13 January 2012

Emotions, Premiums and Backwardation

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.


  1. Hello Bron,

    Could you please explain what it will actually look like when the physical & paper markets diverge.

    My understanding is that when Perth Mint is unable to buy gold from the MINER at the "spot price", then this will constitute divergence. The MINER must have decided that the spot price is not "acceptable" or "right", maybe because he has physical buyers on the side who will pay him more??

    Please confirm and/or explain.

    What is not clear is when/if the paper & physical prices diverge, is:
    (1) What are the factors that would cause the big players (eg. miners, Mints [eg.PM]) to ACT in such a manner, so that it is now clear that paper & physical prices have diverged.
    (2) How would Perth Mint conduct business in this scenario. Would you just increase the spread by a large amount or would you need to maintain 2 sets of prices??

    Do you think that we may see such a split in the future?

    Thanks kindly.

  2. Bron, you should write a short article & send it to zerohedge. You more than anybody are able to observe the process of redeeming unallocated bullion from London & how miners sell their dore, to the Perth Mint or whoever. Also the possibility of a divergence between unallocated & the bid for Perth Mint allocated or physical delivery.

    You might get a lot of commenters calling you an asshat (rather than an arsehat) but no biggie.

  3. Hello Bron, You say "Perth Mint is not having any problem acquiring, or selling, silver at spot."

    I am being quoted 37-18 AUD for 300
    Koala's,Kookaburra's etc.from Perth Mint Sales,35-18 AUD for 500.
    yet spot has been below 30 USD.

    Strange !

  4. JOAT,

    That's fabrication costs. They don't work the metal (at spot price) into different coins & bars for free.

  5. Tyler Durden's comment re-posted and discussed here:
    isn't exactly convincing, and I note that he didn't respond at all to your comment at ZH at all.
    I'm with the Screwtape File cynics on this: very fishy indeed.

    For me, this next great wave of the 'pump and dump' scheme is both good and bad, but bad for the longer-term silver market. If it succeeds it will provide a nice profit opportunity provided you can get out before the dump. But there must be a very finite limit to the number of times that they can do this before the mugs begin to lose faith and depart en mass, which could suppress silver prices for some considerable time.

    Interesting that they don't attempt this scheme for the gold market - presumably because there are insufficient numbers of idiots with enough real money to buy much gold (unless there is a more subtle scheme incorporating FOFOA and the like).

  6. Gordan, As a lover of the English language and logic, I hope your claim that FOFOA has been bought out is wrong.

    If we have been trolled for 10+ years by people who have presented predictive, logical, and plain English arguments for gold, in order to convince a minority to buy some gold then I've been fooled.

    Good luck to our new overlord bankers, who's micromanagement skills know no bounds.

  7. lol @ last anon. What a comment. It had me in stitches. :D