and trading activity - and trade and ration liquidity accordingly - would go a long way to preventing further concentration.

4 comments:

Adrian said...

Thanks for sharing this one Bron. I've just brought "This time is Different", and will see if this gets a mention.

Gordon said...

Bron,

Sorry to be off topic as I love your blog. But I have to pursue the silver fabrication issue because I think that it is a rip-off and that you have been blinded to this.

When you first responded to defend the difference between the gold/silver fabrication spread you (reasonably) explained this as a fixed cost that appeared different between the 2 metals as a percentage because of the value of the underlying metal. Fair enough: a fixed cost that will include labour etc.

Irrationally, in your most recent response to my query you state that the cost of labour does not go up because the price of silver increases (totally accepted). Therefore, proportionally, the fabrication cosy - or spread - should decrease, yes? But, it did not.

Without irrationally defending the PM can you explain this?

Bron said...

I'm not across the detail of all the fabrications of each product or how they have or have not changed, but conceptually lets say we sell a 10oz bar for metal + $20 and buyback at metal - $20.

If the metal price is $20, then the all up buyback price is $180 and selling price is $220. Spread is $40 or 22%.

If the metal price goes to $40, then the all up buyback price is $380 and selling price is $420. Spread is $40 or 10%.

The spread in dollar terms shouldn't change, but will in percentage terms because it is being divided by a large metal value.

When you say the spread has not decreased, are you talking about dollar spread or percentages. Can you give me a specific product and example.

If you are talking about the precentage spread not changing then for that to happen we would have had to increased premiums a lot in line with metal price. I have not heard that we have done such a significant price change.

Note: silver coins and bars are sold as metal plus a fixed dollar premium but bought back at metal less a fixed percentage.

Gordon said...

Thanks Bron,

I think you cited the example yourself. To quote:

"The spread in dollar terms shouldn't change, but will in percentage terms because it is being divided by a large metal value."

Together with:

"Note: silver coins and bars are sold as metal plus a fixed dollar premium but bought back at metal less a fixed percentage."

There you have it.