Silver news you won't get anywhere else

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)

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

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

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

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

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

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

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

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."