04 September 2011

Physical v Paper & PAGE discussion on FOFOA

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 to agree with Paul I's "egghead" analysis - in the end there is no forced requirement to split out physical gold from unallocated from leased out, so they can continue to play their games.

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

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

I'm underwhelemed by PAGE. So there may be a "fully allocated spot gold contract". Guess what, we sell the 300t of physical gold we refine each year at spot in the OTC market - the buyers can be totally private. I don't think we will see much trading moving to PAGE beyond what bullion banks will feed it to meet local demand as other buyers aren't going to want their activities out in the public and visible to the benevolent Chinese Govt.

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

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

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

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

As to PAGE being a way to get renminbi exposure, well that will be interesting to watch but note what Victor said "long the allocated contract at the PAGE and short gold in US$" - the end result is no impact on the gold price because the long cancels the short.

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

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

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

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

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

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

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

Agreed. What that document does is make it clear what unallocated is. No professional player is unaware of that, they just believe in the system and thus believe in the “value” of their unallocated, because they are of the system. I do not believe there is any big move from unallocated to allocated at the moment, nothwithstanding the antics of Chavez. If that was the case we would be seeing a lot more bidding for our weekly 5t.

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

Those comments about “silver scrap is mainly sold and refined locally because it is not high enough in value to justify shipping it around the world” were primarily focused on Australia, which is more geographically remote, and does not have much silver refining capacity. In other markets silver may be far more mobile.

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

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

costata: “Recently I came to the opinion that leverage on the currency side was irrelevant. The key point is that the gold itself is not fractionalized. If PAGE said no margin that doesn't prevent someone from borrowing outside the exchange and trading a 100% cash account with PAGE.”

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

costata: “We should also not underestimate how much the Chinese love to gamble. The paper gold market appears to be going gangbusters right alongside the development of the physical gold market according to this article.”

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


  1. Paper price equals physical price (currently) - as you noted, Bron. That is a point that must be repeated ad infinitum until all of the people who have been lied to and told otherwise understand it.

    Once they understand it, they'll realize why all of these other exchange are not a panacea that will change the gold/silver landscape.

  2. Nice one Bron.

    Just a heads up..

    It appears, that when you copy and past into Blogger, it screws with the space formatting between words, when viewed in a feed reader.

    Maybe something like the (chrome) extension 'Web Clipboard (by Google)' may help with that oddity.

    Love your work..

  3. Part of the beauty of the web - you run into stuff written by people who know what is, people who see what could be and people who know what has been.

    It takes all these perspectives to form a reasonable basis for moving forward.

  4. "who know what is, people who see what could be and people who know what has been"

    I assume I'm the know what is?

    Robert LeRoy Parker - a liar in what respect, can you be more specific, I covered a lot of point in the post.

  5. Hi Bron,
    There are other interesting docs i have found about the un/allocated issue, please have a look, e.g.::



    Here I find this part important: "C. Monetary Gold "

    Could you please comment?

    I have a feeling (as I mentioned earlier) that this accounting standard is evolving and this sensitive issue needs time but we have not heard the last words from standardization/harmonization point of view.

  6. Yes they are taking their time. The question is whether the breakdown of monetary gold into physical and unallocated will be made mandatory to report or just a one line monetary gold figure.

    I note also the statement that "however detailed information on swapped gold is not required."

    No reason given, it must be obvious to the readers I suppose.

  7. :o)
    We shall see what we get in December:

    "...The IMF Committee on Balance of Payments Statistics (Committee) was informed at its November 2009 meeting that the review of the International Reserves and Foreign Currency Liquidity: Guidelines for a Data Template (Guidelines) would gain momentum in the middle of 2010. A consultative process is underway now. As noted during the 2009 Committee meeting, an important element of the consultative process involves reconvening the Reserve Assets Technical Expert Group (RESTEG),1 and this was completed in September 2010. A draft schedule (Appendix I) for updating the Guidelines has been developed. The schedule calls for preparing a pre-publication draft of the Guidelines, for posting on the IMF website by December 2011..."

    Source: http://www.imf.org/external/np/sta/bop/resteg.htm

  8. I don't know if PAGE will be a good or bad price discovery mechanism. I do know that anyone who would trust the custody of their gold, 'allocated' or otherwise, to an organization controlled by a communist dictatorship will come to regret their decision, when (not if) the Party decides they want the gold. Caveat emptor.