09 December 2013

Tight physical supply

Readers have asked me to comment on Koos Jansen's report of tight physical supply. There are a few interesting observations made in the article I have some comments on.

1. "sometimes when they get gold in, it’s coming from the back corners of the vaults. He knew this because these were good delivery bars marked in the sixties"

This is not unheard of. In June 2006 the LBMA issued a note saying that "in the past year, an increasing number of gold and silver bars have been re-appearing in the market after having been held for many years in vaults (whether in London or elsewhere) ... some of these “deep storage” bars may no longer be regarded as acceptable, either because of physical defects or poor marking." They followed this up in Oct 2007 with another clarifying note.

Unfortunately, Warren James has not had time to develop an aging analysis of the bars in the ETFs from his bars database, and the age of those being redeemed, which would provide additional information on how far down the barrel the scraping is happening.

Given the first reports of deep storage bars come from 2006, it is not surprising that "sometimes" refiners see old bars. If they had said they "often" or "frequently" got old bars, then that would be a lot more interesting.

2. "there have been several times this year on which they were unable to source gold, this shocked me. They’re bringing in good delivery bars, scrap and dore from the mines, basically all they can get their hands on. This gentleman has been in the business for 37 years, he was there during the last bull market in the late seventies. I asked him when was the last time this has happened, that he was unable to source gold, he said never"

All I can say is that the Perth Mint hasn't heard of any problems sourcing 400oz bars out of the bullion banks ex-London at this time, so I'm not sure what to make of it. The quote is third hand, I wonder if "unable to source" was meant as "unable to source at par" but that subtlety was missed. I reported in May that 99.99% 400oz bars were attracting a premium, maybe it meant 99.5% bars are getting a premium now? The wording however seems clear about outright inability to source.

3. "They put on three shifts, they’re working 24 hours a day, and originally he thought that would wind down at some point. Well, they’ve been doing it all year. Every time he thinks its going to slow down, he gets more orders, more orders, more orders. They have expanded the plant to where it almost doubles their capacity. 70 % of their kilobar fabrication is going to China, at apace of 10 tons a week. That’s from one refinery, now remember there are 4 of these"

Perth Mint is seeing good demand for kilo bars from China, but nothing like the premiums we saw earlier this year. We refine around 5-6 tonnes a week, so those numbers accord with what we are doing.

4. "in China there are 6 LBMA refineries but he has never seen a Chinese gold bar, they’re keeping it all"

Warren confirmed this when investigating Dominic Frisby's statement from HSBC about it, and in this follow up. Of all the ETF bar lists that Warren downloads he hasn't see one Chinese gold bar yet. No doubt no newly mined gold is getting out of China.

5. "What I do know is that we are on the threshold of a situation that has never occurred before. A squeeze is imminent, it could take 3 months or 6 months, but all I know is that it’s coming, and I know that with 100 % certainty."

I've seen a lot of 100% certainty that the fractional bullion banking system is about to blow up, starting in 2008 from the financial crisis. What I watch for is bullion banks desperately bidding on our refining output, as I said in this post or "just watch Bullion Vault and Gold Money - which are backed by 400oz bars and which deal in that market every day - for reports of difficultlies in getting 400oz bars and restrictions on how much gold can be bought, and/or if they start to add on a "special" premium to their spot price." I'm not seeing that desperation by bullion banks, nor premiums from Bullion Vault or Gold Money on 400oz bars, so at this stage no confirmation.


  1. you wrote: "maybe it meant 99.5% bars are getting a premium now? The wording however seems clear about outright inability to source."

    Could this then be the cause of the recently backwarded fut. curve? I.e what can be delivered is not worth the spot but spot+(higher)premium?

  2. Bron, yes I got hooked with the kilo premium. Is there a way that I can track this?
    If I look-up Degussa or PerthMint buy prices they still display a small discount vs spot.

  3. Any premium on 9950 bars is not incorporated into spot quotes, that is why it is a premium. How that hides the real physical price is a whole other post.

    The kilo bar premiums I'm talking about are in the wholesale market and you won't find them quoted on a website, you might see some reference to them in news article when they talk to a refiner or trader.

  4. thanks Bron.

    "Any premium on 9950 bars is not incorporated into spot quotes, that is why it is a premium"

    My thinking here was that if I have to pay spot+premium for a deliverable bullion, then ceteris paribus, a small contango won't be sufficient to trigger a condition of arbitarge on the curve. Even for a wholesale dealer.

    Pushing it a bit further, and keeping lease rates unchanged, I would expect a gradual shift to a "new" term structure, parallel to the first but converging to Spot+premium.

    Does this make sense to you? On my side I can not have proof of what I am thinking as I am not able to know what premiums actually are being paid.

  5. Yes, you are right, contango may be evident looking at spot but if there is a premium then it really isn't contango, but this is visible outside the wholesale market. There are other costs as well like shipping physical (if you are arbitraging a lot) that can make a small contangos or backwardations unarbitragable. Hence why I think people who jump on occurances of small backwardation are making a mistake - it is often just noise.

  6. "a small contango won't be sufficient to trigger"

    ooops..just realized I wrote contango while I meant backwardation...guess your cost-answer refers to backwardation anyway.