Gold Chat

Inconsistent nonsense

2012-01-26T22:51:00.000+08:00

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.

Survivor Bias and TBTF Tyranny

2012-01-23T15:57:00.000+08:00

London Banker "has been a central banker and securities markets regulator during a varied and interesting career in global financial markets" and is a very credible commentator IMO. From his latest:

"Perhaps gold is being used as collateral for margin and cash liquidity, sold by counterparties to bring the price lower, leading to margin calls for even more. A crisis arising from a major default (Greece, Portugal, a huge bank) would force the price lower still, when the collateral would be exercised on default. Following on, the price might rocket again to enable the conspirators to seize outsize profits. Just a scenario, mind you! (Although, I note that Lehman's counterparties reported record profits through much of 2009.)

What is left of the global markets becomes a game of engineered survivor bias. Only those operating outside the law and with unlimited regulatory forbearance can win while the rest of us lose."

Some may remember my comments on FOFOA blog about how "Bullion banks are like spiders in the center of a web. They can feel the twitching of the flies in the web and determine the mood of the market better than anyone else and often in advance of others."

London Banker again: "Their top down view of clients' trading and custody portfolios and cash positions and flows puts them in a position to exercise tyranny. They can game their clients, taking advantage of superior information, credit and liquidity to ramp or crash targeted markets as needed to precipitate a crisis."

In other words, it is not just about avoiding debt (or its variant, leverage/derivatives) but also avoiding having most of your positions and trading with one bank.

Reading this stuff makes me comfortable that the Perth Mint will be one of the few left standing after all this is over. We don't engage in speculative trading/risk taking and the AAA rating means we don't have to beg and put up collateral with banks to be able to do the covering trades and other transactions necessary to keep the business running.

In the coming flight from risk, it won't just be about moving to cash (and hopefully many moving to precious metals), but it will also be about a flight to riskless/conservative counterparties. The problem for those looking to store precious metals is that at that point the Perth Mint is likely to run out of capacity - both in physical storage and also insurance (as we fully insure - few others do). All that will be left then is personal storage, which won't be a problem for those with small holdings. But for those with multi-million dollar holdings it will be tough as there aren't many non-bank fully insured custodians.

The lesson is to prepare now, which I'm sure all my readers have, as it is going to get nasty.

Gold Scams

2012-01-20T17:00:00.000+08:00

I've got a post up on the corporate site you will like about gold scams - hat tip Kid Dynamite for the lead story. I've included three real life examples of scam emails that the Perth Mint has received. You will (or won't) be surprised that it is not just average people fooled by this stuff - we have been contacted by suburban accountants and lawyers trying to facilitate a $100 million deal without pausing to think why a legitimate buyer wouldn't just come to us directly and save themselves a 1% commission.

Expert says: Money spent on gold is practically wasted

2012-01-18T14:31:00.001+08:00

Regular readers of this blog know I watch reports from Vietnam as an indicator of how Governments deal with large flows of money out of fiat and into gold. Non-first world countries feel this more I think and thus they give us a view into the future as to how first world countries will respond when they get hit with a real loss of faith in the ability of fiat to hold value over time and/or a view that there are few productive investment opportunities in the economy.

This Mineweb article on India raising import taxes on gold and silver has some interesting quotes in this respect:

"...this hike will discourage imports ... that is what the government wants, since imports have made a huge dent in India's growth story and growth seems to be flagging"

"The shift away from financial savings to something which will just lie in lockers around the country could be a large contributing factor to lower growth..."

"Another expert with a nationalised bank pointed out that money locked up in the yellow metal effectively disappears from the economy to become jewellery or sits idle in cupboards and bank lockers."

"Money spent on gold is practically wasted and it is also excluded from the financial intermediation system. Imports needed to be curbed."

"The massive jump in gold imports has also led to an increase in current account deficit."

No surprise that most of this plays on the "gold is useless" meme. In actual fact I agree with that. One's savings are better invested in productive businesses and entrepreneurs rather than an inert metal.

However, what the financiers, technocrats and politicians don't get is that movements into gold are a clear signal or vote by savers that the economy is crap. The solution is not to block the signal, but to solve the underlying problem. Actually the way to solve it is to get out of the way and stop fiddling with the economy but that would put them out of a job I suppose.

What these guys are doing is taking painkillers so the pain in their chest won't bother them. Then they'll all be surprised when they get a heart attack. Indeed, money flowing into gold is painful. That's the point.

Emotions, Premiums and Backwardation

2012-01-13T15:17:00.001+08:00

Good interview between Jeff Lewis (silver-coin-investor.com) and Grant Williams (vulpesinvest.com). Grant makes a very good point on emotions influencing how events are interpreted (my emphasis):

" It’s important to try and keep a sense of balance because the way things trade, particularly in silver, it’s easy to get fixated upon an idea and to blame every move on that particular idea. In the case of silver, the big theory about silver is the manipulation of the COMEX futures. ... It’s a dangerous game to sort of ascribe every single move in an instrument to a construct that has yet to be proven beyond any doubt. While I suspect there is definitely something untoward going on the silver futures as Bart Chilton has intimated in his comments this past year. I think it’s a very dangerous game to not have a balance, to just simply look at the way markets behave, look at the extraneous events that may have an effect and cause the de-leveraging or liquidation and to try and get a more rounded picture of why something moves now."

Later he says what the extraneous event was:

"I think a lot of that downdraft we saw in both gold and silver going into year end, was just people who are having to raise cash and selling the thing that they had a little bit of profit built into. Now, once they start going down, the shorts are going to press that; and so these falls get a lot more vicious than perhaps they would be in just an orderly market where people were looking to sell a bit of precious metals to raise some cash for year end. But as I say, you have to try and take your emotions out of this thing."

Interesting here that Grant says that the initiator of the price drop was year end selling, which was further "pressed" by speculators. I made a similar point in this corporate post when talking about bullion banks being aware of falling Indian consumer demand. My point, and Grant's, is that not everything is a manipulation (as in being initiated by speculators) and sometimes speculators are just riding a physical market trend. Don't drink the Kool-Aid (or should that be "Silver-Aid") of the pumpers which blame every price drop on manipulation but who never question any price rise.

As Ted Butler says (my emphasis) "... when silver experienced two separate 35% price declines in a matter of days. Such a decline in a world commodity for no observable supply/demand reason is unprecedented and I would say impossible in a free market." Same applies when you have the London AM Silver Fix increasing 20.1% over 24 hours from $10.77 to $12.93 on 18 Sep 08 (note: I can't find two 35% price declines in London Fix data, Ted must be talking intra-day).

Some who has been drinking the Silver-Aid is Tyler Durden with the silly headline Physical Silver Surges To Record 30% Premium Over Spot, In Backwardation. Regrettably, it was picked up by Money Morning Australia (from whom I'd expect better), to which I left this comment:

"What that chart tells us is that PSLV is a closed end fund with some possible tax advantages with good marketing, hence the premium. In the real physical wholesale silver market which is not constrained by a limited number of shares, Perth Mint is not having any problem acquiring, or selling, silver at spot."

Tyler must be drinking a lot of Silver-Aid or desperate to alleviate the cognitive dissonance of a circa 25% increase in COMEX silver warehouse stocks since mid-2011 to claim that a stock exchange listed trust is as good as and representative of cold hard physical in your hand.

Further proof that Tyler is suffering is his conclusion that the backwardation discussed in Keith Weiner's appended article "means, although for those who like the punchline here it is, as above: shortage" when, if you read Keith's good article, he says at the bottom that (my emphasis) "In a normal commodity, backwardation means shortage. ... But in gold and silver it means something else entirely. People have the metal. But for whatever reason(s), they choose not to take this free money. In the silver market right now, trust is in short supply."

Why everyone thinks that Zero Hedge is a credible source when in this example (and I have others) he can't even understand that Keith is saying there isn't a shortage of metal, there is a shortage of trust. I covered this idea in the Gold Standard Institute's 2009 Canberra seminar - see this post on Degrees of Distrust.

I've left this comment on ZH, let's see what comes of it:

"Perth Mint does not incur any premium when it pulls physical out of London. Whoever is feeding you that is making a fool out of you. If you really are independent and after the truth, more than happy to chat with you anytime - you have access to my email in my profile."

There are plenty of good reasons to hold precious metals I don't know why people resort to this shortage and premiums meme - maybe it is just a simple idea easily understood and communicated compared to some more intellectually dense analysis of the market's supply/demand/stocks.

Anyway, to finish on a more upbeat tone, here is Grant again:

"... we are left with an awful lot of strong hands holding silver now. I’m here in Asia, the futures price is really more of an irrelevancy. Over here it’s all about physical metal both in gold and silver and so we see a lot of buying of physical metals here in Asia when the price comes down on the COMEX and we see premiums expand because it’s very tough to get delivery."

I focus on the base trend for precious metals and see it driven by increasing numbers of strong hands. The day-to-day volatility (down AND up) is driven by leveraged money of speculators and hedge funds and bullion bank prop desks. I'd suggest ignoring that volatility, otherwise you waste too much emotional energy stressing about it. Just buy your PMs (or dollar cost average in) and forget about it and relax. That's what insurance is for.

Reasons For Gold’s Weakness

2012-01-10T09:43:00.000+08:00

I've got a post up on corporate site riffing of a recent Jeff Clark article on the same issue, adding in some comments on declining Indian demand and how the bullion banks would have played it. Click here to download the pdf article.

I'll be posting a bit more stuff on the corporate site from now on as I'm off a project I've been working on, so more time to focus on the commentary. You'll see from the pdf format I'll be writing under the Treasury department name. We are looking to beef up the commentary and analysis, maybe with a dedicated subsite under perthmint.com.au. More info to follow and will be interested in feedback and suggestions.

Gold The Most Explored Mineral Commodity

2012-01-04T11:21:00.000+08:00

Got a post up on the corporate blog on how 50% of all money spent on non-fuel mineral exploration during the last 15 years was spent on gold exploration.

And from the "who can make the most dramatic price forecast" department comes The Possibility of $1,000 Silver before Hyperinflation. Has anyone made a higher call?

To save you reading the whole article, here is the key logic behind the headline:

"...with gold at this relatively conservative top of $10,000 - if silver is at its historic 16:1 average in relation to gold - silver will be $625 per ounce. We have also explained above how it is entirely possible for silver to overshoot this 16:1 average, which is normally what happens when a trend has been misaligned for such a long period of time. If silver does reach a 10 to 1 ratio as it has done before at different times throughout history, then we would be seeing a price of $1000 per ounce..."

I suppose when you start off with the assumption that $10,000 gold is "relatively conservative" then $1000 silver is not far behind.

The key "gotcha" is in the headline: "before Hyperinflation". That is not a situation in which you want to trade your silver for $1000 of soon to be worthless fiat.

Is PAGE dead on PBOC ban on non-Shanghai gold exchanges?

2011-12-27T22:54:00.000+08:00

Mineweb (ex-Reuters) is reporting that "Gold exchanges in China outside of two in Shanghai are to be banned, authorities said in a statement released on Tuesday."

Looks like the much hyped Pan Asia Gold Exchange is dead. Not sure where this leaves those who claimed that it "will ultimately destroy the remaining short positions in both gold and silver".

I will come back to this story but for the moment I want to see how the pumpers and hype merchants spin it, or unspin what they said before.

I also find it interesting that this story breaks at the same time as China Daily reports that "China should further diversify its foreign-exchange portfolio and make more gold purchases when the metal's price dips but is still at a relatively high level, a senior central bank official said on Monday."

What is China's game re gold? How can we weave these two stories into a coherent explanation?

Safety cookies

2011-12-23T14:04:00.000+08:00

What are safety cookies? Gold coins. Very amusing charaterisation in this article from Terry Coxon of Casey Research

Terry sees safety cookies (or coins in your pocket) as the first rung on the ladder of internationalisation. In light of the recent IRS reporting requirements, which require US persons to report "all worldwide assets subject to exceptions and applicable threshold amounts", you could also call coins privacy cookies.

Unsegregated Allocated

2011-12-22T17:29:00.000+08:00

Following on from this post from 2009 where I identified five types of storage (Segregated Allocated, Unsegregated Allocated, Unsegregated Physical Backed, Unallocated Fully Hedged, Unallocated Unhedged), we now have confirmation that "Allocated" metal at a bullion bank is unsegregated from this interview with Kyle Bass (42 minute mark) where he talks about bars being all over the place when they did an audit.

The unsegregated nature of bullion bank allocated is why Bob Pisani picked up the wrong bar in his visit to the GLD vault as part of a HSBC promo.

This unsegregated storage is not necessarily a problem and would not make a difference in any bankrupty of a custodian as the key "segregation" is the specific bar numbers and weights in the client name. Whether bars belonging to two different clients sit together on the same pallet or are on separate pallets separated by air, I cannot see making a difference.

GoldMoney is no longer Gold Money

2011-12-22T10:12:00.000+08:00

Digital Gold Currency Magazine is reporting that GoldMoney is suspending the ability to make and receive payments in precious metals to or from other GoldMoney customers due to the "global increase of compliance requirements for payment service providers."

This capability was the key differentiator of GoldMoney to other online precious metal storage businesses. It is an unfortunate development for gold standard advocates.

The decision was not entirely driven by increased regulations as GoldMoney also indicate that "our customers’ use of the metal payments and currency exchange services is not significant." Looks like a case of disporportionate compliance effort for GoldMoney on something that didn't drive business.

Interesting then that customers have voted and said they aren't really interested in gold as money. Possibly this may change if those customers are faced with high inflation or banking system instability, but it will be hard for GoldMoney to restart the functionality and catch up with any regulatory requirements in place at the time (assuming there is any regulatory tolerance for alternative payment systems at that time).

Freegold anyone?

Has Gold's Uptrend Been Broken?

2011-12-20T14:15:00.000+08:00

I have a post up on the corporate blog featuring a Sharelynx log chart of the gold price.

There is also a very good video of why gold was (is?) favoured as money over other elements/metals in this post The Science Of Gold

And in response to this cheeky question from JR re that post "Is the Perth Mint claiming that gold is money due to its unaltering quality!?", the answer is No. The "What others are thinking" category on the corporate blog is for non official views and maybe the wording "gold is all but unrivalled as the outstanding candidate for money" could have been a bit more qualified in retrospect. :)

My thoughts on Freegold

2011-12-17T22:03:00.001+08:00

A reader, LS, asked for my thoughts on the following topics:

1) freegold
2) the gold for oil trade
3) the current price is not a real physical price of gold because of happenings in COMEX/LBMA
4) do you believe the current world affairs will resolve itself towards freegold or something similar?

Firstly, I haven't had the time to read FOFOA in depth given the amount of material and thus give it justice. My comments here are therefore tentative thoughts.

Freegold is very interesting and I can see the logic of the idea of leaving fiat to perform the medium of exchange role and gold the wealth store role. I have a feeling free banking (see also) and a restriction on maturity transformation would need to be involved for it to work. There is a hell of a lot of discussion condensed in that sentence, more than I have time for at the moment.

I would also argue that Freegold needs to allow gold leasing but not gold lending. By "leasing" I mean as in leasing a car, ie physical asset rented (not borrowed and sold). Manufacturers of gold products like the Perth Mint could not operate without leasing because with Freegold's ban on lending of gold and other financialisations it would be difficult (impossible?) to hedge against gold price movements.

This leads to my next point, which is that the gold price under Freegold would not be stable and still exhibit some volatility. This is because under Freegold people can save excess wealth either in gold or by investing in productive enterprises (ie true investment). Human nature being what it is we will still have overestimation of the success of productive enterprises, thus failures, thus business cycles, ths varying preferences to store wealth in gold versus investments.

On the Oil/Gold idea, I don't have an option as this is not an area of FOFOA I've looked at much.

The current price is a real physical price as physical buyers and sellers of size (giants) are willing to exchange at that price. When aversion to counterparty risk really hits market players (MF Global you'd think should have been enough), then we will see a divergence between paper and physical.

As to the fourth question, well this is bound to my answer in the paragraph above, which is a necessary condition, but not sufficient, for Freegold to emerge. You would also need consensus that a gold standard is not the answer, and there are strong forces working towards that end. Possibly the biggest problem is getting people to understand the reason why financialisation of gold needs to be banned. How it will end is impossible to predict.

Either way it is going to be exciting to see how it plays out.

FOFOA, New Vaults and physical/paper price

2011-12-15T17:54:00.000+08:00

A couple of weeks ago FOFOA made the following statement:

Do you remember the stories about HSBC clearing out space in their vaults, or JP Morgan building new vaults? What could be the explanation for this if the aggregate gold stock is so stable? Then it occurred to me that unallocated storage is much more space-efficient because the gold sits stacked on pallets. Allocated gold often gets put into cubby holes to assist in recordkeeping. That takes up much more space. So the process of allocation after many decades of non-allocation requires an expansion of vault space. This is how I now interpret these stories.

I left a comment suggesting other reasons for new vaults:

1. Investment's share of demand vs jewellery/industry is much higher now compared to past, thus more going into vaults rather than around necks.

2. ETFs and others (eg Goldmoney) share of investment demand vs coin/bar is greater compared to past, thus more going into vaults rather than backyards.

3. Industry consolidation during gold bear market meant vault closures and thus increase in utilisation of remaining vaults, leaving less spare capacity to absorb above factors before new vaults were needed.

Just to clarify that last point, say there were 10 vaults with capacity of 100oz but each was only holding 60oz. Total spare capacity is 400oz. Then you have 3 vaults close during gold's bear market and metal is moved into the remaining 7 vaults. You now have 600oz in 7 vaults, leaving only spare capacity of 100oz.

Another point is that allocated metal is not "often gets put into cubby holes". Allocated does not rely on physical segregation by client. For example, you can have a pallet of 32 x 400oz bars with 32 owners of each specific bar number on that pallet. My guess is that except for all but the most paranoid client (mostly likely central banks), most allocated at bullion banks is held this way, rather than piles segregated by client.

I also forgot to mention that my guess is that the amount of physical supporting unallocated metal accounts with bullion banks has increased, that is the fractionalisation has declined. This puts further pressure on vault capacity.

Evidence for this is that whereas unallocated accounts were free a number of years ago, there is now a small fee on unallocated. My guess is that the physical turnover/redemptions have increased in line with a more busy gold market and thus bullion banks have needed to hold more physical to back their unallocated to deal with day to day fluctuations.

Of course it could just be the banks going for a fee grab if they felt their clients would just accept it.

And while I'm doing posts on my comments on FOFOA's blog, here is another for those who don't follow the FOFOA blog comments closely - and I can understand that considering some posts get 400+ comments (link here):

Re 1) [major refiners would start posting their own price for physical gold, having their own auctions, making the trading volume public], that is what the Perth Mint already does. The 5 tonne or so per week we refine is currently auctioned. Settlement can be full cash, but mostly is done in London paper gold plus a cash premium. I just watch this premium, it will tell me when paper gold has really disconnected.

BTW, miners sell their metal to us either for cash or swap for paper gold (which they then on trade).

The system will break when miners find few willing to take their paper gold or the price offered is much lower than what we will pay. And in that situation we will always be after to better the offers they get because we are getting better prices for the real physical at the other end.

Because the Perth Mint stands as intermediary between physical buyer and physical seller, the miner is always informed as to the real price of gold.

We are not reliant on the London market to tell us the price, we make a Perth price every day. However currently London is a convenient settlement mechanism for us the miners and the buyers, but it is just to help the flow.

Negative Gold Lease Rates (again)

2011-12-14T12:46:00.001+08:00

If Tom from Metal Augmentor keeps on putting out great stuff like this post on negative lease rates, then I'll be out of a (blogging) job.

It is heavy going but a comprehensive discussion of the issue with a dramatic speculation that "The selective collateral nature of the tri-party format may force bullion banks to eventually declare their unallocated LBMA gold accounts as backed by 100% physical bullion." Other key points if you don't have the time to read the 8500 word article:

"leasing is probably done directly by the bullion banks on behalf of commercial banks for a fee. Instead of pledging the assets acquired with the sale proceeds of gold leased pursuant to a carry trade, the borrower of gold now pledges existing collateral that it could not otherwise sell without incurring a loss. The central bank accommodates the gold leasing by accepting a wide range of collateral that would be otherwise prohibited in conventional funding schemes"

"An outright sale of gold could always be hedged by acquiring a gold forward contract. Therefore, even if gold leasing has not experienced a recent resurgence, the increase in the gold forward rate indicates that owners selling gold to generate liquidity still want their gold back once the funding need has abated. The combination of a falling gold price and rising forward rate is quite a bullish feature of the gold market that is lost in the reporting on negative gold lease rates."

"the persistence of negative lease rates could be accompanied by the emergence of something entirely new: The result could be negative gold “lease rates” as gold price expectations may create an entirely new phenomenon: cash borrowed to buy gold for future delivery (what I call “gold bonds”). In effect, this is the equivalent of gold owners forward selling their gold at higher and higher prices, and receiving cash up front to be used for current liquidity needs. The above scenario may appear a lot like the current futures market because it involves leverage but the difference is that “gold bond” transactions are 100% backed by metal."

A few of comments:

Tom: "From the perspective of the borrower (typically a bullion bank or its customer, a hedge fund), gold was historically leased as a way to fund a gold carry trade under which excess returns could be earned by using the sales proceeds from leased gold to purchase highly-rated securities meeting the central bank’s collateral requirements."

Bron: This is by far the major use of leased gold, but gold can also be leased by users/manufacturers of gold products to provide physical funding of their work in progress inventories, which does not involve any sale of the leased gold.

Tom: "As just mentioned, the gold (or silver) lease rate does not represent the actual rate at which lease transactions are being done in the market. The published lease rate is simply an indicated value derived from two related variables, the gold forward rate and LIBOR."

Bron: In support I would say that the Perth Mint has always paid positive lease rates when borrowing gold, although it does so for inventory funding rather than carry trade etc reasons. Note Perth Mint borrows without posting ANY collateral because of the West Australian Government's AAA rating.

Tom: "a customer may execute a gold swap with a bullion bank pursuant to which the customer’s physical gold is initially stored in an unallocated account and used as the collateral for dollars loaned to the customer. The bullion bank then sells the gold from the unallocated account to replenish its funds and concurrently enters into a gold forward contract with a gold refinery. The forward contract is then used to back the gold liability to the customer."

Bron: My emphasis on "physical" in that. This sequence of transactions is what fractional bullion banking is. In this case the customer's metal is "lent" to the refiner.

Tom: "sane market participants will naturally demand that gold as a financial instrument retain its utility as the ultimate collateral for non-recourse funding. Under these circumstances, the appearance of 100% physical backed LBMA unallocated bullion accounts seems like a very good possibility"

Bron: I note that some years ago balances in LBMA unallocated accounts attracted no fee, whereas now there is a very small account fee as % of value. Indication perhaps that bullion banks have had to increase the percentage of physical backing unallocated (and thus need to recover that cost) due to an increase in physical redemption/turnover on those accounts.

MF Global and HSBC case

2011-12-12T22:07:00.001+08:00

As usual, Zero Hedge and others hype a story way beyond the reality (see here for the Bloomberg story), such as:

ZH: "is whether or not MF Global was rehypothecating (there is that word again), or lending, or repoing, or whatever you want to call it, that one physical asset that it should not have been transferring ownership rights to under any circumstances."

TF: "A lawsuit such as this one could easily bring about the total destruction of the Comex/LBMA-based, fractional bullion banking system"

Here is a suggestion, read the actual Interpleader Complaint for the facts:

1. Mr. Fane and MFGI entered into five COMEX gold contracts and three COMEX silver contracts relating to the Property. HSBC is the depository for the Property pursuant to a certain Gold Delivery Point Agreement and a certain Silver Delivery Point Agreement entered into between HSBC and the New York Mercantile Exchange, Inc.

2. By e-mail dated October 25, 2011, MFGI notified HSBC that "MF Global’s customer Mr. Fane would like to take possession of [the Property] and move [the Property] to his account at Brinks (sic). I have already canceled for load out. Customer will advise of date and time.”

3. Mr. Fane did not contact HSBC to request that the Property be transferred to his account at Brink’s prior to the Commencement Date.

4. By letter dated November 18, 2011, HSBC, through its undersigned counsel, notified the Trustee that it had possession of the Property. HSBC also notified the Trustee, in light of HSBC having received instructions from MFGI prior to the Commencement Date to transfer the property to Mr. Fane upon his request, that HSBC would act in accordance with MFGI’s prior instructions barring an injunction or contrary instructions from the Trustee.

5. By letter dated November 21, 2011, Mr. Fane requested that HSBC transfer the Property to his account at Brink’s.

6. By letter dated November 22, 2011, the Trustee, through his counsel, asserted to HSBC that the Property constitutes customer property under Part 190 Regulations of the Commodity Futures Trading Commission and that the treatment of the Property must be administered by the Trustee. The Trustee further instructed HSBC not to release the Property to Mr. Fane.

7. By letter dated November 22, 2011, HSBC notified Mr. Fane that the Trustee had instructed HSBC not to release the Property to him and that the Trustee asserted an interest in and claim to the Property.

Not being a lawyer, I read this as "before you went bankrupt, you said I could have my metal", "yeah, well, you didn't take it before I went bankrupt, so it is now part of the bankruptcy proceedings".

So no rehypothecation or loaning, no "suing" by HSBC, no stealing or counterfeiting of the bars and certainly not the total destruction of bullion banking. Just another lesson in counterparty exposure and possession is nine tenths of the law.

The Squirrel and the Grasshopper

2011-11-23T16:39:00.001+08:00

The text below was forwarded to me a few years ago and I rediscovered it today. I've edited it to take out Australian specific references. The Squirrel and the Grasshopper story really resonated with me when I first heard it as a kid. I thought the squirrel was prudent. I’m sure other kids felt sad for the Grasshopper. I propose everyone can be divided into two groups – those who side with the squirrel and those who side with the grasshopper.

ORIGINAL VERSION

The squirrel works hard in the withering heat all summer long, building and improving his house and laying up supplies for the winter.

The grasshopper thinks he's a fool, and laughs and dances and plays the summer away.

Come winter, the squirrel is warm and well fed. The shivering grasshopper has no food or shelter, so he dies out in the cold.

MODERN VERSION

The squirrel works hard in the withering heat all summer long, building his house and laying up supplies for the winter.

The grasshopper thinks he's a fool, and laughs and dances and plays the summer away.

Come winter, the squirrel is warm and well fed.

A social worker finds the shivering grasshopper, calls a press conference and demands to know why the squirrel should be allowed to be warm and well fed while others less fortunate, like the grasshopper, are cold and starving.

The media shows up to provide live coverage of the shivering grasshopper; with cuts to a video of the squirrel in his comfortable warm home with a table laden with food and informs people that they should be ashamed that in a country of such wealth, this poor grasshopper is allowed to suffer so while others have plenty.

Do gooders demonstrate in front of the squirrel's house. A Lefty Politician rants in an interview that the squirrel got rich off the backs of grasshoppers, and calls for an immediate tax hike on the squirrel to make him pay his 'fair share'.

In response to pressure from the media, the Government drafts the Economic Equity and Grasshopper Anti Discrimination Act, retroactive to the beginning of the summer, and creates The Grasshopper Housing Department. The squirrel's taxes are reassessed. He is taken to court and fined for failing to hire grasshoppers as builders, for the work he was doing on his home, and an additional fine for contempt when he told the court the grasshopper did not want to work.

The grasshopper is provided with a Grasshopper Housing Department house, financial aid to furnish it and an account with a local taxi firm to ensure he can be socially mobile. The squirrel's food is seized and re-distributed to the more needy members of society - in this case the grasshopper.

Without enough money to buy more food, to pay the fine and his newly imposed retroactive taxes, the squirrel has to downsize his home.

A 60 Minutes special shows the grasshopper finishing up the last of the squirrel's food, though spring is still months away, while the Grasshopper Housing Department house he is in, crumbles around him because he hasn't bothered to maintain it. He is shown to be taking drugs.

Inadequate government funding is blamed for the grasshopper's drug 'Illness'.

The grasshopper gets arrested for stabbing an old dog during a burglary to get money for his drugs habit. He is imprisoned but released immediately because he has been in custody for a few weeks. He is placed in the care of the probation service to monitor and supervise him.

Within a few weeks he has killed a guinea pig in a botched robbery.

A commission of enquiry, that will eventually cost $10 million and state the obvious, is set up.

Additional money is put into funding a drug rehabilitation scheme for grasshoppers.

The grasshopper dies of a drug overdose.

The usual sections of the press blame it on the obvious failure of government to address the root causes of despair arising from social inequity and his traumatic experience of prison.

The squirrel’s taxes are increased to pay for law and order, and they are told that they will have to work beyond 65 because of a shortfall in government funds.

Why Gold Mining Shares Are Lagging The Gold Price

2011-11-01T10:24:00.000+08:00

I've got a post on the corporate blog referencing two articles on the divergence of mining shares to the gold price - and the conclusion is it isn't all the ETF's fault.

Negative Lease Rates

2011-11-01T10:22:00.000+08:00

Very good two page analysis of negative lease rates by Pollitt & Co’s John Paul Koning, including central bank activity in this market. Quote:

What sort of “non-banks” might be supplying leased gold to the market-making banks at these extremely negative rates? As we already pointed out, central banks seem willing to lend only at positive rates, which leaves only one other source: the investing public. ...

The public effectively lends gold to banks when they deposit their physical gold in unallocated form at a bank. ... The negative interest rate received by the borrowing bank is probably in the form of client fees or bid-ask spreads. ...

By serving as the cheapest source of lent gold, the investing public has effectively priced central banks out of the gold lending market.

The Perth Mint does a bit of leasing and certainly no one is paying us to borrow metal. However, unallocated accounts at bullion banks do attract an account keeping fee, as Koning notes, and this is effectively paying the bank to use your metal.

Another factor as to why investors may be prepared to pay people to borrow their metal is that it can be cheaper than the costs of storing it (ie Allocated). I do also think the derived negative rates are a theoretical interbank no counterparty risk rate. Once you add in a premium for the counterparty risk the actual rate is positive.

Finally, there is a mathematical relationship/arbitrage between the futures markets and GOFO (and thus lease rates) and this could also have an impact (not something I've been following too closely).

Silver news you won't get anywhere else

2011-10-31T15:11:00.025+08:00

Shall we count how many bloggers pick up on this news item Chinese silver imports decline 39% y/y; exports tumble 44% y/y:

Silver imports in China fell by 39% y/y and 16% m/m to 264.7 tonnes, the lowest level since February, while silver exports declined by 44% y/y to 83.5 tonnes, keeping China a net importer of the metal for two consecutive years on a monthly basis.

On a product basis, silver powder, unwrought silver, semi-manufactured silver, and silver jewellery all declined y/y in September with the latter two products suffering the steepest decline and silver powder only falling by 4% y/y. Indeed, silver powder is the only product that has grown for the year-to-date.

And from the "Chinese love paper more than physical" department, see China's gold frenzy gives birth to small bourses:

The emerging exchanges offer a lot size as small as one ounce, which lowers the capital needed to begin trading, even though the margin requirements can be as high as 30 percent. With lot size set at 10 ounces and margins at 20 percent, the initial capital requirement to start trading is about half the amount required by the SGE.

Emerging exchanges claim to trade physical gold, but most investors are not interested in taking physical delivery. Some exchanges make it difficult and expensive to take delivery. ...

"Who would want to take physical gold? People just want to speculate on price moves and make a profit," said a customer service representative at the exchange who gave her last name as Chen.

Analysts compared the gold investment spree to the wave of retail stock market investors in the last decade, who rushed to a bull market with little know-how, only to suffer huge losses during later market turbulence. ...

Although China's central government has vowed to open up the market, and has made progress by allowing more foreign banks access to the two Shanghai exchanges, an open market for retail investors is yet to take shape. ...

But it was unlikely to happen as long as the country's foreign currency exchange remains tightly controlled. Until foreign exchange controls are lifted, Chinese gold bugs would continue to need tables to put down their bets. "The Chinese love gambling," said Hou.

Doesn't sound like China's exchanges are any different from COMEX. If the Chinese Government wanted its people to buy physical gold you'd think all this paper gold would be shut down. I suppose we will have to wait until the much hyped PAGE is up and running [sarcasm].

What the 1 tonne coin tells us about the gold bubble (not)

2011-10-30T19:08:00.001+08:00

All weekend I've been getting heaps of google alerts about the 1 tonne coin, over 90 at last count. Interestingly they have all been mainstream media outlets picking up on the few source Australian media reports about it but next to nothing from the gold bloggers. You'd think such a story would get more coverage within the gold community than mainstream. The fact that it hasn't is starting to cement a view I've had for a while that the gold bloggers treat the Perth Mint like the mainstream media treats Ron Paul - don't give em any publicity, unless it is negative.

Anyway, ignoring that paranoid diversion, I've been particularly interested in the comments left to the mainstream media outlet articles on the 1 tonne coin. Lots of funny ones like "where can I order it", a few calling it obscene waste of money (to be fair, you can't expect average person to understand the concept of pooled physical backing unallocated) but most importantly the "gold, what a stupid thing to buy" comments outweigh the pro-gold. Secondly, there aren't many of those anti/pro comments anyway. More proof that we are no where near a gold bubble, if we were then I'd expect it to generate more comments about gold as an investment.

I also love this opportunistic website http://1millioncoin.com/ which was up in a couple of days. Whatever you do don't click on any of its ads, we don't want to encourage these people.

One Tonne Coin

2011-10-27T22:04:00.000+08:00

It has been killing me having to keep this under wraps www.1tonnegoldcoin.com

The idea was conceived by Acumen Design as part of their pitch to win the contract to renovate our shop and exhibition. I ran that project until recently and I loved the idea but it was considered impossible (maybe because I wanted it to be 3 tonnes, which would have given it about 1.5m or 5ft diameter). It was our CEO, Ed Harbuz who really got behind it and challenged our guys to work out how to do it, saying that if the Egyptians could make Tutankhamun's gold coffin then surely we could do the same with modern technology.

A few trial runs were made in smaller sizes to get the right mold material and to solve problems dealing with that much molten metal, eg thermal shock. My favorite part of the making video is using a router to cut in the milled edge serrations - if you ever want to "work" pure gold apparently normal wood router bits work just fine.

A silly indulgence to out do the Canadian Mint? Probably, but it will generate some nice publicity and draw tourists to our exhibition and shop so we'll recover the cost of fabrication in time.

Why are there shortages at the Mint

2011-10-23T22:46:00.000+08:00

There has been some heavy criticism of the Perth Mint running out of retail size silver bars on the SilverStackers forum. Some good questions, some crap ones and I've tried to address them all. My first comment starts on page four of the thread and I've just posted probably my last response on page eight. Worth reading if you want to get a sense of some of the issues we face.

I'll probably rework those comments along with past posts here and here covering similar material into a more definitive post on the commercial factors the Mint has to face/consider.

Also worth reading is this series of three FT Alphaville posts on oil backwardation: I, II, and III. One would be silly to think that the same strategies aren't employed in the gold market, especially by those with the "the ability to internalise flow and keep it out of the public market (possibly within your own dark pool)".

Gold Symposium

2011-10-20T14:25:00.000+08:00

A bit remiss of me not to mention that I will be attending the Gold Symposium in Sydney, November 14 and 15. If you are in Sydney it is really a must go to event considering the speakers: Ben Davies, Dan Denning, David Evans, Egon von Greyerz, Eric Sprott and John Embry, Kris Sayce, and Louis Boulanger.

Remiss because Friday is the last day to get tickets at $199, after which they go up to $299. There is a draw for a natural nugget worth $2000 from Focus Minerals and the Mint is also throwing in a 25th Anniversary 1oz Proof coin as well. This isn't going to have thousands of attendees so good odds on winning.

Let me know if you are going, would look forward to catching up with you at the end of each day for drinks.

US manipulating the gold price up

2011-10-13T21:11:00.000+08:00

Very funny to read this from Reuters where Iran claims that its enemies were deliberately causing the price of gold and foreign exchange to rise in a bid to undermine the Islamic Republic's economy. "The enemies and ill-wishers want to make a fuss and present wrong information to provoke and deviate the market," Ahmadinejad told a crowd in a town in the western province of Hamadan, where he was on one of his frequent provincial visits. "In order to disturb the market they buy a lot of gold coins with their huge amount of money ...

Seriously, this should be read in context of Vietnam's issues with its citizens buying gold as an inflation hedge/savings, which I've blogged about in the past. We are seeing how politicians respond to high inflation. In Vietnam's case, try to ban/restrict gold or in Iran's case, blame outsiders. In neither case take responsibility. Don't expect it to be any different in Western countries.

I also note DGC Magazine's pick up of expansion of reporting (in USA) of export/import of physical money to prepaid access/stored value card products. Of course all about preventing the "transfer of money obtained through illicit activity". I wonder how long before the movement of money between states within a country has to be reported. They may as well get it over and done with and tell us fuck your privacy and just ban all forms of physical money/value and tell us we have to have one government issued credit/debit card we have to use for any transaction.

Finally, I recommend reading Unqualified Reservations blog post on maturity transformation, on which he has written about before. His argument is that borrowing short and lending long is at the heart of our banking problems and cause of the business cycle. Quote:

The genius of Professor Krugman is that he goes so near the truth that he makes it obvious even to his commenters - who typically are both idiots and fools, but several of whom spontaneously exhibit the same insight themselves: Why can't we regulate or even ban the maturity mismatch? Savers would have to make the maturity choice themselves and it would be transparent. Currently, the savers don't understand the huge run risks that the banks have by funding with demand deposits and lending long. It's hiding the risk.

Fekete on Sprott and Silver

2011-10-10T18:22:00.010+08:00

I missed this piece dated 6 September 140 Year of Silver Volatility where Fekete picks up on Bob Moriarty's Facts on Silver from 25 April with this cutting comment: "Beware of the fund manager, crying from his rooftop that the paper silver market is a joke, while down there under the roof he is selling paper silver at a 25% mark-up."

Also worth reading Bob's article with these five facts on silver:

1. When charts go parabolic, it ends badly.
2. The actual ratio of silver to gold in the earth's crust is not 16 to 1.
3. There is no shortage of silver. There never has been a shortage of silver. Until the laws of supply and demand are repealed, there never will be a shortage of silver.
4. The most illogical thinking and worst use of "facts" is common among the silver uberbulls and the parrots that follow them.
5. There cannot be a run on Comex. The rules do not allow the chance for a run.

By the way, Bob is certainly in the "Repeat of 1980" category with comments like "You can't profit if you don't sell and all the permabulls are screaming "Buy, buy, buy." As they will at every top."

PS I missed the Schoon and Morairty posts because those sites don't run RSS feeds, which I think are essential. I've got around 100 feeds giving approx 250 posts a day to get through, just not possible to include manual site visits in that.

Classification matrix for PM blogs

2011-10-09T19:35:00.000+08:00

Perth Mint is doing some strategic planning sessions at the moment and I was looking for a way to discuss what is going on in the precious metal blogosphere. Nothing like a matrix to oversimplify things (since when does just two dimensions fully describe anything), here is my attempt.

My two dimensions are to what extent does the blog deal in facts or lies including misunderstanding of how things work (the x-axis or What?) and to what extent does the blog attempt to explain and get to the bottom of what is going on compared to just accepting things as they are (the y-axis or Why?).

The resulting categories are:

Truth Seekers: these commit to using facts and try and explain, they might not get it right, but the intention is there.
Technical Analysis: just focuses on the facts (price) but doesn't care about the fundamentals or why the price is moving as it does.
Tabloid Entertainers: doesn't let the facts get in the way of a good story or clicks and doesn't get too deep as that may over tax the brains of its readers.
Propaganda Merchants: conscious misinformation and false explanations to push an agenda and/or clicks.

Let me know what you think. Are there some better dimensions I can use? And if you can come up with a word beginning with "T" for Propaganda Merchants box then that would be great as I can call it the Four Ts Matrix, which would be cool.

The fun part is working out where to place all the precious metal bloggers. But lets get the dimensions and categories set first.

Futures furphies

2011-10-02T20:28:00.001+08:00

Wikipedia: A furphy, also commonly spelled furfie, is Australian slang for a rumour, or an erroneous or improbable story.

In Gold Stocks: Ready, Set, Eric Sprott and David Baker say that "While the futures market is comfortably forecasting a continuation of today’s levels, the majority of sell-side analysts refuse to update their gold price estimates to reflect its recent strength."

It is futures 101 that futures prices are not a forecast by the market, they are just a mathematic derivation from the spot price, interest rates, freight and storage costs, with gold interest rates and dollar interest rates being key components. Backwardation is when gold interest rates are higher than cash rates. Contango is the reverse. Either way, the futures price isn't forecasting anything. See this blog post for more on backwardation.

In that same article, Sprott raised the "excessive turnover" meme which Eric seems to be running recently - he must think he is on a winner with this. I dealt with it in this post and to that I'd like to add another counterpoint. First, the quote:

"In the LBMA market, for example, market participants traded an average 19.6 million ounces of gold PER DAY in July 2011. Keep in mind that the total gold mine production in 2010, globally, was approximately 86.5 million ounces. ... so the LBMA is essentially trading a year’s worth of production in less than a week"

I think it is misleading to relate turnover only to new mine production. This assumes that there is no sales by any of the investors who hold above ground gold. Eric should at least be including privately held gold stocks of 30,000t, or 965 million ounces. Adding that to the 86.5moz then the 19.6 moz represents the "LBMA" turning over the stock once every 54 days, or 7 times a year. Not as dramatic, is it. If we included the 30,000t or so of central bank holdings then it is even less so. But don't fear Eric, help is at hand.

The funny thing about the "large turnover is bad" idea is that in most markets this is seen as a good thing, as it indicates the particular market is liquid. On this line of thought, note that the recent Loco London Liquidity Survey was undertaken by the LBMA at the request of the World Gold Council "in order to strengthen its argument that the gold market is sufficiently deep and liquid to justify gold’s characterisation as both high quality and liquid" with the objective of getting gold included in the Basel liquidity buffers for banks.

What did their survey show? "The average daily trading volume in the London market in this period was 173,713,000 ounces or $240.8 billion." I can see Eric getting his calculator out now and dividing 86.5 by 173.7 and getting really excited. When you hear that the "paper" markets turn over annual mine production every 12 hours, remember you heard it here first.

The other thing I find interesting is the different way Sprott pitches this meme. For the gold/silver bugs we get:

"... I think all the paper markets are a joke. As you are probably aware, we trade a billion ounces of silver a day. A billion ounces. The world produces 900 million a year." (link)

But in the Markets at a Glance article with Sprott branding on it for a more wider market it is less breathless and a bit more sophisticated:

"When price discovery is dictated by levered paper contracts with no physical backing, it’s extremely easy and relatively inexpensive to jostle the spot price around."

Interestingly, the LBMA survey revealed that 90% of trading was spot, not forwards (sort of the over the counter markets version of futures), which equals 156moz. COMEX average daily trading during August was 278,000 contracts, or 27.8moz. 156 versus 27.8 - who do you thinks jostles who?

Continuing on with futures, we get this from Patrick A. Heller: "Increases in margin requirements make sense as prices are rising, as that helps keep the market in order, but it does not make sense when prices are falling."

Now this is a very common misunderstanding. Margin increases (or decreases) are to do with volatility of the price, not the direction of the price. Dan Norcini explains it well:

When you get a market like silver that drops 15% in ONE DAY, you are going to get margin hikes. The reason - the very integrity of the Clearinghouse comes into play.

Silver closed down $6.48 today. In a single session, one long contract in this market cost the buyer a paper loss of $32,400! That is enormous. If you consider the fact that the previous old margin was $21,600, that was wiped out and then some.

During the clearing or settlement process, the winners get paid (have their accounts credited) by debiting the loser's accounts. If the losers do not have sufficient funds in their accounts, the whole process breaks down.

Zero Hedge has really went downhill in the past few years and this post by them I found very funny and symptomatic of the sort of readers they are now attracting:

We are only putting this up because we have been flooded with emails about an event which for some reason readers believe is relevant. The event in question is that according to its website, the London Gold Exchange ("LGE" or the "Joke") has closed. The one thing we would like to say about this is that the LGE is nether an exchange, nor does it trade gold.

You have only yourself to blame Tyler. While he didn't meant he post to be ironic, I read it that way. Yes, Tyler, your readers can't tell between real gold news and rubbish, but guess what, neither can you, IMHO.

To close, I'll quote myself from Ed Steer's Gold & Silver Daily on the recent sell off in precious metals:

Here's an interesting comment that I got from my friend Bron Suchecki over at The Perth Mint yesterday. I'd sent him an e-mail on the weekend asking him how sales were both on Friday...and their Monday, which started Sunday night here in North America. This was the reply that I got...

"The Perth Mint has been very busy this Monday morning with a lot of buying [but also some selling], however buying is outweighing selling by a fair margin [pun intended]...and the decrease in the AUD/USD has taken some sting out of the drop for Aussie investors.

I see this sell-off driven by leveraged “weak hand” money. In contrast, average investors [the real smart money] are looking at this as an opportunity to buy in or top up at cheaper prices. These buyers are “strong hands” and have been the ones who have been driving the trend all these years."

Catch up

2011-09-20T21:42:00.000+08:00

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?

A Fofoarain take on the swiss move

2011-09-08T09:48:00.001+08:00

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.

Eric, Catherine and Kid

2011-09-05T21:22:00.000+08:00

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".

Physical v Paper & PAGE discussion on FOFOA

2011-09-04T22:46:00.002+08:00

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 toagree with Paul I's "egghead" analysis- in the end there is no forced requirement to split out physicalgold from unallocated from leased out, so they can continue to playtheir games.

Kid Dynamite: “How do you have trueallocated storage of any bullion less than a full bar? Ie, yes: barshave 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 andcoins. Bar numbers help in trusting the custodian, but can stillachieve the same with unnumbered bars and coins by marking them (egtexta). One way to really test if allocated is being offered is toask if you can view your metal and if there will be any problem ifyou mark your coins and bars.

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

I'm underwhelemed by PAGE. So there maybe a "fully allocated spot gold contract". Guess what, wesell the 300t of physical gold we refine each year at spot in the OTCmarket - the buyers can be totally private. I don't think we will seemuch trading moving to PAGE beyond what bullion banks will feed it tomeet local demand as other buyers aren't going to want theiractivities out in the public and visible to the benevolent ChineseGovt.

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

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

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

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

As to PAGE being a way to get renminbiexposure, well that will be interesting to watch but note what Victorsaid "long the allocated contract at the PAGE and short goldin US$" - the end result is no impact on the gold price becausethe long cancels the short.

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

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

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

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

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

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

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

Agreed. What that document does is makeit clear what unallocated is. No professional player is unaware ofthat, they just believe in the system and thus believe in the “value”of their unallocated, because they are of the system. I do notbelieve there is any big move from unallocated to allocated at themoment, nothwithstanding the antics of Chavez. If that was the casewe would be seeing a lot more bidding for our weekly 5t.

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

Those comments about “silver scrap ismainly sold and refined locally because it is not high enough invalue to justify shipping it around the world” were primarilyfocused on Australia, which is more geographically remote, and doesnot have much silver refining capacity. In other markets silver maybe far more mobile.

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

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

costata: “Recently I came to theopinion that leverage on the currency side was irrelevant. The keypoint is that the gold itself is not fractionalized. If PAGE said nomargin that doesn't prevent someone from borrowing outside theexchange and trading a 100% cash account with PAGE.”

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

costata: “We should also notunderestimate how much the Chinese love to gamble. The paper goldmarket appears to be going gangbusters right alongside thedevelopment of the physical gold market according to this article.”

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

Vietnam speculators cause "unstable psychology"

2011-08-10T18:40:00.000+08:00

The Vietnam Government saga against its people's preference for gold continues. Commodity Online reports that after the gold price "skyrocketed" the State Bank of Vietnam allowed private companies to import "5 tons of gold to help stabilise domestic markets and supplement local supply. ... 'Taking advantage of the situation, speculators in the domestic market had speculated, and manipulated, causing unstable psychology among people even though the amount of Gold in the market is still high' [State Bank of Vietnam] said. The State Bank of Vietnam also said its consistent policy is to stabilize the dong’s value, and it is risky for people to buy and hold gold at the moment..."

I'd say its risky to buy and hold the dong whereas holding gold would indicate a very stable "psychology"!

The Mint is humming

2011-08-09T09:29:00.001+08:00

Nigel Moffatt, Treasurer of the Perth Mint, breaks from his leash with some really bullish statements in an interview with The Australian newspaper:

He said he could see no end to the gold boom.

"If you're in the US or Europe, what on earth are you going to put your money into?" he said. "You wouldn't touch the equity market at this stage. Interest rates are low, and frankly precious metals are a hell of a good way to go. I can't see anything around to stop it. Bit it won't go northwards in a straight line because people will always be taking profits."

And then this morning an interview with the ABC:

The head of the Perth Mint says the price of gold will continue to rise, even after hitting another record of $US1,720 an ounce.

Nigel Moffat says the mint is fielding calls from all over the world from investors wanting to jump aboard the gold juggernaut.

If this continues I'm worried he is going to become a media tart. If he gets a stint on TV then I think I'll call a temporary bubble top.

Weekly wrap

2011-08-08T07:06:00.017+08:00

Some blogs that caught my eye last week. First is The Burning Platform with Edward Gibbon's five marks of Rome's decaying culture from his book The Decline and Fall of the Roman Empire:

1. Concern with displaying affluence instead of building wealth.
2. Obsession with sex and perversions of sex.
3. Art becomes freakish and sensationalistic instead of creative and original.
4. Widening disparity between very rich and very poor.
5. Increased demand to live off the state

I think it would be fair to say we are close to ticking all of them. Second is Steve Keen on the RBA's setting of the cash rate:

The graph shows an almost 100% correlation between the cash rate and the 90-day bank bill rates. However the data also shows that in almost every instance the RBA cash rate FOLLOWS the 90-day bank bill rate, rather than leads it. ... This analysis raises a number of interesting questions:

1. Why do we have the RBA as an interest-rate setting body at all when all they do is follow the market?
2. Why does the RBA shroud itself in such mysticism when their actions are so transparent to all?
3. What is the quality of our economists, politicians and financial commentators that we have to go through the “Will They or Won’t They” pantomime each month?
4. How could any economist get their forecasts wrong, particularly on the up-side?

Very much Wizard of Oz man behind the curtain. Third is Mark Tier at economics.org.au with two takeways on small/no government, which speak for themselves:

"... when the income tax was introduced in 1913 no one in his right mind would have suggested a top rate of 90 percent. In fact, there was considerable support for capping the income tax at 4 percent. This was shot down by those who argued that specifying such a maximum rate would mean the income tax would rapidly rise to that (then) horrific level. Can you imagine living in a world where an income tax of 4 percent is unthinkable!?"

"On January 24, 1848, the California gold rush began. But it took eighteen years for the U.S. Congress to enact a mining law to regulate such discoveries. Meanwhile, gold production in California boomed. How could that have happened without a governmental framework to recognize mining claims, register titles, and regulate disputes?

The miners created their own. They established districts, registries, procedures for establishing and registering a claim and buying and selling claim titles, and a system for resolving disputes. Officers were usually elected, including the recorder of claims."

Finally, we have a report by Mineweb that I think few PM commentators will pick up, but which I think is a good signal that gold is on the move into the mainstream. Mineweb reported on Thomson Reuters buying GFMS which "will enable Thomson Reuters to offer clients analysis of metals markets alongside its news and prices". This is a sign to me that smart money is moving into gold, as they are the only ones who can afford a Reuters feed. The mass market (dumb?) money follows much later, which is when we'll see a real bubble.

A cartoon that should concern all PM investors

2011-08-07T16:46:00.000+08:00

The cartoon below (h/t Nathan's Economic Edge) is a warning to gold and silver investors.

Instead of focusing on how and why there are no productive investment opportunities, the cartoonist demonises the cash "hoarder". Yes, you must spend your cash to help pull the debtors out of their problem. If you won't, then next they will charge you to hold cash - see BNY Mellon's negative interest rates. By the way, if that did come to pass it would be amusing because one of the (mis)criticisms of gold is that it costs to hold it and it doesn't pay a return - well if more banks copy the BNY Mellon action then neither will cash.

Demonisation is what PM investors can expect as metal prices increases - you will be classed as rich hoarders. Hopefully it stays at that, rather than degenerating into a "super PM profits tax" or confiscation. However, one shouldn't underestimate the politics of envy and thus keeping an eye on which category the majority of voters sit would be prudent (FOFOA's The Debtors and the Savers worth a read in this respect).

Turning $400k into $1.2m

2011-08-06T14:08:00.000+08:00

Late yesterday the bullion desk manager let me know that one of "my clients" had sold up. By "my clients" she meant clients I knew from when I worked on the desk, which was a long time ago.

This client bought $400,000 of gold about 15 years ago and sold it yesterday for $1.2 million. He and his wife are now in their seventies and are now drawing down on their nest egg.

Sometimes I've asked myself whether working at the Mint is of any benefit to society, whether it is a productive job - we don't make anything useful like cars or food - we just melt and stamp and store metal.

It is days like yesterday however that give me a boost and make me feel like I am doing something useful.

The coming goldbug civil war and your PM exit strategy

2011-08-02T16:53:00.000+08:00

I recently received a question from a client regarding my three point staged approach to choosing a storage method, as per the Perth Mint website:

“1. While the world environment is benign, they hold unallocated. They do not incur ongoing storage costs and fabrication charges.
2. When the environment becomes uncertain and risky, they convert to allocated.
3. When the world is at a crisis point, they take delivery of their physical metal.”

By the way, I wrote that webpage text many years ago, well before the gold bull market and when the world environment was benign.

His question was “At a crisis point why would investors opt to take delivery of their metal, rather than sell it? Isn't that the whole idea of holding precious metal?”

I found it a very interesting question, because it indicated that the investor saw only one scenario developing, what I would call “Repeat of 1980”. This scenario sees the 1970s repeating with a bubble in metal prices driven by high inflation, recession and a “mild” financial crisis.

This exit strategy assumes that just like the 1970s, the current economic environment is just a cyclical phase and we will return to “normal” at some point, in which case you can deploy your increased wealth into other (hopefully) cheap productive assets. Selling your metal for cash certainly could be profitable in such a scenario.

However, my third point was addressing another scenario, one I call “End of the Debt Bubble”. This scenario in simple terms (and probably do the complex issues involved a disservice), is that we are at an “end of cycles” as the debt levels most Governments and individuals have accumulated will not be able to be paid back. The only acceptable political solution, it is argued, will be for Governments to inflate debts away, which given the scale of the problem, will lead to hyperinflation as people lose confidence in fiat currency’s ability to hold its value. Some consider this scenario will also involve confiscation. In the case of Australia I personally think this is unlikely and have covered it in detail in this post.

This is a completely different sort of crisis, possibly also involving societal breakdown, in which case investors would be looking to take delivery (in coin form) with the purpose of using their gold and silver as money to buy goods and services or simply because they feel more secure having the physical metal in their possession in such a situation. Selling your metal for cash in such a scenario could be disastrous unless you quickly convert that cash into some other wealth preserving asset.

This is the single most important issue precious metal investors must have a view on, because if you get it wrong it will potentially do significant damage to your wealth. You do not want to have held on to your metal if we will experience a “Repeat of 1980” as you will end up selling at a much reduced post-peak price. Alternatively you do not want to have sold your metal if we experience the “End of the Debt Bubble” as you will be left with worthless cash.

Whichever scenario you favour, I suggest you read this post of mine on Deflation or Inflation .

For those who believe in “Repeat of 1980”, this post summarises the key arguments why the US won’t be able to paper over its debt problems. For those believing in the “End of the Debt Bubble”, keep in mind that the text of the post was written 20 years ago. At the time the writer was sure that it was “the End” – how sure are you that it really is different this time?

It is not something you have to work out right now as you can wait for more "data" as economic events unfold, but unlike my questioner, at least be aware that there are alternative "futures".

As the gold price increases, you will also start to see a "civil war" developing in the gold internet community on this issue. All gold commentators you read have a view on this issue. It may seem that everyone is in the “End of the Debt Bubble” but a careful reading of many commentators tells me many hold a “Repeat of 1980” view. At the moment all gold advocates are united against conventional economists and investments advisers as they have been proven right with a 10 year bull market.

But once the gold price starts to get really high, you will see commentators who believe in the “Repeat of 1980” scenario start to recommend selling your gold. This is likely to result in “End of the Debt Bubble” commentators calling them "traitors" or "incompetent" for recommending holding soon-to-be worthless cash. The passion of the current debates in our little gold internet community will be nothing compared to this.

The key will be to keep your emotion out of it, weigh up the claims, and hopefully make the right decision.

Why Won’t Sprott Buy More Silver For PSLV and crash COMEX?

2011-07-19T11:23:00.004+08:00

Update 25 July: I contacted Sprott Asset Management and they clarified that they could do a PSLV secondary at any time however the time lag for SEC clearance (possibly up to 45 days) of a new prospectus would allow traders to frontrun the placement. Once the one year public period has passed they would be able to do an overnight deal in which case there would be no frontrunning. Sprott Asset Management reiterated that they would not do a deal that would have a material impact on PSLV’s premium.

Update 20 July: I've been informed that Sprott can't do a shelf offering until his fund is one year old, which it won't be for many months yet and that Sprott said at the Vancouver Resource Conference that he would not do anything to hurt the resulting premium in the fund. That answers the question in my post title. I've left the rest of the post below as is. I'd still suggest that he consider structuring additional offerings in a way that would put some pressure on the market. Buying silver via forwards may not be best way to do it.

Kid Dynamite has come out all guns blazing in his latest post. His post goes into detail into a point I raised in my last post - why isn't Sprott doing secondary share issues for his silver fund?

He has a point. By not issuing more shares in the face of demand, all that happens is investors are paying $120 for $100 worth of silver. This means $20 worth of silver is NOT being bought and taken off the market, which takes pressure off the bullion banks.

The response that if he did a secondary that it would reduce the premium, hurting the existing investors, is valid. But the point is he shouldn't have allowed that situation to develop in the first place. [see update below] Now he is caught. By not wanting to hurt existing investors he is diverting silver demand AWAY from taking physical off the market INTO just bidding up the premium.

In any case, I would counter the "reduce premium" argument by suggesting that Sprott could do the secondary in a way as to probably cause no loss to existing holders. Consider that PSLV has 22.3 million ounces. A 20% premium suggests there is at least demand for 4.46 million ounces (20% of 22.3moz). I think most would agree, however, that he could do a secondary for double that given the profile and trustworthyness of his fund.

COMEX has registered stocks of 26.8moz. Consider if Sprott slowly bought 8.92moz of silver futures and then stood for delivery. That is ONE THIRD of the entire COMEX stock. What do you think that would do to the price of silver when Sprott and others assert that the physical market is currently so tight? Those that believe this would have to expect that you'd get a price increase that would easily cover any decrease in PSLV's premium.

And the argument that Sprott shouldn't do it because COMEX would cash settle does not hold water. Even if the cash settlement price is below the current "real" physical price, it would still probably be above his purchase price (as silver is in a bull market). In any case, if his actions were able to cause such a significant and high profile failure to deliver, then the resulting price move really would be "explosive", producing a profit on his existing silver holdings that would cover any loss (if any) on the cash settlement of his futures contracts, and benefitting existing PSLV holders to boot.

It is a win win: if COMEX delivers they take a huge hit to their stocks, if they don't, the price gets a huge hit to the upside. Personally I don't think it would play out this way. Bullion banks would source silver to deliver into the Sprott contract and thus maintain COMEX stocks. But that is just a theory. Until someone with the capability to make such a move does it, it is all talk, both on my side and theirs.

Turnover and Fractional Memes

2011-07-17T10:35:00.000+08:00

I recently listened to an interview between Eric Sprott and Chris Martenson. Eric has a very good line in spin playing to the themes beloved by the 'bugs. Deconstructing them requires more time than I have at the moment, but this comment I can't leave:

"... I think all the paper markets are a joke. As you are probably aware, we trade a billion ounces of silver a day. A billion ounces. The world produces 900 million a year."

There are many falsehoods in the precious metal commentary "market" but I'm surprised Eric is supporting the idea that large turnover figures are suspicious, which I debunked in this post. He should be careful supporting this meme as it can just as easily apply to his own funds, particularly his silver fund as he seems not interested in doing any secondaries (in contrast to his gold fund).

The suspicious turnover meme is often confused with fractional bullion banking, an example being this comment by The Burning Platform:

“Several competent analysts have worked the numbers (including Bill Murphy and Chris Powell of GATA), and have come to the conclusion that for every ounce of silver in known inventories there are approximately 100 paper contracts trading (a fractional bullion system, if you will) on various exchanges across the globe.”

My response below:

1) My understanding is that the 100:1 figure did not come from “analysis” but from a statement made by CPM Group’s Mr Christian. See here. I would be very interested in independent analysis coming to the 100:1 figure that did not rely on Mr Christian’s comment, please provide links.

2) Mr Christian’s comments were confused by many as a statement about the ratio of fractional bullion banking instead of paper to physical trading ratio, which are two completely different things. GATA’s Adrian Douglas did an analysis that concluded the fractional ratio was 4:1. That analysis had serious flaws in my opinion (see here but in the end it was too conservative, with Mr Christian confirming it is generally 10:1 (40:1 in the case of AIG).

Pan Asian Gold Exchange Hype

2011-07-13T14:03:00.001+08:00

The new Pan Asian Gold Exchange (PAGE) has got Andrew Maguire into hyper mode claiming that it "will ultimately destroy the remaining short positions in both gold and silver" and "in very short order affect current precious metals price discovery dynamics." This all based on his wishful thinking that "if just 1% of their [Agricultural Bank of China] customers bought a single 10 ounce contract, that would equate to 1,000 tons of physical gold being drawn down."

As Kid Dynamite comments in a FT Alphaville article on Maguire "a 10 ounce contract is worth well more than the average annual income in China, right? There was a stat recently that 40% of Americans couldn't come up with $2k if they needed it for emergency bills... I wonder what % of Chinese can afford to buy 10 ounces worth of gold?" I tend to agree. While it is always positive to have more ways people can buy gold, if you think that "this new gold and silver exchange has flown under the radar" of the big short players like Andrew does, then you are severely underestimating them, at your cost.

It reminds me of the hype that circulated some time back about the new vault in Hong Kong (by the way, what happened to all that metal was that clients were supposedly going to pull out of London and move to Asia, bringing down the LBMA?) Anyway, the impression (meme?) given by that story and the spin on PAGE is that there are few exchanges/markets around the world apart from the "fake" COMEX and London. Certainly, the story is that there are few places where "real" prices for physical metal can be found. In respect of that, you may find this list of gold markets from Sharelynx a useful reality check:

US- New York Open Outcry; Electronic Trading CME
UK- London LBMA
China - Shanghai SGE; SHFE
Hong Kong CGSE; HKEX; HKMEX
India - Mumbai NCDEX; MCX; NMCE
Indonesia - Jakarta JFX; ICDX
Japan - Tokyo TOCOM
Pakistan - Islamabad NCEL
Turkey - Istanbul IGE
United Arab Emirates - Dubai DGCX
Europe EUREX
Nepal - Kathmandu MEX
Russia - Moscow RTS
Singapore SICOM
South Africa - Johannesburg JSE
Taiwan - Taipei TAIFEX
Thailand - Bangkok TFEX
Brazil BMF

Between these, the 25+ ETFs that Sharelynx also tracks daily, and retail bullion dealers, I'd say it isn't too difficult for investors to buy gold these days. China certainly hasn't had access to these methods of buying gold to-date, but by the amount of physical metal we've seen being shipped into China over the past few years, I don't think Chinese investors (savers, more like) have had any problems getting all the gold they need.

Government v Industry

2011-06-29T16:43:00.000+08:00

The two charts below from Andy Smith's (Bache Commodities) latest piece are a humorous use of US house prices to illustrate the problem of Big Government. The first shows the real boom is in Government jobs and lobbying. The second how gold buyers aren't fooled by America's shift from productive to unproductive jobs.

PMs and the LME Warehouse Scam

2011-06-18T21:22:00.000+08:00

Gata and ZeroHedge have picked up on this Wall Street Journal article on bankster owned warehouses restricting deliveries out to the minimum amount allowed by the LME. The scam is summarised by the Financial Times: buyers "must keep on paying rent on the metal even after you have asked for it to be delivered, giving warehouse companies a guaranteed income stream".

But with no restrictions on how quickly metal can come in (and the bankster warehouses have been bidding for metal to be delivered into their warehouses from producers) it "has had the effect of driving the cost of metal in the physical market in the US to the highest level in more than a decade relative to LME prices". The FT notes however that this creates the risk that "the LME contract risks becoming entirely detached from the physical market."

Apart from the storage fee scam, an increasing price is good for the banksters because it makes it easier to sell commodities as an alternative investment class to institutional investors (see FT on Goldman Sachs).

Problem is, with lots of metal coming in but restrictions on it going out and you end up with increasing stockpiles. That doesn't help the story that commodity prices will rise. Solution: take the metal "off warrant" which, as FT Alphaville points out, just transfers it into a "non-LME storage facilities or simply being classified private non-LME registered stock in the very same warehouses. Kept out of sight, so to speak."

The scam here is that (FT Alphaville again) "the industry still reads cancelled warrants as an indicator of physical demand" which is positive for prices, however "many of the 'cancelled' warrants are ... not transforming into real deliveries, they’re just being stacked elsewhere in the same warehouse. In which case the demand they insinuate is potentially not real at all."

Precious metals are not subject to the warehouse outward restrictions scam and the spot market is much bigger than futures anyway, from a physical point of view. However, the "off warrant" scam can be played, particularly on fools like ZeroHedge who get all excited about COMEX eligible and registered trends while ignoring (ignorant of?) the "stock" sitting in ETFs and, more importantly, the dark pool that is bullion bank vaults. And don't fall for the "its fractional" false flag. Yeah unallocated is fractional, but what is missed is that if the amount of fractional is giga-enormous, then even at 10:1 or even AIGish 40:1, the amount of physical metal being held in the system is still enormous.

Which is why I am very interested in this ETF bar list project and am doing what I can to help, as this I believe holds the potential to reveal just how big that dark pool of stock really is.

Lies leave traces behind

2011-06-05T20:37:00.000+08:00

A quote from the latest Mike Krieger article: "For the grossly impudent lie always leaves traces behind it, even after it has been nailed down, a fact which is known to all expert liars in this world and to all who conspire together in the art of lying."

This quote appeals to me because I see this happening often in the internet precious metals community. I see many untruths starting out and propagating and even if they are "nailed down" they still leave a feeling of distrust. I am of course speaking of the Perth Mint here, but there are many other beliefs about the precious metal markets that behave like this. These untruths also resurface again and again, thanks to precious metal newbies who fall upon old webpages, which gives them life all over again.

These untruths fall into two categories: a) Lies, which I classify as those put out by people knowing them to be false; and b) Misunderstandings or Misinterpretations, which are put out by well-meaning people unknowledgeable in the subtleties of the precious metals markets. Why these untruths appeal and resist refutation is best explained by the following text, which prefaced the quote above:

"... in the big lie there is always a certain force of credibility ... and thus in the primitive simplicity of their minds they more readily fall victims to the big lie than the small lie ... It would never come into their heads to fabricate colossal untruths, and they would not believe that others could have the impudence to distort the truth so infamously. Even though the facts which prove this to be so may be brought clearly to their minds, they will still doubt and waver and will continue to think that there may be some other explanation."

I should point out that the quotes are not Mike Krieger's. Mike was merely quoting from Adolf Hitler's Mein Kampf.

(Trying) to buy gold in Chile

2011-06-03T00:05:00.001+08:00

A lot of stuff SovereignMan writes is good, but this latest piece on buying gold in Chile is a spin job. Simon Black says that Chile is "where the government just leaves you alone", with "a fairly well-developed gold market". See if that is justified with these key points from the article:

"major banks or the Central Bank, with the great disadvantage of having to pay value added tax" - most countries do not charge VAT on investment bullion

money exchange houses ... the way they sell is informal, which means that they are not required to charge the value added tax ... premiums on gold coins in these shops from as little as 1% over spot" - doesn't say what quality coins you get for 1% and I question whether the 1% really is 1% once the buy/sell spread on the spot is taken into consideration (money changers aren't known for tight spreads)

"some private bullion coin dealers which deal in foreign issuances like the Canadian Maple leaf coin for around 3% to 6% over spot. These dealers do not necessarily have a place of business with fixed office hours – they’re private traders who will often meet at your home or office" - sounds a bit dodgy and I'd certainly not be interested in having a dealer know where I live or work

"storage, the best of option in Chile is at the banks. This can be difficult for foreigners as it is typically required to have some sort of residency visa to have a safety deposit box or checking account" - bank safety deposit boxes are no good in a bank holiday

"no private secure storage facilities in Chile other than the secure vaults around the country’s many casinos" - that isn't a sign of a well developed market

"possible to bring in larger quantities of gold, tax-free, but there is a slightly more complicated process. One must first convert all gold holdings to coins issued by a country with which Chile has a free trade agreement ... a lawyer must obtain a ruling letter that the coins were made in that country (Canada, in this example) and are thus not subject to import duties" - what a silly requirement and process

That doesn't sound like a country that wants people to own gold.

Corporate fascist economic system

2011-06-02T15:22:00.010+08:00

A Fistful Of Dollars:

Without Federal Reserve intervention in the financial markets since September 2008, the biggest banks in the world would have entered bankruptcy liquidation. The U.S. economy would have experienced a 10% to 20% fall in GDP. The unemployment rate would have soared above 15%. The stock market would have fallen 70%. Wealthy bondholders and stockholders would have seen their wealth cut in half. Incumbent politicians would have all been thrown out of office. The richest Americans, constituting the ruling class, would have borne the brunt of the pain.

In a true capitalist system, organizations and people who assumed too much risk and made poor decisions would have failed. But the United States does not have a capitalist system. We have a corporate fascist economic system where a small cartel of bankers, military weapons suppliers, and mega-corporations set the agenda for the country through their complete capture of politicians and the mainstream corporate media.

The Global Economy’s Corporate Crime Wave:

Corporate corruption is out of control for two main reasons. First, big companies are now multinational, while governments remain national. Big companies are so financially powerful that governments are afraid to take them on.

Second, companies are the major funders of political campaigns in places like the US, while politicians themselves are often part owners, or at least the silent beneficiaries of corporate profits. Roughly one-half of US Congressmen are millionaires, and many have close ties to companies even before they arrive in Congress.

As a result, politicians often look the other way when corporate behavior crosses the line. Even if governments try to enforce the law, companies have armies of lawyers to run circles around them. The result is a culture of impunity, based on the well-proven expectation that corporate crime pays.

Tungsten Bar Scam

2011-06-01T21:37:00.000+08:00

I'm suspicious of tungsten gold bar stories. This story on fake bars in Vietnam confirms my suspicion.

It say that reports of fake bars caused a 50% drop in gold turnover, which reduced fiat inflation as it reduced the use of, and holding of, gold as money. As the story notes, previously "government agencies had to apply a lot of measures to stabilize the market. The State Bank of Vietnam had strenuously resisted with the criticism from the public when it was compiling the government decree [ie restrictions] on bullion gold trade."

Convenient. Remember this play book when you start to see stories about fake bars coinciding with high inflation/mass interest in precious metals.

SPAM comments

2011-05-30T13:39:00.000+08:00

It seems blogger have been automatically classifying some comments as Spam and not publishing them. Apologies, I haven't been checking the spam comments folder for legit comments.

We are flies in a bullion bank web

2011-05-26T20:02:00.000+08:00

I left this comment on the FOFOA blog:

Your point about bullion banks having the best intel is important. Bullion banks are like spiders in the center of a web. They can feel the twitching of the flies in the web and determine the mood of the market better than anyone else and often in advance of others.

For example, if Mints are starting to see an increase in demand and begin running down stocks, they will start to take delivery ex-bullion banks, who as a result now have intel that retail demand is picking up before anyone else sees it in reported coin sales.

London Banker has expressed this idea much better than me in this post:

Over the past 25 years the financial markets of the world have become highly concentrated in the intermediation of a handful of firms, and regulation has been harmonised in the interests of these few firms. ...

Sadly, these few global firms have been for some time in "a conspiracy against the public", and have subverted the organs of public governance and the infrastructure of the financial markets to their purposes. ...

Four global banks are intermediaries in 85 percent of OTC derivatives transactions. The same banks dominate prime brokerage. The same banks own large equity interests in the now demutualised exchanges, clearinghouses and even warehouses of the global markets. Naturally, the same banks dominated underwriting of securitised assets. The implications have scarcely been grasped of what this portends in terms of the information asymmetries and the opportunity to manipulate markets without risk.

Each of these roles gives these few banks a view into the positions of market investors. They know who owns what, using what leverage, under what terms, and trading in which markets. Knowing that, the manipulation of prices to impoverish investors and enrich the ruling banks is child's play with a bit of ill-transparent HFT through proprietary dealing desks and connected hedge funds aligned with the firms. ...

The only resilient solution is local, transparent markets with disintermediation of the controlling banks. Eliminating the information asymetries which allow them to see everyone's positions, leverage and trading activity - and trade and ration liquidity accordingly - would go a long way to preventing further concentration.

Valcambi CombiBar

2011-05-26T16:53:00.000+08:00

I know this is a competitor of the Perth Mint, but I really like the idea of the Valcambi CombiBar.

The CombiBar is a 50 gram gold bar with 50 detachable 1g bars, like a chocolate bar. You can break off a strip of 5 or 10 1g bars, and then further break down into individual 1g bars. Very handy for barter situations.

Rational Discussion

2011-05-15T19:32:00.000+08:00

Is this too much to ask for in the internet precious metal world?

Australian Housing to Bust, Eventually

2011-05-15T10:09:00.080+08:00

This post by Terry McFadgen on Australian housing prices is a good summary of the question of if/when prices will tank. One thing overseas readers should keep in mind is that Australian borrowers can't walk away from their debt - the bank can foreclose on you and then go after you or bankrupt you for any remaining debt not paid by the sale of the house.

As you would expect this dampens the negative price spiral that can occur in countries where walk away is an option. However, consequence of this is that in the face of financial difficulties people will tend to restrict other spending and divert money to paying off the mortgage to avoid the stigma of bankruptcy (although this doesn't seem to have bothered "former tennis ace" Mark Philippoussi) This contraction in discretionary spending acts like the “Paradox of Thrift” Terry mentions in his article.

I think Terry makes a good case that "house prices could simply slide down gently over a long period, with inflation doing most of the work of price adjustment" but he does identify four risks/shocks which could bust prices.

He notes that the RBA is between a rock and a very hard place in trying to de-bubble housing but having to increase interest rates too much to control inflation, or having to cut interests rates too much if housing tanks which will weaken the Aussie dollar and stocks as foreign investors pull out.

My view is that push come to shove RBA will cut rates and damn the exchange rate as an imploding housing market is not good for banks and the political pressure will be too intense. This will be an extend and pretend that will work for a few years as there is plenty of room to move with interest rates at the 6% level. A weak exchange rate is good for AUD precious metals prices, by the way, a sort of hedge against house price drop in a way.

I would also not discount politicians doing something stupid to "help" housing. With debt to GDP of 20% a populist call to "do something" could be made when other countries are at 100% ratios ("we have the capacity"). It will all be wasted of course but could drag the game on a bit longer.

However, as the US shows us, once you get to zero interest rates you've got nowhere to go and QE doesn't help housing. Once we reach that point then we will really see a housing price crash as the boomer demographics, China slowdown and "income levels [don't] hold up relative to interest rates" factors all kick in together.

To sum up my view on house prices, "It Won't Happen Overnight … But It Will Happen" (explanatory link for non-Aussies)

Depository Fear Index

2011-05-14T21:09:00.000+08:00

Did a post on the corporate blog about changes in the percentage of metal held by Depository in allocated form. I see it as a sort of a “fear index” as it can indicate a change in clients’ perception of economic uncertainty and risk. It has declined from 25% in 1999 to 5% in 2007 but has risen since then to 15% - risk aversion is back baby and I can only see it increasing. This will make our coin guys happy.

Someone is wrong on the internet

2011-05-04T09:17:00.000+08:00

Kid Dynamite found this cartoon. It is unfortunately far too true for me. Why do I give a stuff?

Producing more than you consume

2011-05-03T18:48:00.000+08:00

From The Flow of Value blog:

"All investments are made with surplus value (some of which has been borrowed to be invested), which has been netted out of the flow of value by those who produce more than they consume. This stock of value is commonly known as wealth. But governments and borrowers are consuming more than they produce, and as such are consuming from this wealth accrued by others."

Part of the problem is that those who produce more than they consume stupidly lend to those who consume more than they produce. If the lenders only lent to those legitimately aiming to increase value by starting/expanding businesses (real wealth creation) would we be in the problem we are?

However, few can directly lend to productive members of society. That is the function performed by bankers as they are supposed to intermediate between lender and borrower, doing the checks on the borrower the lender does not have the skills or time to do.

However, the banks haven't been productively lending as proven by Money Morning who show, as an example, an Australian bank (ANZ) is currently lending 59% into the residential mortgage market compared to 25% in 1978, when they were lending a far bigger proportion to wealth creating business. As Money Morning says:

"In 1978, total lending to the business sector made up over half of all the bank’s lending. Yet today it’s a pathetic 17%. ... The result is less credit flows through to business, including entrepreneurial business. It means just as private enterprise can be crowded out by government spending, private enterprise can be crowded out by a misallocation of resources by retail banks."

Dave in Denver - The Golden Truth?

2011-05-02T17:02:00.001+08:00

A couple of weeks ago this blogger did a post about the University of Texas taking delivery. In it he made the following statement

"Delaware Depository also serves as one of the Comex depositories and you risk having your gold mingled with unallocated gold or "accidentally" borrowed"

To me he is saying Delaware Depository would defraud their clients by giving/lending a bullion bank the client's allocated gold without their knowledge. I left a comment saying as such and that I thought he had stepped over the line with this.

He replied, saying I "crossed over the line by accusing me of crossing over the line". I left another response disagreeing, but he did not allow it through. I emailed him to ask if he hadn't got the response or had, but wasn't going to publish it. No reply back from him.

My view of blogging is that you should be prepared to defend yourself (or admit you were wrong) if you are really after the truth. Dave obviously disagrees. Below is the response he would not publish - I'll let you make up your mind on whether Dave is really after the Golden Truth.

"Very few people/entities can be trusted in the world of precious metals" Agreed, but I gather you don't include Perth Mint in that :)

Your argument against DDSC is based on two red flags. First is non disclosure of insurance arrangements. Here "DDSC agrees to maintain "all risk" insurance coverage for Precious Metals stored for you." That is a bit vague as it doesn't say "fully" but they do say here that "All precious metal assets held at DDSC are maintained in customer-specific custody accounts, on a fully insured basis, and off of DDSC's balance sheet." If they aren't fully insuring but saying they are then that is not good and a real red flag - I'm assuming you know for a fact that they don't fully insure.

I would note that any depository of size is unable to be fully insured because insurance markets don't have the capacity/willingness to underwrite it. That would cut in at around $1b - $2b with the cost getting prohibitive beyond that, assuming it is even available. If DDSC's total holdings are above that you may have a point.

"DDC is a Comex depository - sorry, guilt by association and guilt by sleaze." I think you're second red flag of guilt by association is weak. As you say "With the sleaze and corruption embedded in our entire system, especially on Wall Street" you can't trust Wall Street. But then you yourself "trading on Wall Street. For nine of those years, I traded junk bonds for a large bank", so couldn't someone just raise a similar guilt by association red flag on you? You don't disclose that you didn't work for Goldman? Don't get me wrong, I'm not saying you are guilty by association, just suggesting you put the shoe on the other foot and see how it feels.

"If you want to read into or infer anything from what I wrote, that's your business" I don't think it is just me reading that in, I think most people would. Because I think most people would read that into it that is why I think it steps over the line.

When you say "you risk having your gold mingled with unallocated gold or 'accidentally' borrowed" you are saying there is a reasonable possibility (ie risk) that DDSC will engage in criminal fraudulent action to comingle a client's metal and/or lease it out. That is a pretty strong statement.

"you crossed over the line by accusing me of crossing over the line" So it is OK for you to accuse someone of being at risk of acting criminally but not OK for me to simply say I think you went too far by making that statement? I think our differing views about “crossing the line” is a difference between Australia and America in respects of custom and laws regarding defamation and free speech.

Silver debunking

2011-04-29T22:24:00.000+08:00

Silver has been running hot and so has the misinformation. Some antidotes:

Sprott Begins Selling PSLV Shares Good detective work by Kid Dynamite on Sprott's other funds selling their PSLV shares. My guess is that the funds sold their shares and then bought physical at spot, pocketing PSLV's 17% premium

Comex Explains Large Adjustment in Silver & Gold Registered Inventories Brian O'Flanagan explains the large transfers of COMEX silver from registered to eligible.

How the COMEX Didn’t Lose its Silver Tom Szabo's detailed coverage of the COMEX transfer issue.

Bernanke an economic voice of reason

2011-04-28T18:58:00.000+08:00

Reading this opening line from a Seeking Alpha article "Ben Bernanke continues to be one of the only economic voices of reason in the United States" my first thought was the article was humorous. Not so, he is actually serious! It continues:

Gold is economically irrelevant for the following reasons:

1. The pricing mechanism of gold is too easily manipulated by extremists. Gold is the investment vehicle of fear.
2. Gold is no longer a currency. Gold has no fundamentals.
3. Gold prices are transitory. This is a fad.
4. Bond prices, gold stocks, and core inflation suggest there is no imminent threat to the economy.

This is the mainstream view, unfortunately. We are a long way off a bubble.

Vietnam Government resisting a move to gold as money?

2011-04-25T17:26:00.000+08:00

Commodity Online reports that the State Bank of Vietnam is putting further restrictions on gold lending and has asked commercial banks to cease lending gold and eventually to stop accepting gold deposits.

"Vietnam has already forbidden banks from lending gold for the production and trade of gold bars since October last year. But starting May 1 banks are not allowed to offer gold loans to jewelry makers either."

"The new rule is an attempt to eliminate the role of gold as a means of payment in Vietnam, the central bank said. It noted that the government will, however, continue to recognize the right of citizens to have gold holdings."

"Gold holdings by the public were estimated to be about 400-500 tons then, said Vietnam Gold Association. Vietnam has been among a handful of countries in which banking sector takes gold deposits - bearing some interest - and lends gold as a lawful monetary means to bank borrowers. However, this practice may soon end with new regulations from the central bank."

Commodity Online has been reporting for some time about increasing restrictions on gold as its people increasing move to using gold instead of their fiat currency and with this latest move it sounds like Government sees a real threat brewing. I've had a view for some time that one will not wake up with gold suddenly banned - it will happen incrementally - and this behaviour supports that view (although this could depend on country by country factors).

Vietnam I think will be worth watching - we may well be seeing a loss of faith in fiat (hyperinflation) developing in a country where there is an existing use of and infrastructure of gold as money. How the Government responds could give some indication of how others will, but it is a unique situation as few countries have populations that familiar with gold.

Interesting to contrast Vietnam's approach with India (whose public is said to hold between 10,000 and 15,000 tonnes).

Indian bullion dealer RiddiSiddhi Bullions Limited (RSBL) has just launched a gold account with the option of allowing RSBL to lend your gold out on your behalf.

RSBL "will lend your bullion to various professional bullion market participants against adequate security ... at the sole discretion of RSBL Commodities to decide whom to lend and for what time period." As its fee, RSBL retains 10% of the income and will take liability for any defaults by borrowers.

Note that the account is not targeted at the average investor with the minimum purchase size for gold being 1 kilo.

Shuttling wealth through a crisis

2011-04-23T21:55:00.000+08:00

Quote from FOFOA's latest post:

That's right, gold is not at its highest and best use being spent (circulated) as a currency during a hunger crisis. Instead, if you are one with PLENTY of net worth, gold is the very best way to shuttle your wealth THROUGH a crisis to the other side. If you are forced to deploy this wealth for food during a crisis, then you apparently planned poorly.

Couldn't agree more - gold is not meant to be used during a crisis, but after.

We are nearing an endgame

2011-04-20T11:21:00.000+08:00

I consider comments like these below from a high profile business executive (as reported by The Australian) as significant. You can be sure the smart money is now positioning itself.

THE world economy is on "life support", living beyond its means, with the threat of a cataclysmic shock within the next eight years, ABC chairman Maurice Newman warned yesterday. The former chairman of the Australian Securities Exchange, who is also a director of the Queensland Investment Corporation, said the Australian economy was better placed than many others to withstand the potential major shock to the world trade and financial system. But he warned that Australia had only a few years to get its economic house in order ...

"We are nearing an endgame, which I put at no more than eight years away, possibly less," he said. He warned that policy failures of governments, rising social costs and financial market volatility would "create a crisis" that would trigger "widespread trade and capital market dislocation". ...

But investors needed to prepare for the crisis by de-risking their portfolios and cleaning up their balance sheets. Australians needed to press their political leaders to make the economy more competitive.

Mr Newman predicted that the coming financial crisis could trigger an end to the role of the US dollar as the reserve currency of the world. He said it could be replaced by a system of International Monetary Fund drawing rights, which could be made up of a basket of currencies including the Chinese renminbi and gold.

Ambivalent about taking delivery

2011-04-19T12:11:00.000+08:00

So "Tocqueville Gold Fund manager John Hathaway was ambivalent about the necessity for the University of Texas' endowment to take delivery of its gold investment" according to GATA. Of course he is, the last thing gold fund managers want is institutional investors realising that they can store gold themselves for 0.10%.

To be fair, Tocqueville only holds 5% of its fund in physical gold so the 1.35% management fee you are paying him is for stock selection.

Ben Davies' Hinde Gold Fund however "holds at all times between 75% and 100% of its assets in allocated gold in secure vaults in a leading Swiss private bank, Julius Baer" with a management fee of 1.5% and performance fee 20%. If we assume Hinde is getting similar rates for its gold, then his effective management fee for the 25% which are stocks is 5.7%

For example, if you are investing $100m, then Hinde is charging you $1,500,000 a year. But you could store $75m worth of the gold yourself at 0.1% = $75,000, so you are really paying $1,425,000 management fee on $25m, which equals 5.7%.

It will be interesting to see how Davies, Sprott and the ETFs deal with this. My guess is not talk about it. If you are an insitutional investor of size who does not have a legal restriction on holding physical gold, then you'd be stupid to not hold allocated directly.

As Bloomberg note "By comparison, the SPDR Gold Trust, the biggest exchange-traded fund backed by bullion, charges a management fee of 0.4 percent of invested assets. That would reach almost $4 million for the Texas fund." A couple of years at $4m is enough to build your own vault!

From that same article is an amusing statement from Ralph Preston of Heritage West Financial, a futures trading firm: “The call to take delivery is more of a challenge to the system and it borders on the anarchistic ... It’s poor sportsmanship.” It sure is Ralph, I mean how are you going to earn brokerage every time an investor needs to roll their futures if they don't have futures.

Taking delivery is poor sportsmanship, what a joke. That takes talking your book to new heights.

M3 Inflation and the Gold Price

2011-04-09T15:40:00.000+08:00

Very interesting article showing a good correlation between the author's M3 Inflation figure and the gold price. His M3 Inflation is M3 growth minus 90 day bank bill rate. It seems the gold price lags the M3 Inflation figure by a few years, making it a potential macro gold price forecasting tool.

Closing Unallocated

2011-03-31T16:55:00.004+08:00

In the entire time I have worked in the Depository business (since 1998) through the many times I have explained our unallocated "business model", the one thing that has surprised me is no one asked a very simple question, a question that cuts to the core and would reveal whether the Perth Mint had any integrity and whether we were lying about unallocated:

"So if it is funding working inventory, you will have to close it at some point, yes?"

That point has been reached with silver as announced on the corporate blog. Gold will follow in due course, possibly quite quickly once people realise the best storage deal in the world cannot continue forever.

You would not be surprised to know that our Certificate Approved Dealers were not overly happy about it - which business wants to stop selling its best product line - but it could not go on forever.

Of course the move has raised questions, and I'm currently managing four discussions on it (Ed Steer, Kitco, Gold is Money, SilverStackers).

This move should now raise another important question, but I'm not going to wait in case no one asks it:

"So if the West Australian Government is on the hook for the Perth Mint, surely there is a limit to how much they can guarantee, so therefore a limit to Depository?"

Answer is yes, at some point Depository will also close Pool Allocated and Allocated. When is an open question depending on how fast metal flows in and what happens to the gold price. But the day will come. The Government does not have the financial capacity or willingness to guarantee massive precious metal liabilities.

This suits me fine and should suit our clients, as the bigger you are the bigger the target - theft and political.

Many people just don't get this about the Perth Mint. It is not some money hungry management team looking to take on leverage and grow for the sake of growing and bonuses. It is conservative and about looking out for the interests of its clients. When we end up closing the whole Depository business to new clients, maybe the message will get through. Problem is it will be too late for some.

PS - an excellent analysis and history of the Liberty dollar case.

Understanding Unallocated

2011-02-28T16:09:00.002+08:00

This recent post by me on the Mint's corporate blog is the simplest way I can think of to explain the Mint's version of unallocated. Note that there are only so many "pipes", which will become clear in a few month's time.

Gold lenders of last resort

2011-02-06T21:26:00.002+08:00

Another post by FOFOA that will get you thinking. My response below.

FOFOA,

There would be many within the Mint who would be amused at you categorising me as a “mainstream” view. I understand you are using my explanations as representative of the mainstream view but I would like readers to be clear that my personal view is different. To clarify this, some comments on your piece.

While I have no direct evidence of the bullion bank's (BB) activities, I am not as sure as others that the BBs are massively financially short gold (this is not to say they don't run short term speculative positions). My reasoning for this is that gains and losses on such positions impact their reported profit and loss. If they were as massive short for as long as some claim, their losses would have been visible.

I would also suggest readers ask why a BB would take on hundreds and hundreds of tonnes of short gold positions over time in some attempt to suppress the gold price. You only do this if you have a philosophical hatred of gold. I understand that gold ownership is a political action, a rejection of fiat currency and banking, but would (at this time) a bank with a BB division really be threatened by the pathetic fraction of a percent of those investors who hold gold? Threatened to the extent that they would of their own accord take on a massive short position?

Now the above does not mean I think everything is OK. On my fractional fubar post you mentioned, I commented “ It troubles me as well. The Mint has been under no illusions about London unallocated as the legals say we are an unsecured creditor and the bullion banks would never make any statement one way or another about what they did with it. We have operated accordingly.”

Bankers make money by intermediating – buying from one, selling to another, borrowing from one, lending to another – and taking their cut along the way. I would suggest readers consider the theory that BBs would be willing to intermediate for someone else with that philosophical hatred of gold and take their riskless cut along the way. Why risk your own money when someone else is willing to do so, with the bonus that their activity protects your banking “franchise”?

This then leads on to your statement that “there is no clearly defined lender of last resort to cover the risks”. Is this really the case? You mention two risks the BBs have.

1. Default – Borrowing gold doesn't solve this problem, as the act of borrowing gives you an gold asset but also a gold liability. The only way to solve this problem is to buy the gold, which results in a loss because you have to give up dollars to acquire the gold asset.

2. Liquidity – Buying gold doesn't solve this problem as while it gives you gold to give to your creditor but also gives you price exposure as you have technically bought your gold asset which is due in the future. The solution is to borrow gold directly, repaying it when your gold asset comes due. Alternative, you can borrow synthetically by buy spot gold and then selling forward (using the gold from your gold asset to deliver into this forward sale).

I would therefore agree that BBs have "exchange rate risk" for the default situation but not for the liquidity situation. This assumes that holders of gold (which in cases of large volume really just means central banks) are willing to sell (in case of default) or lend ( in case of liquidity) to BBs. I therefore suggest the question is not whether central banks are lenders of last resort, but whether they have the capacity, or willingness, to fulfil that role now or in the future.

In my previous post I stated that central bankers are the gold market's lenders of last resort. The fact that central banks hold gold as a physical asset (and only gold) in addition to fiat currencies is clear indication to me that gold is not just another commodity. However, the other side of this is that central banks can be lenders of last resort of this “money”, just as they are of dollars.

Central banks have been more than willing to lend dollars to banks to help them out with their liquidity problems, eg taking on their crappy mortgages etc, rather then have them fail and to avoid a systematic collapse of the banking system.

Consider the situation where a bank comes to its central bank and say “Hey, I've got all these pesky unallocated gold holders wanting physical but all I have is these long term loans. Can you lend me some of your physical gold and I'll replace it later when those borrowers repay their leases? If you don't I'll have to declare bankruptcy, the gold price will rocket up, this will cascade through the gold market and we will have a systematic collapse of the banking system.”

Why would a central bank not be willing to support a bank's BB division in such a situation, especially when they would do the same for dollars? For me this is not the issue, I think they will do (are doing?) it.

You mention the CBGA as proof that (some) central banks are “are no longer going to be the lender of last resort to this system”. I think it is therefore very interesting that the 2009 statement makes no reference to leasing as the previous two statements did. Why the change?

To me then the key issue is whether the central banks have the capacity”.The interesting thing about capacity in respect of gold of course is that you can't print it! Easy to do if your bank has a dollars problem, not so if they have a gold problem. Questions to consider:

a. How much gold would central banks be willing to lend to prop up banks? All of it? Or would they balk in the case of gold? Who cares about dollars, just print more – but risk the country's only real asset?

b. Out of the total they are willing to lend, how much has already been lent?

A speculation: maybe the reference to no more leasing in the 1999 and 2004 CBGA statements was a message to the BB to clean up their books. However, around 2008-09 the banks said they will fail without the backstop, need more time to unwind, have increasing physical redemptions, so CBGA drops the leasing reference to enable them to continue the "extend and pretend that there is not a run on the bullion bank reserves."

In conclusion, I would like to suggest the following in respect of the two risks

1. Default – This is most likely to happen if the BB lend to a short seller who is now bust. In this case we should see buying and thus an increase in the gold price.

2. Liquidity – As agreed, this will happen if unallocated holders are calling for physical. In this case we should see an increase in the lease rate.

Note that in the past the lease rate was around 1% to 2% with low gold prices, during gold's bear market. This was because of the large amount of miner forward selling that was going on. What we have seen in recent times with miners closing down their hedging is low lease rates and high gold prices (see this post for a chart). So there is a very general relationship between short selling and lease rates over the long term.

What would be interesting would be sustained increasing gold prices AND higher lease rates, as it may indicate buying to cover defaults and borrowing to cover liquidity.

Further discussions with FOFOA on GLD

2011-02-01T22:54:00.001+08:00

FOFOA,

Firstly, I'll have to be more careful in how I write. My post was really mixing up responding to specific quotes of yours but then veering off on to related concepts/positions that are not yours. My exploration of the idea that APs would fraudulently take GLD gold or “GLD is bad because bullion banks involved” was directed at the simplistic anti-GLD ranters not looking to the subtleties and not at yourself. One of the problems with writing rather than speaking face to face I think. Anyway, on to the discussion.

“Market-price reversible swap” makes more sense, I read “essentially lent” as implying some obligation to return the physical. With regards to the “naked short” I was talking from a financial point of view, whereas you are using the term in the sense of physical.

To clarify the distinction for our readers, let us consider a bullion bank with a physical ounce asset backing an unallocated ounce liability to its clients. If that bullion bank then lends that physical to a jewellery company who use it in their operations, then the bullion bank now has an ounce claim asset backing it unallocated ounce liability. From your point they are short “physical” but I would also note that the bullion bank is not short “financially”, that is they are not exposed to any movement in the price of gold.

Yes they are exposed to the risk the jeweller does not return the physical at the end of the lease. Probably more importantly, they are exposed to liquidity risk. I think this is the sense that you use “short” and is reflecting the issue of “maturity transformation” (see Unqualified Reservations blog for an excellent explanation of why this is a big problem).

My use of the word “short” is for situations where the bullion bank exchanges (or sells) the physical backing its unallocated ounce liabilities for cash. This creates a financial risk as there is a mismatch between the denominations of the liability (ounces) and the asset (dollars). When you used the phrase “sell them for dollars that can then chase an ROI” this implied to me a financial short and that was what I was addressing.

I now understand what you meant by "special right" when you say “once the price of physical gold starts running away from the paper price”. I will have to disagree with you on this to some extent. Now by that I'm not saying GLD does not have its risks or that any not-in-your-hands gold is better than in-your-hands gold, but I have, maybe naively, a stronger belief in arbitrage and greed.

Let us consider your scenario where the markets have been closed for a week, during which no doubt the price for physical gold has risen. On market opening I agree we are likely to see much selling by retail investors who no longer have any trust in the markets. They are wanting cash so they can buy physical gold. Their selling pushes the price of GLD down.

Now you state that “the APs can just scoop up those shares at a panic discount”. This I'm not so sure about. The prospectus lists 16 APs, only some of which are actually bullion banks (with their angry) unallocated creditors):

BMO Capital Markets, CIBC World Markets, Citigroup Global Markets, Credit Suisse Securities, Deutsche Bank Securities, EWT, Goldman, Sachs, Goldman Sachs Execution & Clearing, HSBC Securities, J.P. Morgan Securities, Merrill Lynch Professional Clearing, Morgan Stanley, Newedge, RBC Capital Markets, Scotia Capital and UBS Securities.

I find it hard to believe that all of these will conspire to agree to hold off on buying GLD until a significant discount appears. Arbitrage traders in each firm will be watching GLD drop relative to the physical price of gold. As it goes to $1 to $2 discount per ounce etc, the traders will be thinking “if I don't take that discount and lock in easy profit now then one of the other APs will and I'll lose the profit”. With 16 traders I find it hard to believe that one will not jump first, providing offers to buy and thus arresting the decline in GLD's price. What does Newedge care about JP Morgan's angry unallocated customers and why let them get GLD gold at a big discount to save them and deny yourself a profit?

Now I will concede that for my scenario to work all of the 16 APs have to have access to physical in the OTC market, which may not be the case for the smaller players. But then when you say the physical price is diverging from GLD's price, this implies that there is market for physical at a price and thus would it not be more easier for the 16 APs to acquire physical compared to retail investors, given their connections in the OTC market?

As you say we are talking about systemic failure. I suppose I'm nit picking, but is not systemic failure a situation where gold goes into Feketian “hiding” in which case there ceases to be a gold price? What I'm saying is that up until that parabolic breaking point, while gold is still being sold for cash, the backstabbing greedy profit motive of the 16 APs will ensure GLD's price stays in touch with the physical gold price. That is my answer to your question “Will anything other than physical gold itself track the price of physical gold in a physical-only market?”

For readers who don't find this particularly helpful or are not comfortable assessing these risks, I would suggest taking FOFOA's advice:“I don't know the answers but I do know one way to avoid the risks.” - that is, buy physical!

The ability of non-APs to borrow GLD shares and then sell them short I think we are in agreement on and is another problem with GLD, or to be fair with stock exchanges in general it seems.

Finally, I take some issue with your statement that “or some other coin the ETF shareholders would have bought had there not been an ETF. The ETF diverted demand in many ways”.I partly disagree with this, but I also partly disagree with those who think GLD's tonnage is “additional” demand. The truth is in between both in my opinion.

There is no doubt that a fair portion of investment in GLD would have occurred anyway, either into other funds (eg Central Trust), Allocated account or cash and carry coins and bars. In this sense all GLD does is make this investment more visible than it would have been. Unfortunately commentators obsess about GLD simply because it is visible and ignore the other 28,000t or so of privately held gold (not to mention Asian demand in “jewellery”, which is really investment in nature).

However, I do believe that the creation of stock exchange listed gold products has increased demand for gold by making it easier to get exposure to gold. Buying it through a stock broker eliminated the perceived inconvenience to some investors of having to go down to a coin shop and then worry about where to store gold.

As to the WGC, in my dealings with them I don't agree with your view that “they are focused on all aspects of the gold market, including the structural integrity of the Bullion Banks' fractional reserves given that the CBs have removed their physical backstop.” They are a miner trade group. Their focus was on physical offtake and thus obsessed about the metal behind GLD being Allocated gold. Funny when you consider that the legal structure introduced, in my opinion, some holes that negated the “security” of the Allocated gold backing.

I can't say anymore except that I'd guess I'm one step closer to them than yourself (note: the first exchange traded gold product in the world was the Australian Gold Bullion Securities, the second was the Perth Mint's ASX code:PMGOLD, the WGC naturally took some interest in these Aussie upstarts). Unless of course you are close to the WGC, but then that would be revealing a bit too much? :)

Fraud on GLD holders?

2011-01-31T18:07:00.006+08:00

Further to my post yesterday, FOFOA left this comment on his blog discussing two risks he sees with GLD:

1. That the gold in GLD has multiple claims on it. Quote: “GLD's gold bars originated as reserves in the mainstream bullion banking system. That is, they are essentially reserves on loan to the ETF from the bullion bank's fractional reserves. And the lending of anything always creates a synthetic supply” and “that lent its reserves to paper GLD investors in the first place”

2. That shorting of GLD results in multiple claims on the gold: Quote: “The other side is the lending of this "synthetic gold supply" that creates an additional synthetic supply of synthetic gold. When someone shorts GLD they borrow the shares from someone else. And that same share can potentially be borrowed again and again.”

My short response is I disagree with 1 in respect of “lending” but agree with 2. Now for the long response.

The idea in point 1 that GLD has encumbered gold in it was raised in Catherine Fitts’ “Precious Metals Puzzle Palace” and also Hinde Capital’s “Precious Metals ETF Alchemy GLD – the new CDO in disguise?”

I discussed this issue in this post. If Authorised Participants borrowed physical (or used physical backing their unallocated liabilities to their clients, which is the same thing) and delivered that to GLD, there is no claim or encumbrance by the original lender to the Authorised Participant on those bars held by GLD.

To claim otherwise is to question the entire basis of Allocated gold that the market (and “giants”) operate and rely on, as no giant with a couple of tons of gold can just bury it in their backyard. It would also question the integrity of GATA consultant James Turk’s GoldMoney as well.

The second part of FOFOA’s comment is that any delivery to GLD by a bullion bank of physical gold that was supporting/backing the bullion bank’s fractional unallocated liabilities is a “synthetic supply” that effectively suppresses price by “divert[ing] growing investment demand away from the tightening physical market.”

I would note that for this statement to be true the bullion bank(s) in question must be naked short. Not all Authorised Participants for GLD would have access to the physical to do this, nor would they all be willing to take on such a financial exposure. Question to FOFOA: how many tonnes of GLD do you think are short?

A final point (and FOFOA probably won’t like this conclusion). I would claim that those at risk from this activity are not holders of GLD, but bullion bank unallocated clients because the legal title to the metal in GLD is held by the Trust, not the Authorised Participants or bullion bank unallocated clients.

Now this is a simple legal fact. It does not mean that in any meltdown when fractional claims come home to roost, holders of GLD will survive while bullion bank clients will not. It may happen that the custodians do “take” the gold behind GLD and give it to their unallocated clients first and use the get out clauses in GLD to say they “lost it” or some such other fraud if they are unable to subsequently replace it. Some believe that this is likely behaviour, others that no matter how ruthless bullion banks may be, that they would not engage in such outright fraud. I'll leave that to you, the reader, to have an opinion on.

FOFOA seems to think this is a possibility because he thinks that the bullion banks somehow have a special right to the gold in GLD, see this comment:

A place to park your unallocated deposits and sell them for dollars that can then chase an ROI, knowing that the gold will still be there for you to buy back any time it is needed, because you are an Authorized Participant with special rights to the gold.

I do not see how Authorized Participants have any special rights. Once they deliver gold and get GLD shares and then sell them for cash which they then "chase an ROI", they give up an rights to the GLD share or gold. Yes an Authorized Participant has special ability to redeem GLD shares for gold, but they have to tender the GLD share first, which in the situation above, they can only obtain by buying GLD shares off investors, thus pushing the price up.

If you, the reader, think that it is likely that bullion banks would steal Allocated gold, I would then argue that if a bullion bank was to consider engaging in such fraud, it would not do so with GLD’s Allocated metal because that is an exchange listed product with regulatory, audit and client visibility (through the bar list). Using Allocated metal held by other clients with the bullion bank would be a far lower risk as that is an over-the-counter market arrangement, subject to far less oversight as it is in the "dark". Again, GLD represents the least risky paper gold – the last to fall, so to speak.

Remember that gold ETFs are only 2,000t out of 30,000t of privately held gold, a fair bit of which is Allocated with bullion banks and other custodians. I think it is a more believable thesis that any short covering, fraud etc is more likely to occur in the over-the-counter "dark" market first, leaving the visible ETFs to maintain the façade that everything is OK.

The point of my discussion above is not to suggest GLD is a safe investment. It is just to introduce a little more nuance beyond a simplistic “GLD is bad because bullion banks involved.”

In respect of point 2 about the shorting of GLD, I would like to see some numbers on that. I am not sure it is as pervasive as implied. This article on ETF shorting in general and ETF settlement fails give a sense of the extent of the issue, but unfortunately GLD is not mentioned.

One final comment by FOFOA:

From my perspective, GLD had the opposite effect on the price of gold (and may have been intended for just that purpose) as it diverted growing investment demand away from the tightening physical market.

All I will say to this is that is was not intended by the WGC for that purpose and there was obsession about creating a product that resulted in "physical offtake". Whether the vehicle that resulted was the best design is another matter. There seems to be this view that the WGC is part of the "bullion bank conspiracy". I suggest one look at the membership of the WGC and some of the companies and their involvement in other activities supportive of gold. WGC wanting the gold price to drop doesn't stack up in my view.

Funny business in GLD

2011-01-29T22:21:00.003+08:00

FOFOA has an interesting speculation on the movements in GLD:

So now I offer up a scenario, not as a statement of fact, but as fodder for thought and discussion. In this scenario I am not assuming that the drain on GLD to date has been the direct redemption of ETF shares by Giants. I presume it is simply redemptions by Bullion Banks in order to meet the delivery demands of "important clients," real Giants, perhaps from Asia and the Middle East. And because the BBs would normally have better options than plundering GLD, I am assuming those options are either gone or far more problematic than legalized looting.

Also, following Lance Lewis' "puke indicator," one could be forgiven for suspecting that the Bullion Banks have some way to temporarily "pound" the price of gold down on the COMEX in order to buy back ETF shares during a "good price window" with the intention of redeeming those shares into deliverable gold for clients that purchased it at a higher price.

I left a comment, which I post below FYI:

The reason one cannot correlate gold price and GLD holdings is because authorized participants (AP) don't have to create and redeem GLD shares on a daily basis in response to investor activity in GLD.

For example, if you're an AP and have a view that the market is bullish, then you expect over time to see net buying of GLD. Therefore, if on one day there is net selling of GLD, then you can:

1. Buy GLD shares

2. Immediately lease gold and sell it (or just short futures).

3. AP is now long GLD and short unallocated gold or futures. Important to note they have no exposure to gold price movements.

4. Sit on the GLD shares and when investor bullish sentiment returns

5. Sell your GLD shares

6. Buy unallocated gold and repay your lease (or close out your short future).

The above process means that the AP avoids GLD share redemption and creation costs.

Same thing happens in the face of net buying - an AP borrows gold and delivers it to GLD for shares, which they sit on an over a period of time sell into demand for GLD.

This is a way of minimising transaction costs when making a market in GLD or SLV or any other ETF.

The end result is that we see lumpy creation and redemptions, reflecting accumulated buying or selling activity over a number of days.

In the case of large lumpy redemptions, that can reflect an AP who held on to GLD shares in the expectation they would be able to offload them later into expected buying. If that buying does not eventuate, then the AP offloads the lump of GLD share they have as they are incurring ongoing funding costs.

You are correct in that redemptions of GLD cannot really be used to infer too much about what is going on re investor sentiment. The GLD bought back by an AP and gold redeemed is just sold by the AP to someone else, ultimately.

All GLD holding movements tell us is the sentiment of GLD holders. All that futures tell us is the sentiment of futures traders. Are these markets representative of the all private investors in gold. Maybe, maybe not.

What commentators miss is the OTC "dark pool". Consider that ETFs + Futures only represent less than 10% of estimate privately held gold (see this post).

In that case, we should not get too excited by the activity we see with ETFs and futures as it is not where the real giants are.

Consider also that bullion banks know their activities in ETFs and futures can be seen/deduced in some way. Therefore you must assume they let you see what they want you to see, with their real position and activities hidden in the "dark" OTC market.

Australian Housing Prices

2011-01-19T10:20:00.002+08:00

I've been following an excellent series of posts on the high cost of Australian housing and land from The Unconventional Economist blog. Worth a look if you are interested in the reasons why this is the case - Leith van Onselen's puts it down to restrictive government policies on land use.

Reserve Bank of Australia Gold Sale

2011-01-18T16:20:00.003+08:00

Further to The Australian's 11 January article "Reserve Bank's gold sale cost us $5bn", I thought my readers may be interested in the then Perth Mint CEO's response to the 1997 sale.

Consider these quotes:

"It is important to remember that we are evaluating gold now in a low-inflation environment, in which other financial assets are currently performing extremely well, the most important of which is the stockmarket. However, current conditions are not going to last forever. In my experience, in the long term, politicians cannot help themselves. When they are faced with a really tough decision, such as the one creeping up on them now - that of how to create jobs - they will take the easy option and let inflation go."

and

"When the crunch comes, governments will want to be re-elected. Rather than take the tough decisions, they will turn the inflationary tap back on. For that reason, I believe that gold will again have its day. I have not lost faith in gold."

The foresight of these statements come from the fact that Mr Mackay-Coghill worked for International Gold Corporation (Intergold) from 1971 to 1986. Intergold represented South African miners in the production and selling of Krugerrands and Mr Mackay-Coghill was responsible for the introduction of the Krugerrand to world markets in his role as CEO of Intergold.

Sprott says SLV has physical?

2010-12-10T16:45:00.002+08:00

I found it interesting in this Sprott piece The Silver Lining that Sprott includes SLV in his table of "real investment demand for silver".

In the context of his point that GFMS and The Silver Institute neglect investment demand, I assume by the use of the word "real" Sprott must mean physical. In which case by including SLV's 305,205,951oz he is therefore saying it does have the physical.

If SLV doesn't, then he shouldn't include it in the table as their holdings would represent fake paper silver. However if he doesn't include SLV then he has no point about GFMS/Silver Institute missing investment demand of 225,783,924oz because without SLV the "aggregate implied investment demand" figure from GFMS/Silver Institute covers the other funds' inflows.

Gold Bubbles

2010-10-10T13:10:00.000+08:00

UK financial writer Dominic Frisby argues “that both metals [gold and silver] are still in a bull-market phase. Any mania is yet to come.” In support, he notes that in 1980 gold bullion went from $400 to $873 an ounce in only 36 trading days, with silver trading from $16 to $50 in 37 days. The current market is not exhibiting those sort of price moves.

He also proposes looking at the value of the US gold reserves compared to money on issue as an indicator of a bubble - “in 1980 … the market value of the 260 million ounces of gold held by the USA in Fort Knox came in at $221bn, yet only some $160bn of paper money was in issue” so if “the market value of the gold held in Fort Knox once again exceeds the number of US dollars the US authorities have issued, then gold will be in bubble territory once again, in that it will be trading at levels above its intrinsic value”.

Dominic closes his article with his definition of a bubble that I think may explain why a lot of financial commentators are consistently negative on gold: “A bubble is a bull market in which you don't have a position”. However, I doubt we will see many of them change their view and buy gold, because these days the internet means all their previous statements are recorded and easily searchable and I can’t see them admitting they were wrong.

Perth Mint Blog

2010-10-09T11:45:00.002+08:00

Perth Mint has launched an online bullion selling website and to go with it a corporate blog. After 2.5 years of blogging privately I'm finally going to be able to go legit!

The change in role means I will have more time to put into posts and be able to formally draw on our internal data. I'll keep this blog up for posts that aren't suitable for a corporate blog. For the moment I'll be dual posting as it is a soft launch before they go for a proper launch and marketing campaign. What I'm aiming to cover with the corporate blog can be found here and is pretty much the same as what I've tried to do with this blog.

Prof Keen Compares Bankers To Drug Pushers

2010-10-08T11:42:00.002+08:00

Professor Keen presents a dramatic analogy in his recent article on his speech at the American Monetary Institute’s 2010 conference: “banks are effectively debt pushers, and trying to control bank lending at the source is like trying to control the spread of illegal drugs by directly controlling the drug pushers. While ever there are drug users who want the drugs, then there’ll be a profit to be made by selling drugs, and drug pushers will always find ways around direct controls.”

The comments were a response to the American Monetary Institute’s campaign to establish a 100% reserve banking system. While Professor Keen is ambivalent about the proposal, he feels that the issue “is not how money is created, but how it is used. If it’s used to finance productive investment, then generally speaking all will be well; but if it’s used to finance speculation on asset prices, then it will lead to financial crises”.

He therefore feels reforms need to be focused on modifying borrower behaviour rather than trying to regulate lenders. His article is worth a read for his proposed reforms and the civil and mostly intelligent debate of them that follows in the comments section.

High Court Judge Rules Paper Money “Almost Worthless”

2010-10-07T14:10:00.003+08:00

In a recent High Court of Australia judgement on the Goods and Services Tax treatment of foreign currency transactions, I note with amusement Justice Dyson Heydon’s statement that:

“Apart from those rights [as legal tender], the pieces of paper had little value. They might have been used to stop an uneven table wobbling, or to jam shut a loose door, or to amuse small children, or to light a cigar. If the currency included coins, the coins might have been used to turn stiff screws or to lay on railway lines for the purpose of being flattened. But uses of that kind, which are very remote from their real purpose, would not prevent both the pieces of paper and the coins from being almost worthless.”

Before you rush to burn your money or flatten your coins, the judgement notes that “because the tokens are currency, the holder of the tokens can use them as a medium of exchange and as a store of economic value. Currency has value only because of the rights that attach to it.”

So relax, your paper money does have value. However, if you are concerned about what high inflation may do to the value of cash, you may wish to consider storing your surplus “economic value” in the form of legal tender bullion coins - sorry, tokens.

Of course, I can’t guarantee that precious metal prices will not fall, but at least you will always be able to use the coins to turn a stiff screw or two!

Gold Symposium Bail Out

2010-10-02T12:23:00.002+08:00

I've had to pull out of The Gold Symposium as the Mint's Board meeting (which I have to attend) has been moved to a day of the event. Was looking forward to meeting the speakers and attendees so not too happy. In that case the Board better approve my business case for redeveloping our exhibition area :) or I will have missed the event for no good reason.

Free Sharelynx Trial

2010-09-29T10:14:00.002+08:00

China desperate for gold & The Mind Conspirators

2010-09-05T21:04:00.003+08:00

1) Reported by imarketnews.com:

Sales by overseas central banks could see a sharp fall in gold prices, the Financial News reported Wednesday, citing Zou Pingzuo, a central bank researcher.

"Investors should be careful about investing in gold. Gold prices could fall sharply because of intensive gold sales by the U.S. and other overseas central banks," Zou said.

To me this a sign of desperation by the Chinese. There has been no indication by the US to sell and all recent talk is about central banks buying. They are trying the old scare tactic of central bank selling to try and push the gold price down. They want to buy as much gold as they can but don’t like the current high price.

I think they are hoping this "bubble" will deflate and they can continue with their sneaky "get out of dollars and buy gold". What happens when the Chinese realise the price isn't going to drop? Will they be forced to go all out and start buying whatever physical they can?

2) Worthwhile read for libertarians - The Mind Conspirators by Nelson Hultberg. A quote:

Philosophical fallacies and socialist falsifications of economics and history have gained sway in the school system to poison our citizens' minds against the American concept of freedom. Such fallacies have created a grossly distorted image for the man in the street about the way the world works. Freedom is now seen as inimical to human dignity. Creative entrepreneurship is portrayed as exploitation of the poor instead of their only hope. Gold is termed a "barbarous relic" instead of history's proven store of value. ...

We are being conditioned to accept sloth as normalcy, servility as dignity, weakness of will as compassion, and government conveyed privilege as justice. The world of sanity and rationality gives way to regimental nightmares of Orwellian "newspeak" and "political correctness" in order for legions of middle-class sluggards to feel good about themselves while they live out their spiritually squalid lives queuing up to the entitlement troughs of the mega-state.

My response to the article agrees very much with the comments of MetaCynic:

Accepting Hultberg's argument that ideas are the engine of not only entire civilizations but of every individual, begs the question why do some ideas gain traction and not others. Why did the ultimately unworkable collectivist ideologies of the big picture intellectuals, Rousseau, Hegel, Comte and Marx, find acceptance in the midst of the wondrous prosperity produced by the Enlightenment's Industrial Revolution? Why does the siren call of unaccountable collectivism to this day continue to outsell individual liberty with all its attendant responsibilities?

Despite its clashes with reality, do collectivist intellectuals really have to work very hard to find widespread acceptance for their ideas? Maybe there has always been a ready market for their disabling poison. In politicians and bureaucrats they have, of course, an enthusiastic audience eager to legitimize their own drive for wealth and power. In the envious masses they have deluded voters proudly participating in the process to redistribute the wealth of others into their own pockets. And in the captains of industry they have "capitalists" in need of protected markets and guaranteed profits. The great majority of humans are conformists and clock watchers interested only in comfort and entertainment.

Australia’s only hard money conference

2010-09-03T16:49:00.002+08:00

From http://www.symposium.net.au/the-gold-symposium.htm

The Gold Symposium, Tuesday 9th and Wednesday 10th November 2010

Symposium announces the launch of The Gold Symposium being hosted at the Amora Jamison Hotel in Sydney, Australia on Tuesday 9th and Wednesday 10th November 2010.

Featuring highly respected speakers from Canada, Australia and the USA, this event will approach topics such as the current state of the global markets; why gold is important as an investment; and, gold versus paper as currency.

Amongst many renowned speakers, hear from the internationally respected gold analyst and author, Mr James Dines. Even now many do not believe Mr. Dines’ longstanding prediction of “The Coming Great Deflation” internationally, but what’s next? Boom or Bust, inflation or deflation, or even a hyperinflation?

Other speakers are:
Mr Dan Denning, Editor, The Daily Reckoning
Mr Louis Boulanger, CFA, Founder and Director, LB Now Ltd
Dr David Evans, mathematician and founder of GoldNerds
Mr Robert Lambourne, Chairman, Penox SA
Mr Rudy Fritsch, President, Allsteel
Mr Richard Karn, Managing Editor, The Emerging Trends Report
Mr Gavin Thomas, Managing Director and CEO, Kingsgate Consolidated
Mr Barry Dawes, Managing Director, Martin Place Securities
Prof Steve Keen, Associate Professor of Economics and Finance at the Uni of Western Sydney
And ME!

My presentation is: Paper gold – will it “crack-up”?
• You only protect your wealth by knowing when (or when not) to sell your gold
• To do this you need a real understanding of the risks inherent in the operation and interaction of the physical and paper gold markets, not the hyped-up commentary designed to increase the commentator’s Google ranking rather than your wealth
• Otherwise you may find yourself holding worthless cash after what you thought was a bubble in gold was really a collapse of paper assets

Gold and silver versus market index bubbles

2010-08-27T13:51:00.002+08:00

Below is a chart Nick of Sharelynx has been working on to show how much of a bubble gold and silver are in (or not).

Note that the x-axis does not have time on it because each bubble had a different timelength (some of the bubbles are 20 years, others 5 years). This does skew/stretch the time, but Nick's emphasis with this chart is more on the percentage growth factor rather than how long it took to get to those bubbles.

GLD, leasing and encumbrances

2010-08-24T17:33:00.004+08:00

In an otherwise good analysis of GLD (Precious Metals ETF Alchemy
GLD – the new CDO in disguise?) and building on Catherine Fitts’ Precious Metals Puzzle Palace Hinde Capital (as does Ms Fitts) gets it wrong on leasing (see slide 18). A bit of a problem considering that "GLD has encumbered gold in it" is one of his key points.

In my experience most lease transactions are done in terms of unallocated account credits. In this case the lender has lent unallocated and if the Authorized Participant subsequently allocates this unallocated metal there is no direct link between the loan and the physical. The lender has an unsecured exposure to the Authorized Participant under the terms of the original lease. There is simply no legal link to what the Authorized Participant did with that leased unallocated gold.

In the case of lenders supplying actual physical bars (usually only be Central Banks) because it is understood that leased metal will be "used" (be that in a physical operation like a jeweller or mint, or for sale to create a short position), the contract cannot practically require the return of the same physical bars that were lent (ie the same bar numbers). If the lease contract was worded on a secured basis (most likely where the borrower is a jeweller or mint) the security would have to be against the general gold stocks of the borrower rather than the bars originally supplied as it is understood that the original bars are melted or sold.

Where lease contracts specify the return of physical at the end of the lease, it is acceptable to settle with any LBMA bar at maturity, with any ounce difference (due to the variability of 400oz bars) settled via cash.

As a result, there is no legal claim by the lender on the original physical bars supplied to the borrower. Therefore if an Authorised Participant borrowed physical and delivered that to GLD, there would be no claim or encumbrance by the lender to the Authorised Participant on those bars held by GLD.

I note that Hinde Capital avoids the “they don’t have the gold” claim. That is an issue I will post on another time.

Silver Leader Board July 2010

2010-08-12T17:46:00.001+08:00

See the document below for a list of all the silver ETFs and online products.

Silver Leader Board July 2010

Gold Leader Board July 2010

2010-08-06T11:44:00.002+08:00

See below for an analysis of gold ETFs and other custodial products.

Gold Leader Board July 2010

SMSF coin ban update

2010-08-03T16:59:00.002+08:00

Further to my blog on the Cooper Review into Super and the recommendations on Self Managed Super Funds, see the 4 August 2010 press release below from ANDA:

Announcement of Government guidelines for SMSF numismatic investments ‘a relief’ says ANDA

The Australasian Numismatic Dealer’s Association (ANDA) says the announcement by the Federal Government that Self Managed Super Funds can continue investing in numismatics, as long as certain guidelines are followed, comes as a relief to many thousands of SMSF Trustees nationwide.

Mr Robert Jackman, Vice President of ANDA says: ‘I’ve been inundated with phone calls since the announcement was made last Friday. The reality is that many thousands of people would have been adversely affected if the Cooper recommendations on numismatics had been implemented. The vast majority of SMSF Trustees only invest in numismatics because they deliver reliable and attractive investment returns.

‘What’s more, the majority of investors already abide by most of the guidelines which ANDA has formally developed with the assistance of the Self-Managed Super Fund Professionals’ Assocation (SPAA). Those who don’t will be forced to adopt better prudential practices, which can only be to the benefit of the industry as a whole.’

ANDA has worked closely with SPAA during recent months, and expects to continue a consultation process on SMSF guidelines which ever party is elected to Federal Government. All three main parties have rejected the Cooper Review recommendations on collectibles for SMSFs.

The Social Construction of (Gold) Reality

2010-08-01T20:03:00.003+08:00

I have a book in my library called The Social Construction of Reality. Its basic thesis is that reality is socially constructed, or to put it another way, reality is what people believe it is. For example, if you moved to a new town and a rumor was circulated that you were an axe murderer, then you can imagine that people would avoid you, police would monitor you and if there was a murder, you would be an immediate suspect. Even though it was not true, you would in effect be experiencing the life of an axe murderer, at least in how people related to you. For you it would become reality because the social group believed it to be true.

You said “But if "smart" dollars of size (or let's just say all dollars of size) are not getting a bid from real physical gold of size... and only "idiot" dollars are getting a bid from "paper gold"... can we really say the gold basis is reflecting reality?”

My contention is that if the social belief is that paper gold is as good as physical gold then for all intents and purposes it is. As a result the basis reflects that and does not go into backwardation because people are accepting paper gold bids for their dollars. Saying this does not mean I condone it, but while the social belief continues, what the real “level of physical gold's bid for dollars” is does not matter regarding price.

There is little proof I have for my claim that we are still in phase two of the Degrees of Distrust as the gold market is opaque by nature. One fact I do have is the recent revelation by the Financial Times that the 346t of gold for the BIS swap “came mainly from investors' deposit accounts at the European commercial banks”. That is 346t of trust by those investors and indicates there are a lot of people who still believe in the system.

I can't 100% sure where we are at, but would caution against too much optimism. If we are still in phase two then a lot of education is still called for. I think the mass market is still not into gold in any major way and when it does it needs to be directed into products that take real physical off the market. We have to ensure investors are properly informed, that they understand the true "gold reality". That the Chimps turn into Champs, not Chumps.

Speaking at Sydney ANDA coin show

2010-07-31T13:43:00.000+08:00

I will be doing a how to invest in gold presentation at the Sydney ANDA coin show on 14 & 15 August, details can be found here.

I would recommend Mark van der Sluys' ‘Gold as Money’ and ‘The role of Gold in an Investment Portfolio’ presentation at 2pm and then I follow at 3:30pm. We will speaking on both Saturday and Sunday. Both our presentations will be filmed and put up on Perth Mint's YouTube channel if you can't make it.

Understanding negative lease rates

2010-07-30T17:15:00.002+08:00

The reporting by LBMA of negative lease rates is often misunderstood, resulting in some commentators coming to incorrect conclusions. Given my recent discussions with FOFOA on backwardation, some explanation of negative lease rates would probably be useful.

In the real world the cost of borrowing gold outright is never negative – no bullion bank will pay you to take gold. In fact, I am aware that some lenders have a minimum rate below which they will not lease. Makes sense, would you risk lending 1 tonne of gold worth $37 million on an unsecured basis at 0.1% for 3 months just to earn $9,400?

So why does the LBMA report negative lease rates? Our starting point is how the lease rate is calculated:

Lease Rate = LIBOR – GOFO (see the LBMA’s Guide for why this is so)

First point to note is that the lease rate is calculated from LIBOR and GOFO; the LBMA does not question its market making members for their actual lease rates. It is therefore based on the accuracy of LIBOR and GOFO. If we look at how these two rates are determined (see here and here) then we see a number of differences:

1. Set at different times – GOFO rate submitted at 10:30am and fixed at 11am, but LIBOR rates are requested between 11.00am and 11.20am and fixed shortly thereafter.

2. Set on different sides – LBMA’s website GOFO is the rate “at which the Market Making Members will LEND gold on swap against US dollars”, which involves using the USD interest bid rate. For LIBOR banks are asked “At what rate could you BORROW funds, were you to do so by asking for and then accepting inter-bank offers in a reasonable market size”, that is the USD interest offer rate.

3. Set by different banks – LIBOR is set by 16 banks, GOFO by 8, with 6 common to both. LIBOR drops the top and bottom quartiles before averaging, GOFO drops the highest and lowest before averaging. It could therefore be possible that the 4 banks use to set LBMA’s GOFO (which they would calculate/relate to their estimate of LIBOR) don’t have their LIBOR rates included in BBA’s LIBOR. Probably worth noting that within a bank LIBOR and GOFO would be set by different desks.

Now these are minor differences as we would not expect rates to move too much between 10:30am and 11:00am, or much difference in the bid/offer spread, or too much divergence between banks on their rate so the dropping of high and low rates should not affect the average too much.

However, I think when rates get close to zero, these differences could have a material impact. Consider also that questions have been raised about LIBOR’s usefulness at these low rates, see here and here.

The fact is that GOFO and LIBOR are not “in alignment”. The resulting calculated lease rate is therefore just an approximation based on two averages. Caution should thus be exercised when trying to draw conclusions from it.

GOFO, however, should be able to be relied on. It should relate to the basis, although not equate to the basis as the basis is calculated from futures prices whereas GOFO is a forward rate - the economics of those two are slightly different.

Degrees of distrust

2010-07-29T22:06:00.002+08:00

My last blog was ultimately about trust and that maybe the basis is telling us that there is still trust in the system. After writing it I remembered the presentation I made to the 2009 Gold Standard Institute seminar in Canberra. Below is the conclusion from that presentation, where I proposed four phases, or degrees of distrust:

1st Phase

We start to see increasing investment in gold reflected by increasing balances in COMEX or ETFs or GoldMoney etc, but the majority of people still hold fiat and stocks/shares. In respect of gold, people have no problem with storing their metal in "the system".

2nd Phase

We start to see occassional backwardation which comes and goes and it usually only between cash and shorter futures/maturities - 1 to 2 months. This backwardation is arbitraged away by longs who still have belief in the system(s) so are willing to take the risk to make a profit. Gold is still held in the system but growth in reported balances is slowing.

3rd Phase

We see more backwardation periods, prolonged and now not just shorter maturities but maybe 3 month going to small backwardation. It demonstrates less interest by longs to take the risk. Possibly start to see reported balances of ETFs and less reputable custodians starting to stablise even though gold price still rising, which would puzzle ignorant commentators. A physical squeeze is developing.

4th Phase

Now backwardation persists, it is a permanent state in shorter maturities, increasing to longer maturities. Reported ETF balances are declining. A clear signal not all is well. Gold is being pulled and stored outside the system. The strong hands are in the majority, the squeeze is really on.

I'd say we are just starting in the 2nd Phase.

The basis does not lie!

2010-07-29T18:30:00.002+08:00

My answers to FOFOA’s response.

I think an accurate definition of "paper" and "physical" is important to the accuracy of your statement: "I am reasonably confident that paper and physical are bound together."

“Physical” to me means real physical gold that has been delivered in settlement. Anything else I deem “paper”. Note that my definition of physical includes Allocated or GoldMoney for example, as they purchase real physical gold and store it, ie it comes off the market and is unable to be lent/fractionalised.

“Physical” does not include the near month futures contract. There is a place for buying 3 month and selling 6 month in which case you are arbitraging paper “gaps”, but what we are interested in is the effect on the real physical cash price.

But what if you could play the arbitrage (closing the gap) game without actually putting any physical at risk of delivery? Would this change the accuracy and credibility of the basis signal?

I assume you are talking here about using unallocated. OK so lets scenario it. Assume a stable supply/demand for both cash and futures so without the actions of an arbitrageur the cash price would remain at $1200 and Dec futures at $1195 for a period of 6 months. Hedge fund notices this and wishes to profit from it but it does not want to (or have) physical gold it wants to risk.

Hedge fund contacts their friendly bullion banker and asks to lend gold. Bullion bank conjures out of thin air some fake unallocated gold, merely recording an asset in its books (loan to hedge fund) and a liability (unallocated owed to hedge fund). Let us assume the amount of ounces is enough to move the price in our otherwise stable market by $3.

Hedge fund’s first step is to buy the Dec futures at $1195 but in doing so its price increases to $1198 (lets say that is the next offer price). Secondly they have to sell spot. Say they find a trusting investor who is willing to accept a transfer of the fake unallocated gold for $1200. Again, this action decreases the spot price to $1997 (next marginal bid price) and the market is now in contango. So far so good.

But what happens in six months? The hedge fund only has two choices – cash settle or physical settle.

If they cash settle then they have to sell back their Dec futures contract, but doing so will cause the price to decrease from its new equilibrium price of $1198 to $1195. Likewise, they have to buy unallocated to repay the loan to the bullion banker, but that will increase the spot price from $1997 to $1200. All that cash settling has done is delay the appearance of backwardation but not eliminated it.

If they physical settle then they get their gold from COMEX and deliver it to the bullion bank to repay their loan. Now this would have no effect on prices. However, the bullion bank now has physical 1:1 backing its unallocated liability to the trusting investor. If that investor asks for delivery, it will have no effect on price because the bullion bank has the physical. In a roundabout way the hedge fund eventually did sell real physical gold to the trusting investor.

Now your retort may be that the fact that the trusting investor was willing to accept fake unallocated allowed the manipulation of the basis to turn backwardation into contango. You would be correct, and that is the point of my scenario. The basis is therefore reflecting reality, the reality that there are idiots prepared to accept paper gold.

The basis IS telling the truth. It is not the hedge fund or the bullion bank who have “manipulated” the basis, it is the trusting investor. But in a sense the basis has not be manipulated, arbitrage is ensuring it reflects reality, that there are idiots who are prepared to bid dollars for paper gold.

If that trusting investor was not so trusting, then the hedge fund would not have been able to execute their arbitrage because there would be no one willing to accept their paper gold. The cash price would have remained at $1200 and the market in backwardation, and the basis would reflect reality, the reality that people were only willing to bid dollars for real gold.

You said “If gold stops bidding for dollars (low gold velocity), the price (in gold) of a dollar falls to zero. This is backwardation!” My reply would be that even if all (real) gold stops bidding for dollars, but there is plenty of paper gold bidding for dollars which are being accepted, then there is no backwardation.

My logic therefore leads me to the conclusion that the basis does not lie, that it cannot be manipulated. Professor Fekete was right all along, long live the basis. However, I don’t feel totally confident in this statement, as I said I’m not an expert in futures so there is probably a flaw in my scenario and logic. If so what is it?

Over time, group 1 will swell and end up holding most of the above-ground physical gold in the world. Group 2 will shrink and end up holding mostly paper gold. Group 3 will be financially sucked dry by the vampires in group 4. And group 4 will ultimately find it has no more markets to churn.

This is the theoretical process that gold backwardation should represent. A healthy and REAL gold contango SHOULD send this process into reverse, perhaps slowly at first, but reverse nonetheless.

So the question I am asking is which direction are we heading right now in this process? How close are we to the end of this process? And why aren't the market signals matching the rest of the picture?

If group 1 already has most of the physical gold and is now a one-way flow, is that not the state-of-the-market that backwardation should signal? And if the state is present but not the signal, what does that say about the signal?

Following from my conclusion that the basis does not lie, then the “signal” must be correct, which means “the state” of group 1 strong hands having most of the physical gold is not correct and we not close to the end of the process you describe. This is consistent with the defence by goldbugs to claims we are in a gold bubble that investment in gold is still a fraction of portfolio allocations and the mass market is not buying gold. Dollars are not being bid for gold, real or paper.

If you don’t like the conclusion, then you must find a flaw in my logic about the basis. I am more than happy to be proven wrong. Well, maybe not just yet, I'd like to pick up some more cheap gold :)

Follow up to FOFOA

2010-07-28T22:13:00.002+08:00

FOFOA has hit me with a lot of questions in this comment. It is 11pm in Perth, so this will be brief, but they are interesting questions and I will cover off on them over the next few days.

When it comes to COMEX FOFOA, I also am a "conceptual thinker and a fundamental analyst-blogger". This is because my gold market experience has only been with the Perth Mint and the Perth Mint has never traded on COMEX, and nor can I see any reason why we would in the future. It is a position you can take I suppose when you refine 300 tonnes of physical per year. I mention it so it is clear where my expertise lies and where it does not. This won't stop me from theorising however, because that wouldn't be any fun.

You question the reality of COMEX. Certainly the fact that one does not have to put down full cash and only margin means that there may well be many technical traders playing with computer digits, and they may be in the majority. However there are also real physical players like miners and manufacturers.

However, I am reasonably confident that paper and physical are bound together. To make that statement I rely on one thing - arbitrage, or greed. Greed as a motivator is something I feel pretty confident relying on. I just don't consider it believable that a bullion bank or hedge fund or other big trader would leave profit on the table.

We cannot discount manipulations or games being played with cash or future prices. But to manipulate one of those means that the gap (ie the basis) between the market you are manipulating and the one you aren't widens or shrinks. If the manipulation goes too far then that will present an arbitrage opportunity to other players, which if we rely on greed as a motivator, they will take. That action closes the gap.

Now as one can "trade" the basis (for another day) as distinct from the price, it must therefore be possible that the basis itself can be manipulated. However trading the basis involves two "legs" - eg buy spot, sell futures or sell spot, buy futures - which again widens or shrinks the gap/basis, presenting arbitrage opportunities to others.

The game of trading to my mind is a "base" of real price setting physical deals with that price pushed and pulled by competing manipulators, speculators and arbitragers, of both paper and physical price. Price may go up, it may go down. Both cash and futures prices may go up, but the gap widen. Or both prices go up and the gap shrinks.

I see it like an elastic/rubber band being stretched and then bouncing back. That stretching is the "noise" I mentioned in my last post. It is fun to watch and I'm sure such watching can give you an insight into the games being played, but what matters is when it is stretched to far, and breaks.

When does backwardation matter?

2010-07-28T16:06:00.002+08:00

FOFOA started a little excitement with his post on backwardation. Professor Fekete responded and Zero Hedge weighed in as well.

I would not be surprised that for many this backwardation thing makes their head hurt and perceive it as all very theoretical and of no practical use. But this is not true and backwardation is a potential profit opportunity for those holding gold. However, it is also being overplayed.

Backwardation is when the future price is less than the cash (spot) price. Consider you are a long term holder of gold expecting to sell it in a couple of years when the price peaks. One day you wake up and note that the price of gold six months into the future is being quoted on COMEX at $1150. You check with your local coin dealer and he is quoting to buy your gold at $1200. What does this “backwardation” mean to you? See below (numbers for purposes of calculation simplicity, not real costs).

You work out that it will cost you $100 to ship your 100oz to the dealer. He will pay you $120,000. You deposit $20,000 of that with your broker as margin (plus extra to cover fluctuations) and buy the $1150 futures contract, plus brokerage fee of $50. You deposit the remaining $100,000 cash in the bank for 6 months at 0.5%. On maturity of the futures contract you stand for delivery and incur $50 brokerage and $100 shipment cost. Your profit on this is $4950, composed of

* Sale of gold: +$120,000
* Purchase of gold: -$115,000
* Interest on cash: +$250
* Brokerage and shipment costs: -$300

Now this is a great deal. At the end of the 6 months you still have physical gold but you have earned additional money while you wait for your eventual sale in a couple of years. Why would you not take up this opportunity?

Well, the deal is saying “Sell us your gold now and (trust us) ... we will have it to sell back to you in the future for less!” You are exchanging your current physical gold for a future claim to gold. You have “counterparty risk”, to COMEX, to the short on the other end of your 6 month futures contract.

Of course, such a wide difference between cash and futures prices does not normally occur, because faster and bigger players see the profit opportunity and get in first. Their action of selling lowers the $1200 cash price and their buying of the 6 month futures increases the $1150 price and thus eventually the gap (and profit) disappears. That is arbitrage.

But if you did see such a big difference in prices, it means the big players aren’t taking up the deal. The cash-futures gap is telling you that people don’t trust COMEX, they don’t think they’ll get their gold back in the future. What backwardation is telling you is that people don’t want to give up their gold, even for a little while. As FOFOA says: “gold stops bidding for dollars”.

This leads to my closing point, which is best summed up by Tom Szabo’s December 2008 comment: “Let’s talk if and when the backwardation is large enough that the arbitrage was there and yet still nobody chose to go after it. That would be truly something!”

For example, if the cash price was $1200 and 6 months futures $1199.25, in my simplistic (and unrealistic from a cost point of view) example, that would mean a profit of $25. That is technically backwardation and technically a profitable one. But could you (or the big players) be bothered with all the work involved in selling gold, buying futures and then taking delivery, all for $0.25 per ounce profit?

Therefore, the only backwardation that matters to me is backwardation that:

a) means reasonable profit and
b) no one is willing to take that profit (that is, it is persistent).

Any other backwardation is just noise and has no “information value” by itself.

If this topic interests you, the following two services specialise in tracking the gap between cash and futures (known as the “basis”):

The Metal Augmentor (Tom Szabo)
Gold Basis Service London (Sandeep Jaitly)

These services look at the bigger picture and don't get distracted by instances of technical backwardation. They look at the trend in the basis, trying to identify in advance when significant and persistent backwardation will occur.

Why Investing In Gold Is An Illuminati Trap

2010-07-24T13:18:00.000+08:00

There are a lot of "why you should buy silver instead of gold" advocates out there, but this blog Why Investing In Gold Is An Illuminati Trap is, well, in a league of its own:

Welcome to The Patriots Cave, I am Joel the K. And yes, that is correct, the Illuminati wants you to waste your money on gold. Gold coins, gold bullion, gold stamps and gold of every sort. ...

This is what I believe the NWO is planning to do with gold. They will scare the middle and upper class into sinking their money in gold, and then they will pull the rug out from under it all. Gold will plummet as panic selling ensues. Gold will fall to under $300/ounce. And then people will realize, that like diamonds, gold too, is just something pretty to look at, and that it has very little inherant value.

So say I am correct in my speculation. What then would be the smart move? Oh that is easy when you think with your instinct and intuition. SILVER. Silver will become worth MORE than gold. Mark my words. Brethren and sistren, for over 6,000 years silver was like gold, a pretty metal to make jewelry and spoons out of, and coins and bullion bars. However, in the last few decades, silver has been found to posess qualities unlike any other metal. Silver is now being used to make computers, electrical appliances, medicine, cars, planes, boats, machines, and millions of other things.

Upcoming cardinal climax good for gold

2010-07-23T09:12:00.002+08:00

I bookmarked this Seeking Alpha article from March this year Rare “Cardinal Climax” Planetary Alignment This Summer Puts Stocks at Risk, says Veteran Sky Watcher. To quote:

On August 1, give or take a week, we’ll have the most five-planet alignments in perhaps thousands of years. Known as the “Cardinal Climax,” this is the meanest, nastiest, most challenging and most transformational of any planetary phenomena in all of written history!

I looked at records going back to the 1800’s, and this is the most difficult alignment I found. When I was at a conference in Boston last month, someone said this was the most difficult alignment they have seen in the last "1,000 years." Another person told me this is the worst alignment in "10,000 years."

Worst cases include a nuclear accident. Nuclear war. Massive societal collapse. Maybe a pole flip, which can wipe out nearly everything.

One week "minus" 1st August is next week, so you have been warned :) Of course if this does eventuate I'm going to have to eat humble pie.

Chart Mysticism

2010-07-19T09:38:00.003+08:00

It is always good to get different perspectives on the markets. Bruce Edwards has worked in the refining game for many years, currently with Sabin Metal Corp. As a way of keeping in touch with his former and current clients he has a web site where he posts his Chart Mysticism on the markets.

He has a chart at the bottom of the page called Gold Shares and Industry Ranking. Bruce explains it thus: "The chart is an index of Gold Mining Company Shares (upper line) and a 10 week moving average of their relative performance when compared with 98 other Dow Jones Industry Groups. I have been keeping this chart since 1993 and it has been excellent predictor of the future relative performance of gold and gold mining company shares. When the lower line is at the high end of its range everyone loves mining company shares and gold. When it is at the lower end of its range everyone hates the group. A long term investor should sell when the lower line is high and buy when it is low."

Coin & bar sizes

2010-07-18T11:21:00.000+08:00

Below is a doc with actual (approximate) sizes of the Perth Mint's coins and bars. Consider that these coins and bars, which fit on an A3 page, are worth over $200,000. A great example of the "value density" of gold.

Perth Mint coin/bar sizes

Opening up gold's distribution channels

2010-07-16T09:22:00.005+08:00

Nick from Sharelynx forwarded two announcements to me today, one on Sprott's new Silver fund and Japan’s first precious metal ETF (actually four of them) where the metal is stored in Japan. The Mitsubishi series name is "Fruit of Gold", gotta love that.

I have been tracking all of these ETFs as well as other publicly reported storage facilities (eg GoldMoney) since 1999. I gave this proprietary data to Nick to combine with his extensive data sources to create a unique time series of these products, which you can find here if you are a subscriber (and if you're not you should be otherwise you are operating in the dark re data on the precious metals markets).

I'm sure we will shortly have some article by the gold haters that the growth of these ETFs are another bubble top indicator. I disagree, and would answer by quoting from a strategic paper I wrote for the Mint's Board in 2001, which probably sounds a bit old hat now:

The demonetisation of gold led to an emphasis on gold as an investment and this was reinforced further with the development of the Krugerrand and subsequent coin programs. However, from this promising start, gold has failed to move with its financial competitors and has thus lost its "market share" of the average consumer’s investment dollar.

What occurred with other investments was a shift from physical to virtual. For example, consumers moved from cash to credit cards, from bank passbooks to account statements, from physical share certificates to electronic registration of holdings. Consumers clearly became comfortable with the virtual form of investments and the convenience they offered. In contrast, however, gold remained physical and therefore became relatively more difficult to purchase and hold.

The result of gold remaining physical was that fewer and fewer intermediaries were willing to offer it to their customers. The two key intermediaries – banks and brokers – stopped offering direct investment in gold because other investment classes, such as shares and mutual funds, were easier to sell. This shrinking of gold’s distribution channels (in some countries it is only available from coin dealers) is it considered to be a contributing factor in the marginalisation of gold as an investment class. Hence, it is not surprising that gold is no longer considered part of a consumer’s investment portfolio.

The arrival of the Internet is accelerating the move to virtual investment categories. Customers will expect to interact through the Internet, especially for "low touch" products such as shares, insurance, and gold bullion. Customers will also increasingly move their banking and investment management online. However, this move will still involve intermediaries, it is just that the intermediaries themselves will become virtual, mirroring the change that has occurred in the financial products they sell. For example, instead of telephoning their broker, investors will trade shares directly with ComSec or Charles Schwab.

If gold is to regain a position on the average investor’s portfolio it must be on the intermediary’s "product list". The response of the gold industry to the move to virtual forms of investment does not address this issue. Virtual gold is only available via direct-to-consumer models, such as Perth Mint Depository Services or online from businesses such as Kitco. However, this approach requires consumers to find and set-up an account directly with the business concerned. These services are also not suitable for use by key intermediaries such as banks and brokers. As a result, gold is not truly "online" as far as average investors are concerned – it needs to be one of a number of investment options available when consumers ring or log on to their broker.

To do this gold needs to be virtual, as shares are. The difficultly is that, unlike shares or mutual funds, gold is inherently physical – failure to insist on physical backing against customers’ holdings leads to the temptation to issue more "paper gold" and with infinite supply, the price and value of gold becomes meaningless. Physical backing is the key to marketing gold as safer than mere paper assets, as something with intrinsic value.

The listing of ETFs on stock exchanges in my view begins the process of legitimising gold as an investment class in the minds of the average investor. However it is a necessary but not sufficient step - a case still has to be made for gold, it still has to be promoted. But at least it is "on the shelf".

The other advantage of ETFs is that they bring transparency to what is an otherwise very opaque market. While ETFs only account for 6-7% of estimated privately held gold, this percentage will increase over time, giving greater insight into the mood of gold investors. Well possibly greater insight, depending on how well analysts read the entrails of changes in ETF holdings.

GLD contango strategy, or not?

2010-07-15T17:30:00.000+08:00

A reader asked me to comment on A GLD contango strategy by Izabella Kaminska. It talks about Paulson & Co earning a return on its $3.4bn woth of GLD shares.

Holding GLD, meanwhile, is cheaper and more cost efficient than buying bullion outright.

I would note that most gold ETFs have management fees around 0.4%. Considering that Bullion Vault's storage fee is 0.12% and that Paulson would likely be able to get better rates than that from a bullion bank on $3.4bn worth of gold, it would be clear that GLD is not cheaper.

is it actually beginning to vacuum the world’s known gold supply float? Gold supplies, which previously, we might add, would have been put to work by central banks and bullion banks that owned them.

If you look at all ETFs and other storage services for which we have public numbers, together they only total 6.5% of all privately held gold. On top of that you can add the 30,000 or so tonnes of central bank gold. GLD is hardly vacuuming "known gold supply float".

Given the low costs associated with holding GLD versus pure bullion, as well as the permanent contango in the market — it is quite clear the asset lends itself favourably to the ever popular contango storage strategy

Because GLD is at least 4 times more expensive to hold than an allocated account for someone of Paulson's size, I'm not sure he could out arbitrage other players.

you buy GLD (perfect proxy for gold, but with no storage costs) you create a hedge by selling front month gold futures. You then lock in the spread further down the curve, and sit and collect the contango premium.

Firstly, GLD does have "storage costs", that is the 0.4% management fee. The problem with the strategy she proposes is that by selling a futures contract she has hedged the GLD long position. So while you may earn the contango, you won't make any money on the increase in the gold price because if the gold price increases, then you are losing on your short futures contract.

She has confused trading the basis (gap between spot and futures) with trading the price. You are either doing one or the other, but can't do both at the same time with the same capital.

My fustration with GATA

2010-07-13T09:34:00.007+08:00

Regular readers of my blog know my main objective is to educate. Unfortunately, this often finds me having to take objection to something GATA has written.

In Adrian Douglas’ latest dispatch he says that "the process by which only a portion of an investment is used to purchase bullion -- what is politely called "fractional reserve bullion banking" -- is fraudulent because it acts against the investor's interests. ... because the consequence of fractional-reserve bullion banking is undeniably price suppression."

This is a dramatic, but exaggerated and somewhat misleading statement typical of GATA. I understand their motivation to generate passion in their readers, but I don't think it excuses imprecision with the truth.

Fractional reserve bullion banking is not necessarily or inherently against an investor's interest and means price suppression. For example, an investor buys 100oz from a bullion bank, who then buys 100oz of physical. If the bullion bank then lends 50oz of that physical to jeweller, it has engaged in fractional banking as there is now only 50% of the investor's claim on the bank backed by physical. However, the other 50% of physical is with the jeweller and, most importantly, it has not been sold.

Yes, the investor is exposed in that the bank's lending has "locked out" 50oz of physical to the jeweller for the term of the loan as well as the possibility that the jeweller may go bankrupt (assuming the bank has no form of security). However, this sort of fractional banking does not result in a sale and therefore there is no price suppression.

My point is that it is the use (or to whom) the bank puts the metal backing its unallocated liabilities to that determines whether fractional banking = price suppression. Of itself, fractional banking does not necessarily mean price suppression as Adrian would have you believe.

Having said that, I should note that the majority of lending of metal (and I do not know the exact percentage) ultimately involves the sale of that physical to back some sort of short instrument (eg a miner selling forward). On this basis Adrian probably feels his black and white statement that fractional = price suppression is justified. I don't think it is. You may consider I'm being picky but I have a problem with this sort of rhetoric for two reasons:

1. GATA is a “tax-exempt educational and civil rights organization”. It is supposed to be about educating people. I think this is important, because a lack of understanding about how the market operates can lead people to exposing themselves to risks they may not be aware of. However by making these types of black and white statements, GATA is furthering misunderstanding. How difficult would it have been to say “because the majority of fractional lending is for short selling, it is a form of price suppression that acts against the interests of the (long) investor”? These sorts of qualifiers do not detract from the point being made, but give notice that the issues are more complex.

2. Adrian laments that “attempting to convince industry insiders … meets a lot of resistance”. Have GATA considered that simplistic statements and conclusions are interpreted by industry insiders not as rhetorical devices but read as ignorance of how the market really works. GATA therefore appears to insiders as lacking credibility, making it easy for them to ignore GATA and label what they say as “rants”.

This is the crux of my frustration with GATA and I don’t think it does them, or investors, any good.

As an aside, I note the dispatch refers to an earlier dispatch where Adrian Douglas says "a document published by the CPM Group in the year 2000 came to my attention recently". The document is "Bullion Banking Explained" and I made reference to this document in my London unallocated: Fractional Fubar or Benevolent Banking? post of 11 April. I considered it an obscure document, buried in CPM Group's website and had not seen it referenced to before. If you search google for "Bullion Banking Explained" with a date prior to 11 April there are only two other references to it in 2001 and 2004.

Coincidence that it comes to Adrian Douglas' attention in his 10 May dispatch one month after I reference it? By the way, this FOFOA blog attributes my post in a discussion of fractional gold banking in a discussion about whether the backing of fractional unallocated is actually physical or just further paper.

Another claim I was particularly intrigued by was when Adrian Douglas says that "as a consequence of my article it appears that Christian has realized how damning his paper was, and while it was posted at the CPM Group Internet site for 10 years, it recently was removed mysteriously." I was disappointed to find that it was just a website reorganisation. The document still exists at this link.

It would have been most amusing if CPM Group had been prompted to remove the paper as a result of GATA. Possibly Mr Christian no longer reads GATA – he did vow recently to never engage with them again after the debate on Financial Sense. Personally I think the paper CPM Group should remove is the two I reference at the end of my post on fractional banking where they say that bullion banks "take the opposite side of the hedge transactions, have inherent conflicts of interest, and always keep their own best interests in mind, even if these are the short-term best interests and arguably not in the banks’ own long term best interests." Mr Christian is the expert on the gold market, who are we to argue?