26 May 2013

Delusions so obvious

Time to catch up on some articles that caught my eye this week. First up is Charles Hugh Smith who picked up a quote that really resonated with me:

The obvious can be dangerous. The deluded man frequently finds his delusions so obvious that he can hardly credit the good faith of those who do not share them.

because I've often been on the receiving end of this. The problem with much of the precious metal commentary is that it seeks to explain market action in terms of obviousness, black and white, single reasons. I understand why this is, because many people are confused and afraid and simple comic book explanations are easy to understand, emphatic, and give a sense of control as you know the "real" (sole) reason why things are as they are. People don't want a multi-factor explanation where which factor is driving behaviour changes over time and the factors influence each other. It is too complex.

A good example of obviousness in action is this Alasdair piece (my bolding):

My reason for writing to the FSA was to establish if allegations were true that bullion owned by these two trusts was being used in contravention of custody agreements. If they had any foundation there would be an important regulatory risk for the FSA which should be drawn to their attention, and in any event needed clarification to prevent a false market. Suspicions that this was the case were fuelled by obvious conflicts of interest in the firms concerned. The sensible course for the FSA would have been to investigate the matter with the custodians and give them a clean bill of health, or alternatively take appropriate action in the event of a breach. Instead, they ducked the issue, leaving the impression that there was indeed a problem.

I couldn't have found a better example as Alasdair actually uses the word "obvious". When I see similar certain words like "will", "is", "clearly" I get cautious because it generally doesn't suggest an open mind. In this case the obvious conflict of interest is that the bullion banks are massively naked short while acting as custodian. You can read the letter Alasdair sent here where he states that "it is common knowledge they are running large short positions in those markets. The perceived conflicts of interest have led to widespread public allegations that the assets of these ETFs are being used to satisfy market deliveries in bullion markets ..."

Now whether or not this is true is beside the point I will be making, but if you want the other side then consider Kid Dynamite's comments/debate on my last post. A little more confusing is the statement by Alasdair in this post that bullion banks are now net long, so does that mean there is no longer a conflict of interest?

Anyway, my point is that Alasdair does not credit the FSA with any good faith or that that maybe the situation is not as obvious as he thinks. Here is an alternative viewpoint. Financial firms for a long time have had potential conflicts of interest between their custodial and trading arms. This is not news to regulators and they and the market have developed mechanisms to manage this. What they are interested in is evidence that these Chinese walls are not working. A conflict of interest can exist if a proprietary trading desk is short OR long. Simply quoting "allegations" based on an inference that a bank may be short would not represent anything obvious to the FSA. In addition, consider that the FSA can maybe entertain the possibility that the short position is hedged and is just market making, as Kid Dynamite asserts. Is it then ducking the issue when from their viewpoint what the FSA sees is just a non-evidence/fact based circumstantial allegation? They will expend their limited resources into investigating this when they have many other breaches to look at?

It may be entirely possible that the bullion banks are using ETF metal illegally. Certainly in most jurisdictions precious metals often fall outside financial regulations as they are real property and often not classified as a financial product, creating loopholes as discussed in my CFTC post. The problem with the "obvious mindset" is that it prevents those who hold it from developing an appropriate strategy to resolving it. They are unable to put themselves in the shoes of the people they seek to convince and rather than trying to find that person's hot button concern, they resort to "its obvious" and "you can't trust them" arguments. When these arguments are rejected because they are not obvious to the other person, the "obvious mindset" person sees it as another example of corruption/stupidity, which feeds their distrust even more, rather than "crediting good faith" to the other person.

Having said that, Alasdair's letter to the FSA is cleverly worded to appeal to the FSA's hot button concern, I just think the letter was ineffectual because the evidence presented was not convincing enough nor were the allegations "widespread" or "public" from the FSA's point of view - precious metal bloggers don't constitute "widespread public", as much as we'd like to think us blogger/commentators are that important.

On to Dan Norcini, talking about copper:

Drawdowns in copper stocks are notoriously unreliable signals however as some less-than-scrupulous players have in the past, simply bought copper, moved it out of the official warehouses and stuck it elsewhere all to give the idea that demand is robust. That allowed them to play the market from the long side claiming that supply was insufficient for current levels of demand.

Of course this would never happen in the gold or silver market. Just a thought for those who claim all of the COMEX and ETF metal has gone to China, never to return. Again, there are often multiple factors behind market behviour, it is not black and white. Maybe some of that metal is sitting in other off-market vault, helping to paint the tape?

Regarding the ETF holdings reductions, Dan calculates from recent 13F filings that "if you take the largest institutional investors combined, their selling accounted for nearly 75% of the shares being dumped in GLD", which is interesting as institutional investors hold around 50% of GLD. I think Dan sums up the recent market behaviour well:

"This is where the pressure keeps coming on the paper markets over here in the West. Institutions see no reason whatsoever to own the metal when they can better put that client money to work achieving historic gains in the US equity market bubble. As mentioned many times here - trying to fight the tape is a fool's errand. Traders have to go with the money flow. Investors had better be damned careful is all that I can say. There is a vast difference between trading and investing."

I really liked this article on hyperinflation in Diablo 3. This is a great piece of research and writing with the amusing conclusion that "if a small, straightforward economy generating detailed, timely economic data for its managers can careen so completely aslant in a matter of months, should anyone be surprised when the performance of central banks consistently breeds results which are either ineffective or destabilizing."

The author does wonder that "considering the level of planning that goes into designing and maintaining virtual gaming environments, that some measure of statistical monitoring and/or econometric modeling must have been applied to Diablo 3’s game world." My guess is they did, using the same mainstream economic thinking that informs public policy, that is why it was such a stuff up!

On to a phase space chart from The World Complex of the gold-oil ratio and silver-barley ratio. It results in a very interesting scatterplot chart in which:

the direction of the orbit is the opposite to what I had supposed it would be when I first graphed the scatterplot. I had assumed we would see higher silver (industrial activity) followed by higher oil price, leading to higher food prices, which I thought would scare people into gold. But what we observe since 1984 is the opposite--higher silver prices leads to higher gold prices leading to higher food prices (anticipating inflation?) followed by higher oil.

The peak in the Au/oil ratio in 1988 is a reflection of low oil price rather than high gold. Perhaps the high silver/barley ratio is a reflection of low food prices, which allows more savings in India and China which translate into gold demand, raising the price of gold first, and food prices secondly due to increased demand.

I'm not sure what to make of the increased noise since 1990. It may have to do with the increasing amounts of easy money in the system encouraging more participants in the commodities markets.

Well worth a click through to have a look at his chart and consider where next in the cycle we will move.

To finish some classic Jim Willie delusions:

I can guarantee you in the next several months, or a year or more, there will be NO COMEX GOLD PRICE. ... It’s all coming to a climax where gold is going to be central with a gold-trade central bank and gold priced at $7,000 per ounce.

What is encouraging is the comments to the article, with many less than impressed, so maybe people are tiring of the same old script which never seems to come true. This comment to the article sums it up:

This is classic Jim Willie gibberish. He is saying he “guarantees” there will be no COMEX gold price in the next few months, or maybe a few years. Basically, he has no clue. But hey, it sounds SO GOOD to hear if you are long the metals. Please. This kind of vague, unsubstantiated opinion, offered as a guarantee, well it really is wordless no isn’t it?


  1. Hi Bron

    What kind of consequences will this have on the precious metals market in Asia?




  2. Probably not much, as that exchange failed because it didn't have enough volume, so it doesn't seem like it was an important market.

  3. Bron-

    In a previous post you said, "BTW, Perth Mint once had a new hire in our Treasury department suggest we should trade on COMEX. That got laughed at (and that was before MF Global). We will take our chances in the OTC market, where at least we can pick our counterparties, do due dilligence on them, and trade on our terms." I am curious what behavior Comex has engaged in that led to that statement. Thanks.

  4. MF Global. Even prior to that it was clear you were relying on the exchange/clearing house. In any case we didn't/don't have a need to use COMEX as we don't have exposure to metal prices.

  5. Bron, not to be rude or anything, but what is your purpose here? We all understand that no one really knows what is happening because there is virtually no transparency in this market. Do we simple ignore the market and stay out? People are trying to give different opinions on what they see happening amd what they think is going to drive this market. If a person is foolish enough to trade off the info who's fault is that. Certainly drawing people's attention to the possibility that something is amiss is not unwarranted. The cause of the irregularities is the issue.

    Finally, let me throw my two cents of speculation on what is likely behind all the conjecture in these markets. Politics, mainly China's snub last fall to the talks in Japan following the FED's QE announcement. Since then they have been on a tear, buying everything in site. Now place on top of that the price drop in April, followed by a moved up China/US Summit to June that on the surface is being billed as talks on trade and territorial disputes. I do not doubt that they will be discussed these issues, but I also think China's gold purchase are the main reason for the urgency. China can't catch up to the US if the US has unlimited money to spend on anything they want. Now gold's role as the anti dollar becomes the tool to stop the printing machine. Not so much for economic reasons, but geopolitical necessity. Likely all the market action is forced by this reality and the banks and whoever else is more then willing to make a fortune and call it their patriotic duty or "GOD's" will if you prefer. All while the regulators close a blind eye.
    Mind you this is pure speculation on my part, but I would submit it is much closer to reality then most realize. The error of the commentators is to believe that the markets will eventually trump the manipulations, when in fact it will be unpredictable geopolitics that is the real straw likely to break the camel's back.

  6. Ferdinand, my purpose here is to remind people keep an open mind. The fact is that there are many who do not "understand that no one really knows what is happening" and instead think that they know what is going on. It is probably a futile attempt as such people won't read this blog but it is worth saying.

    I think your geopolitical point is valid, with so much gold held by central banks we have to ask why, and why they haven't taken this great opportunity to permanently sell their barbarous relic into the bull market.

  7. Bron. Thanks for the time you take to share your knowledge and understanding. Being a natural skeptic, I find your counterpoint very helpful in maintaining a balanced view of the PM markets.

    A few weeks ago you reported that you (Perth Mint) were not seeing supply chain issues other than essentially retail products (coins, small rounds, etc.) Is that still the case?

  8. RE Jim Willie gibberish
    See For pundits, it's better to be confident than correct

    By and large, say Smith and Wooten, pundits get a better audience through confidence and the excitement it generates.

    "There is some psychological literature on the idea that people hate uncertainty," says Smith. "The fact that people don't like uncertainty would suggest that they don't like the idea of a Nate Silver sort of person standing up there and saying, 'I'm only 90 percent sure.'"

    "I like to think of it like a roulette wheel," says Wooten." If you have somebody just placing bets, that person is kind of boring. But if you have someone going, 'Oh, yeah! It's red!' and they are confident, that's the person that you are interested in."