20 September 2011

Catch up

Record prices spawn new wave of China gold bugs: "More investors are moving into paper gold because of the lower capital costs. The prospect of making big and quick bucks by betting on gold's ascent is beginning to look like a fairly easy way to make money." Keep this in mind to temper they hype the next time you hear how China is going to be a huge physical market. One could argue that the gambling like nature of Leverage would have more appeal in the East than the West.

More than 2.8m tonnes of hidden copper stocks: "...how much copper is being stored ‘off market’ in private inventories..." Guess what, there is a lot of off market (in that we don't know who and where) gold and silver. At least we know the overall stock figure is circa 160,000t. When you have that much overhang relative to new mine flow, "...sudden and violent liquidation could pose a major threat to market fundamentals..." Of course a sudden and violent flow of dollars into gold could cause the same problem.

Another Lawsuit Filed Against JP Morgan For Silver Price Manipulation: I nearly fell off my chair reading this from Zero Hedge - "a lot of the content in the filing is regurgitated filler" and "at time reads like a diary of a conspiracy nutjob, and unfortunately that is how the conflicted legal system will see it". What happened to their usual goldbug ra ra ra? BTW, not much in the 100+ page filing and it wasn't very convincing for me.

Dutch Socialist Party puts gold questions to treasury secretary: Note that the Reserve Bank of Australia, in contrast to most central banks, answers these two questions in its past annual reports -

"2) Why are gold and gold loans stated as one line item in the annual report 2010 instead of mentioned as two separate items?
3) Can you give an overview of the yearly yields of the gold loans during the past years?"

If the RBA can disclose this information, why not the other central banks? Interestingly, the RBA has wound back all of its gold leasing. Would you take counterparty exposure to a bullion bank for 10 or 20 basis points return?

08 September 2011

A Fofoarain take on the swiss move

The Swiss National Bank press release: "The current massive overvaluation of the Swiss franc poses an acute threat to the Swiss economy and carries the risk of a deflationary development."

The Fofoarian rephrase: "Too many people are trying to store value in our currency, which is distorting it's role as a medium of exchange. We'd rather you save your wealth in something whose price increase won't impact the economy because it has minimal industrial/productive use but which many people still think is valuable anyway. Hey, I know, how about gold?"

Don't know what I'm talking about? Have a look at this picture and then read this.

05 September 2011

Eric, Catherine and Kid

I forgot to mention I'd left some comments/speculation to this excellent article that looks at the Sprott three months to get my silver story, which includes some graphics of what 600t of silver looks like.

I also liked this blog post by Catherine Austin Fitts, keeping things in perspective:

"Gold is a metal.

If everyone takes all their money out of operating enterprises and puts it in gold and pays people to watch their gold or dig up the earth to get more gold, the economy will stop.

The top guys bubbled real estate and used the money to buy up gold and silver cheap while imploding the emerging markets and forcing their way into big real estate and equity positions there. Now they will allow gold and silver to rise and shift their money back into real estate and land. The emerging markets will continue to rise. And of course there will be interim pumps and dumps along with the way. And technology, including of weaponry, is the wildcard. Our current economy is operating on 50-100 year old technology.

Of course, without law, that which can be stolen and protected rises in value. Operating enterprises require the rule of law or expensive private armies to retain value when times are lawless.

Hence, there is no one answer, no magic bullet. If there is a core, it is certainly not a metal. It is, rather, intelligence both human and divine.

“Happy is the man that findeth wisdom, and the man that getteth understanding. For the merchandise of it is better than the merchandise of silver, and the gain thereof than fine gold.”

Great economies are raised one healthy child at a time. Sound currency certainly helps."

Kid Dynamite's post on the Gallup finding that "Thirty-four percent of Americans say gold is the best long-term investment" is also worth a read along with Adrian Ash's take on it, where he notes "that the gold bubble comes far more in media coverage than in actual investment decisions to date".

04 September 2011

Physical v Paper & PAGE discussion on FOFOA

Below is a cut and paste of some of my comments on this issue at FOFOA's latest post. Also see here for some comments on the GBI system which was the focus of the FOFOA post, in particular the "fully insured" claim, which many operators imply they have.

mortymer: “You will maybe find this one interesting

I had seen the SNA papers and tend to agree with Paul I's "egghead" analysis - in the end there is no forced requirement to split out physical gold from unallocated from leased out, so they can continue to play their games.

Kid Dynamite: “How do you have true allocated storage of any bullion less than a full bar? Ie, yes: bars have numbers that you can put on the statement. Coins do not.”

I've posted on this issue here. In my view "true" allocated can only be for full bars and coins. Bar numbers help in trusting the custodian, but can still achieve the same with unnumbered bars and coins by marking them (eg texta). One way to really test if allocated is being offered is to ask if you can view your metal and if there will be any problem if you mark your coins and bars.

Blondie: “The interview with Ned Naylor-Leyland describing PAGE is a must watch IMO, as I agree that this has the potential to be a real game-changer.”

I'm underwhelemed by PAGE. So there may be a "fully allocated spot gold contract". Guess what, we sell the 300t of physical gold we refine each year at spot in the OTC market - the buyers can be totally private. I don't think we will see much trading moving to PAGE beyond what bullion banks will feed it to meet local demand as other buyers aren't going to want their activities out in the public and visible to the benevolent Chinese Govt.

The Giants are going to continue to deal with the bullion banks in the OTC market where they can wade about without anyone knowing.

Blondie: "The significance I see in PAGE is as a physical gold price discovery market. If it is fully allocated contracts that create the spot fix, then I see an arb developing between the existing (paper-based) exchanges and PAGE where the contracts are backed by physical."

Just to be clear, in the wholesale markets the price of paper unallocated gold with a bullion bank in London and physical gold are the same. Tonnes and tonnes of physical deals (as well as paper) are priced off the London Fixes. The Giants don't need PAGE as a "physical gold price discovery market" - it already exists in the OTC market. There already are arbitragers between paper futures exchange and "contracts backed by physical" ie allocated and spot physical deals.

This is not to say it will always be like this, but right now paper price = physical price. Through all the ups and downs of the past five years and all the rumors of imminent market failure I have not seen paper and physical diverge.

As to PAGE being a way to get renminbi exposure, well that will be interesting to watch but note what Victor said "long the allocated contract at the PAGE and short gold in US$" - the end result is no impact on the gold price because the long cancels the short.

Paul I: “Right now, the gold spot market is like a big, stupid, compliant Labrador, Perth Mint included. It doesn't mind having it's tale wagged by the paper market. PAGE will turn out to be a snarling Rottveiler.”

I'd say that is debatable. Everyone assumes paper is in charge, when the only data we have is COMEX and other visible exchanges but nothing on what goes on in the OTC market, save for some opaque “transfer” numbers from LBMA.

Paul I: “Quite frankly, as an Australian, it makes me sick to see our national gold wealth sold off for pennies on the dollar. I may be naive, but I have to ask why an organization like the Perth mint hasn't long ago tried to maximize value for Australia and Australian gold mines by proposing something along the lines of PAGE.”

I don't think you are getting what I'm saying. Perth Mint doesn't need to start an Australian PAGE – every week we offer 5t or so of physical gold to the OTC market and the bullion banks and other bid for it. You may consider the current gold price undervalued, but that does not mean that we aren't maximising Australia's gold – if the demand is there then those banks bid for it. If anything changing the current private OTC approach to a public PAGE would likely hamper the process.

Paul I: “Instead, we see them pushing massively over-priced "collectable coins" to Grandmas in Post Offices, more demand divertion, very little education.”

Our marketing guys push those fancy coins because they are our highest margin product – that makes business sense, we aren't going to waste prime “shopfront” pushing low margin kilo bars. But that stuff is small by volume compared to kilo bars where ultimately the big dollars are.

mortymer: “To separate physical gold in unallocated from leased would be at this stage too much, they got so far to clear definitions and on what is allocated what is not and that is a progress.”

Agreed. What that document does is make it clear what unallocated is. No professional player is unaware of that, they just believe in the system and thus believe in the “value” of their unallocated, because they are of the system. I do not believe there is any big move from unallocated to allocated at the moment, nothwithstanding the antics of Chavez. If that was the case we would be seeing a lot more bidding for our weekly 5t.

costata: “According to Bron the Perth Mint relies on mine supply of silver for its refinery as very little scrap silver finds its way to them. I see your point about the price of copper and silver. I would be interested to hear Bron's thoughts on this. Is it merely a question of price?”

Those comments about “silver scrap is mainly sold and refined locally because it is not high enough in value to justify shipping it around the world” were primarily focused on Australia, which is more geographically remote, and does not have much silver refining capacity. In other markets silver may be far more mobile.

whiteelefant: “Concerning PAGE: my impression is that any offer which is closer to physical than what the LBMA & Co offers might be taken up and will push the price of Au up. But, I am only a small shrimp and not into finance”

Again, this is an assumption that the LBMA banks are all paper and ignores the huge physical market that exists side by side with paper.

costata: “Recently I came to the opinion that leverage on the currency side was irrelevant. The key point is that the gold itself is not fractionalized. If PAGE said no margin that doesn't prevent someone from borrowing outside the exchange and trading a 100% cash account with PAGE.”

Ha, now we are peeling the onion, or should I say seeing more of the spider's web.

costata: “We should also not underestimate how much the Chinese love to gamble. The paper gold market appears to be going gangbusters right alongside the development of the physical gold market according to this article.”

Very good point, I noted that comment as well. We should not blindly think that Asia is a physical only market and cannot be tempted by the leverage paper offers.