31 July 2012

Deer and elk migrating to gold

Like this from "blogger" David Edwards recent market comments:

"... the recent tone in Washington D C has been one that castigates those who work hard to earn more. Everyone understands that this is a pre-emptive claim on citizens' private assets by a greedy government. During the Roosevelt administration the tone was similar. The result was the same: anyone with money kept a low profile and cut back on consumption and investment prolonging the depression and high unemployment for years.

When you go to a gold mine during hunting season you see lots of deer and elk hanging around the property. These animals sense that they are safe in these no hunting zones. In the coming years, anyone with assets will do the same. The reports from Starbucks and other businesses that service upper income clients is telling me that the migration has begun."

29 July 2012

Shortage followup questions

Some good questions from a thread on my shortage interview at silverstackers.com forum, cut and paste below:


In that interview I was sort of covering the material in this discussion.

The summary text "invest large amounts of capital towards ramping up production" I think got mixed up, what I was saying was WHILE production has been expanded, it is not enough.

When push comes to shove, Depository clients will get preferential supply for collection requests as we have a legal obligation to make delivery whereas we don't have a legal obligation to sell coins to someone off the street, so to speak.


And yet, even though there were two month delivery lead times, it didn't move the price of silver at all in 2008/09. there was no price spike to reflect the demand pressures in the investment market and the apparently constrained supply. It was very interesting as an investor participating and not at all what one would expect. But then the reason was it wasn't the raw material that was in short supply, only the blanks for coins. Although I recall delays on bars as well.

So is the point here that there may be physical delays, but don't necessarily interpret that as a resource availability issue? But if the price does move, what would it mean? Does the price just come down to the paper markets and the manipulations of it by TPTB?


The thing about rationing or high premiums is that it takes pressure off the underlying wholesale market. For example if people are paying 40% premiums for silver coins when the normal is 10% premium, then $30 out of every $140 spent is going to retailers/mints as extra profits rather than buying more silver. If mints were able to keep up then of that $140, $130 would be going to buying (or bidding up the price) of silver.

Excess premiums, whether it is in coins or say PSLV, just means less ounces are being bought. That is why I don't think high premiums are anything to celebrate.

The price is driven by both the physical market and paper market, which is more dominant changes over time.


Would you not agree tho that paper is the dominant market? Say for example just as a thought exercise that just silver alone was for some unexpected reason deemed only acceptable in it's physical form as a means of trade and that all the phantom paper Silver disappeared overnight due to some sort of black swan event.

People who have an PMDS for example cant just pick up the phone and buy X amount instantly and those sorts with unallocated accounts etc cant just use their phone to "say" they actually own it, they have to physically produce it.


Certainly paper often has the upper hand, but many desk-based commentators who aren't in the markets don't realise how much physical is also traded. Blogger FOFOA has a theory that since bullion bank unallocated accounts are fractionally backed bullion bankers are particularly concerned when the physical market starts to suck out metal, draining their reserves (which if left unchecked could take too much physical and result in a bullion bank run). His theory is they push the price UP (not down) as that means the same dollars buy LESS ounces, taking pressure off their reserves. I hope this gives one example of how complex the physical vs paper dynamics can be.

Not sure I understand your point about PMDS. If we went to a physical only market then we would only sell to a PMDS client if we could get/had physical silver.


Now I know it's a far flung what if and an extreme example, and I am not by any means saying that the Perth Mint itself is selling more Silver on paper than what it physically holds, but there are many examples around the world of paper precious metals magically teleporting from or too certain vaults with nothing more than the push of a keyboard and a few typed lines of evidence to say that they actually exist. Literally millions of ounces that would need a convoy of armoured car's and associated security personnel to transport that don't actually happen in the real physical world.


It is a common misunderstanding that the ETF allocations involve physical movement. As most of them store their metal in London, all that is happening is that silver already in the vault (which belonged to someone else who sold it to a bullion bank) is just sold to the ETF authorised participant and they just change a computer record saying that bar in the vault now belongs to the ETF AP (who then transfers title to the ETF trust).


Q: Would you as a personal investor in precious metals trust anyone else apart from the Perth Mint if you invested solely in paper or unallocated Precious Metals ?


It all comes down to the custodian. You either trust them or not. If you don't then not even allocated will be safe. Regarding unallocated, I don't think apart from ourselves and Kitco that there are many who explicitly state that their unallocated is 100% backed, and that is really only possible for businesses which have physical as part of their business. If you are buying unallocated from a bank, then very high chance it is being lent in some form as that is what banks do.


Sorry Bron two questions actually, And this one go's back to the statement I quoted of yours above. Q: Do you think the paper market is manipulated by able bodied self interested parties? Again I ask this with no reflection on the Perth Mint as they are not a Bank or associated with the rise and fall of the stock market etc just on your statement on the physical and paper market.


I would not be surprised if the metals markets are manipulated, but as we are not traders in the big paper markets (eg COMEX) we don't have any evidence one way or the other. However I don't believe the metals markets are suppressed, which I distinguish from manipulation (which is short term). Suppressed means the price is kept lower over a number of years. Those who think this way don't appreciate (or is that respect) the power of the physical market, by which I mean to suppress you ultimately have to supply physical to the market and there is only so much above ground in the hands of the central bankers.


Yes, all metal is NOT held physically at PM... all explained in goldchat.


To clarify, unallocated is backed by physical in our operations in Perth, but also by some physical in transit and temporarily sitting in overseas warehouses on its way to distributors, and by a bit of unallocated held with bullion banks (which is converted to physical on a regular basis). If you're not comfortable with the unallocated business model then go with allocated. 85% of Depository clients (by ounces) hold unallocated, the rest allocated.

Matthew 26:14

"Bron Suchecki, who's in charge of strategy for the famed Perth Mint, is warning all precious metals investors that the next crisis will lead to heightened precious metals demand so expect shortages and mint rationing. This is exactly what happened in 2008, and the next crisis could very well be worse." Curious statement. In 2008 the ass fell out of silver while there was a supposed physical shortage? Defies logic and economic norms.


You're confused because you're not using precise terminology. Restated: "In 2008 the ass fell out of silver due to selling by leveraged paper players needing cash to pay for other losses, while there was a physical shortage of RETAIL sized coins and bars." In fact, the leveraged paper selling, because of arbitrage, would have resulted in associated physical wholesale sized silver (ie 1000oz) bars coming into the market. This is why we didn't have any problem getting hold of 1000oz bars out of London during 2008 even while we were maxed out in the factory making coins.

25 July 2012

Expect Precious Metals Shortages During The Next Crisis

Fear mongering is the stock in trade of most gold commentators/spin merchants it seems, so here is my modest contribution in this interview with Kerry Lutz :)

Seriously, the industry's limited (in the face of mass market demand) production capacity is just a fact, and one I've covered many times before on this blog (see the Shortage label).

I got a lot of grief in this forum discussion about why the Perth Mint wasn't massively expanding capacity for the obvious demand surge that would happen in the future. I covered that briefly in the interview - shock - minting is not that profitable compared to other investment opportunities. The result is no entrepreneurial money goes into building mints.

As an example, look at where the entrepreneurial effort has gone in precious metals - distribution, eg GoldMoney & BullionVault. These are low cost software based businesses which haven't even bothered to build and run their own vaults. That's not a criticism, it is smart business. Who wants to spend $100m+ builidng a start of the art high volume precious metal mint to earn revenue of 4.5% on a 1oz coin? Note, 4.5% is gross revenue, not profit. There ain't much left after operational costs, depreciation, tax etc.

As I say in the interview, it may only be increasing premiums which will draw investment into the industry. However, that will take time to translate into extra capacity. The end result I see is sustained high premiums, which will make pooled metal "products" like Perth Mint Depository, GoldMoney, & BullionVault and, unfortunately, ETFs, a lot more attractive to the mass market coming into precious metals for the first time.

22 July 2012

Puppy pictures

I haven't done any non-metals stuff on this blog, but since Kid Dynamite is always going on about how great his dogs are :) I just thought I'd lay down a challenge to out cute our new addition.

13 July 2012

Sprott is short 1.8moz of silver

Interesting analysis by blogger Kid Dynamite on the latest Sprott PSLV offerring Eric Sprott Must Think Silver is Going Lower!

One point he makes is that there was 0.3920oz per share before the offerring but as Sprott did not buy all the silver, the silver backing the shares is now only 0.3738oz. So Sprott has to buy another 1,858,312oz to bring the ounces per share back up to 0.3920oz otherwise existing holders get screwed as they will have less silver per share than they had before the offerring (calc is number of shares 101,966,125 x 0.3920oz/share less ounces already in the trust of 38112409).

So Sprott is currently short 1.8 million ounces of silver, which is why Kid Dynamite says Sprott think the price is going lower.

The question this raises is what is Sprott's breakeven price above which he starts to lose money. This depends on how much cash he leaves in the fund. Say he keeps same % cash buffer as before. The calc is $889,768,892 / $898,311,957 = 99.05% or 0.95% of total net assets of the fund as cash. Therefore we take the cash the fund has now of $1,095,058,167 x 0.95% = $10,403,052. As the fund currently has $59,734,563 in cash as per Kid Dynamite's calculation, this means he has $49,331,511 to spend on buying silver (59,734,563 - 10,403,052).

So if we divide $49,331,511 by 1,858,312oz we get $26.54. However, he could hold a lower amount of cash. I'd guess the lowest reasonable cash balance would be $8m as this is less than he had prior to the offerring. In this case ($59,734,563 - $8,000,000) / 1,858,312oz = $27.84.

So if silver goes any higher than $27.84 Sprott loses money. If Sprott is as smart as many think he is then $27.84 or thereabouts represents an intermediate top for silver.

What makes this interesting is that while 1.8moz is not that much relative to the market volumes and would not usually move the market if executed properly, all the bullion market players know Sprott has to buy it. Will be interesting to watch the price Friday US time as I'd be surprised if Sprott would want to leave his 1.8moz short position open over the weekend as if there is some market moving news and gold/silver put on a big move, he is stuffed.

06 July 2012

On the imbalance between buy and sell volumes in the LBMA survey

In 2011 the LBMA surveyed its members as part of getting gold recognised as a zero weighted risk asset under BASEL 3. The survey was unique because it attempted to show actual gold market trading volumes, not just the net clearing figures the LBMA provides. The survey showed sales turnover of 5,593,473,000 ounces and purchase turnover of 5,350,183,000 (173,985 tonnes and 166,409 tonnes respectively).

Blogger FOFOA speculated that the difference of 7576 tonnes represents net sales and and increase in paper gold by bullion banks:

"From that LBMA survey, we can see that the LBMA had net sales in one quarter of 7,575 tonnes of paper gold. That’s a gross increase in the amount of paper gold in existence over only three months. 100:1 actually seems conservative in this light. That’s most likely FOREX use of gold as a hedge or a currency play. But even still, the BBs have to hedge their price exposure when selling that much paper gold. Without a hedge, that would be a 7,575 tonne naked short position for the BBs.


There’s no way they hedged all of that in the “gold” market (Comex/mining forwards/GLD). It’s simply not big enough to absorb that rate of flow without rising a lot faster than we saw it rise. So the BBs must be hedging this exposure the way they hedge net positions against other currencies in the FOREX market, simply using complex formulas and derivatives that look at correlations between different things."

FOFOA restated this idea in this interview: "The rate at which the banking system created "paper gold" was 11 times faster than real gold was being mined."

I believe this is an incorrect interpretation of the survey, as I commented: "The reason there is a difference between buying and selling volumes is because not all LBMA market participants were surveyed yet they divided in half all inter-bank volumes (so as not to double count)."

FOFOA responded here and we had some offline email discussions with FOFOA posting a response here. That is the background to my response to FOFOA below.

FOFOA: "Bron has a serious problem with my explanation"

My reaction is driven by a gut feeling that 7,576 tonnes paper creation hedged by some synthetic construction "using correlated asset derivatives" is just unrealistic. An oft made point about gold is that it is not correlated to other assets and indeed its correlation to them changes over time. As a result I am skeptical that one could construct an ongoing synthetic long gold position which would not blow up - just look at the problem JPM had with its CIO's synthetic credit portfolio.

The thesis is that 7,576 tonnes of paper gold was created in Q1 2011. The assumption is that this is not a one off and the outstanding paper gold position is much larger. I understand the FX and other markets are large but if the banks have been doing this for some quarters and not just Q1 2011, then we may be talking some significant positions in the "correlated assets", giving rise to the "whale" problem that JPM had/has.

FOFOA: “some reason why half of the banks sell more to clients while the other half buy more from clients, and then why the sellers (on average) reported and the buyers didn't”

Some reasons as follows. Except for the market makers (and perhaps only the largest ones), each bank would specialise in certain market segments/customer bases. For example, an Australian bank will have a competitive advantage in banking for Australian miners, so their bullion desks would be always buying (paper) gold from miners and selling it to other London banks. We take the miner’s physical and are always (net) selling, which we would layoff with another London bank. Similar would apply to those targeting the jewellery industry, scrap flows, etc etc. I therefore think it is more likely than not that each of the 56 banks would be either net buyers or sellers, with possibly only the 11 LBMA market makers having a more even balance given their central role in the web/network.

I think it is statistically impossible for any bank over a period like a quarter to have clients buying and selling exactly the same amount of ounces. The question is what is a reasonable buy/sell difference. Those with a wide and diverse range of clients (eg market makers) are more likely to have buy and sell volumes closer together whereas a bank who specialises in a market/region or customer base to have a bigger difference. This leads to the quote below.

FOFOA: "the 20 non-reporting banks on average would have had to be buying 11.3 more tonnes each day from their clients than they were selling to clients. Meanwhile the reporting banks would, on average, have to have been selling 6.3 more tonnes each of the 67 trading days to their clients than they were buying from clients. Hopefully you can see why this requires more than just a statistical explanation." [note: the LBMA survey was over 63 trading days]

I see those sort of tonnage volumes to be entirely reasonable considering the amount of paper trade that goes on. Perth Mint for example refines about a tonne or so of gold a day, so we banks would be reporting us as 63 tonnes of net sales. That is just physical and only one small part of the overall mine physical and paper trading. I'd like to do a bit more work on volumes in other markets to get a handle on this issue.

FOFOA “Each trade is assumed to be random as are the choice of non-reporting banks, otherwise we have an "unusual event" that needs explaining, but Bron is not arguing for that and neither am I.”

Trades may well be random in aggregate, but the choice of non-reporting banks is highly unlikely to be random IMO. As intuitivereason noted (July 2, 2012 5:32 AM) 56 is a small sample: "at 36 of 56, there is still a lot of statistical variation possible, let alone allowing for selection bias - there may well also be a greater tendency for those who were net buyers to not respond."

With the commercial sensitivities involved, it is highly likely that there is some skew in who did not report. The banks all compete against each other and given my comment above about each specialising, some of the banks who are net buyers may not have trusted the LBMA process so declined to report, particularly if they are relatively smaller in size. Keep in mind all of the market makers were included and they are likely net SELLERs, (that's where the COMEX short position comes from and would show up on this survey as “client” sales).

I think burningfiat's explanation (July 2, 2012 3:27 AM) that "which 20 LBMA members choose not to participate in the survey? Speculation: Mostly the one's with secretive giant dip buying clients?" should also be considered as a valid point.

FOFOA: "we have three possibilities, one of which is true"

This is too dogmatic, I think it is more likely that we have three possibilities, ALL of which are true. Why can only one be a factor?

There is also a fourth factor. While I agree that the banks don't have a huge naked short position, they would have some long or short position at the end of Q1 2011. We need a guesstimate as to what sort of internal risk limit would be applied - that is how many ounces are they allowed to go short or long.

I think to get to the real net paper creation you have to take the 7,576 tonne difference and first remove for the effect of any skew in who did/didn’t report and factor in the “divide by 2” effect on that skew. You then need to take off any likely net long/short position. What is left needs to be explained. I am going to refine my model over the weekend with the objective of trying to remove these other factors.

I think the LBMA survey has given us an insight into the usually opaque gold market. Understanding what this survey is really saying is a work in progress. Any ideas/comments welcome.