17 July 2011

Turnover and Fractional Memes

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).


  1. Great post, thought provoking

  2. This older article explains a lot:


    there are some my Paul Tustain´s pics at:

    (...in case you are interested.)

    Personally I appreciate how you try to put light in the clouds of misinterpretation and misunderstanding :o)

    IMVHO... during the last 3+ years which I dedicated to self-educating on this area I found more "shades of grey" in the gold market than I xpected. Many objectives, many understandings of events. Few people who I took in the beginning as "authorities" lost lately connecting with the leading group of thinkers.

    The fact is a fact is a fact is the quote of the day. :o)

    Good job!

  3. If you're not part of the hype you're part of the conspiracy. Bron may well be the hitman hired by the M15/Mossad to run down/assassinate Andrew McGuire rather than some unfortunate who began hitting the bottle a little early in the London day.

    Sane precious metals market commentary/analysis is the rare exception that proves the lunatic fringe rule.

    Investor in PM sector since late 'Eighties with the purchase of some 100oz silver bars only a decade early. Caught the '93 gold fund runup. Late 'Nineties had 20%-25% of assets in a couple South African gold miners. Last five years have kept 5% allocation in a single silver miner stock Silvercorp, adding in and taking off accordingly. It roundtripped from 1 to 10 back to 1 then to 15
    (3:1 split adjusted 3 to 30 back to 1.50 on the way to 45.) Keeping allocation constant resulted in selling on the way up, buying on the way down and harvesting a lot of gains. When silver fell from 50 to 35 the stock was cut in half, from 16 to 8. I felt it was pretty stupid betting on a single horse in a narrow volatile sector like silver and still think it stupid but continue doing it anyway because I've never made any money being smart. Looking at the past few years of price action pretty much the same gains would have been accomplished with any of purer play major silver producing peers...SLW, SSRI, PAAS etc.

    Silver tends to get dragged along with gold like a redheaded stepchild often lagging then catching up spectacularly as in the spike to 50 and au/ag ratio compression. Juiced up beta, exposure to gold market movements through a smaller allocation to silver/stocks freeing up capital to deploy elsewhere, at least that's the idea, so far so good with a strict risk management discipline. Over 5%, sell and under 5% buy, no ifs ands or buts.

    Having messed around in these PM markets for thirty years I find the commentary and analysis from those who have actually traded these markets on behalf of clients
    for most their adult professional working career to more helpful in understanding (and roundly reviled by the bug community for it...Jeff Christian, Andy Smith et al) than the other stuff that gets far greater circulation and viral appeal authored by seemingly anyone with bedroom slippers and a lawnchair.

  4. Thanks for the links mortymer, Paul Tustain is, as Pat says, one of "those who have actually traded these markets".

  5. Here is another one:


    ...its important to set definitions if people want to argue or make statements. I hope it helps to many to understand better...

  6. An update with more info:


    I suppose this OECD doc says it all about un/allocated gold accounts and treatment of gold.

  7. Thanks, that stuff is great source material and helps in understanding how CBs treat gold. I particularly like this:

    "Gold bullion held as a reserve asset is the only financial asset with no corresponding liability."

  8. There is a famous saying: "Its not what you paid for your gold its how much of it do you have." This is physical gold in your hands...not paper gold that doesn't exist