26 January 2012

Inconsistent nonsense

Worth reading this response by Victor the Cleaner in FOFOA comments to this question: "At the moment, in order to influence the Gold price downwards, all that needs to be done by the authorities in LBMA and COMEX, is to raise the margin requirements."

This is complete and utter nonsense.

LBMA is a trade association and not an exchange and as such does not set any 'margin requirement'. The LBMA member firms are typically those banks and other financial institutions that trade gold and silver OTC in London, but non-members around the world also trade OTC with these institutions.

When Newmont has some trucks on the road on the way to the refiner, they might want to sell that gold immediately to eliminate any further price volatility from their accounts, and so they might phone JPM and sell that stuff forward. None of the two counterparties is a speculator here. Newmont does have the real stuff, and JPM does have the cash. So even if they would require collateral, this would not influence the price.

Yes, there are probably some raw recruits who follow websites such as TF and who trade COMEX futures in under-capitalized accounts. Yes, CME occasionally raises the margin. Yes, they may just be checking who is the under-capitalized novice and who really has the cash in order to purchase the gold for the contracts they hold. Yes, they may just rip off the clueless novice for fun (and money). But to think this would set the spot price of gold is quite a hubris.

The OTC market is ten times bigger than COMEX, and so it pushes COMEX around in a way that most COMEX-fixated goldbugs don't understand.

If you want to keep gold cheap in the long run, you need to create a huge volume of gold loans, expand the 'money supply'. If you want to manage the price of gold intra-day (and yes, there is indeed statistical evidence for this), you need to sell a lot of gold at spot in a short period of time. But you can do this only if you are a credible financial institution and only as long as you can hand over the allocated whenever your counterparties request it. So you need to understand extremely well what you are doing and how much physical per paper you need to be able to show. Hiking the COMEX margin is a side show.

What I find rather disappointing is the extremely poor quality of the discussion that is presented on the typical precious metal websites. This is financial product pushing of the same quality as pre-1999 when they IPO'd the companies that sell dog-food online.

Here are FOFOA, people discuss a very good reason for owning gold. For some reason, the mainstream goldbug websites totally ignore the good reason and push gold with inconsistent nonsense instead.

Why is that? Want to scalp PSLV? Want to create a mania, sell them financial products (including GoldMoney which is no longer 'money' by the way) and then when the big blackout comes, grab the gold for cheap from those who sell in panic because they never understood why they owned it in the first place? Very sad. And when the Financial Times calls the goldbugs confused idiots, sadly, there is even some truth in this statement.

If Victor keeps this up I'll be out of a blogging job.

4 comments:

Jeanne d'Arc said...

Yes, Victor always makes a great contribution at Screwtape too. Clear, level-headed arguments against the utter nonsense that's spewed out on the silverogosphere (my new word of the day) at an alarming rate.

Victor - if you ever fancy Bron's challenge to take him on at the blogging game, we'd be delighted to have you guest post at Screwtape any time you like..!

Michael H said...

victor already has a blog. What is there is very informative, though unfortunately he hasn't updated it for a while.

http://victorthecleaner.wordpress.com/

List of posts:

Backwardation and Declining COMEX Inventory

Synthetic supply of gold?

The Gold Forward Offered Rate (GOFO) – Fever Chart of the LBMA

Negative Lease Rates Revisited

Bullion Banking with Alice and Bob

Backwardation in the Case of a Monetary Metal

Justin said...

"If you want to keep gold cheap in the long run, you need to create a huge volume of gold loans"

How does this keep gold in the long run? Short run maybe. I would suggest this is exactly what is depreciating the $ against gold in the first place, since ultimately every $, being inextinguishable debt, is a gold loan.

Elly said...

Two obsrvations:

Number one, what holds true for gold, does not necessarily hold true for silver (a much lower-value metal). In the case of silver, it may clearly be far more feasible to put "COMEX pressure" on the market.

Secondly, in the gold market, COMEX may "push COMEX around" rather than vice versa, but COMEx is still a somewhat useful *reflection* of market expectations of future supply and demand.