23 January 2012

Survivor Bias and TBTF Tyranny

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.


  1. "as it is going to get nasty"

    Not disagreeing with you but are you just using a little hyperbole, or are you seeing a movement in the bid between unallocated & allocated?

  2. The 'Top down' view seems reminiscent
    of JPMorgan to MFGlobal.
    There is a growing movement in the US,to audit the FED's gold,to see if it is there or has been 'leased' a hundred times over to keep the price down on the COMEX.
    What do you think?

  3. The "nasty" comment was referring to London Banker's speculation that financial failures were now becoming a country v country geopolitical game, not about any price divergence.

  4. Hi,For any that doubt that the rigged game on gold suppression,has
    been going on since de-monitization
    please read all the links from --
    Fed chairmen admitting it time & again!
    Greenspan & others!!

  5. Bron,

    Off topic, but do you still plan on sharing Perth real weekly/monthly numbers for gold sales?

    The pumpers are getting loud again and some sanity in real numbers would help.

  6. Also off topic, at least sort of.

    I was intrigued by your post on Srewtape Files back on Jan 17 about the 'Lahk' trading unit (100,000 oz) on the London Over the Counter spot silver market.

    Since then, I have been wondering what unit (number of ounces) OtC London gold trades in?

    That would also be worth knowing.

  7. "...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..."

    There was mention after the MFG collapse of which brokerages were 'safer'...the problem is while there's other MFG's waiting to happen, even what many would consider 'safe' are only safe until the dominoes start falling...and what seems 'safe' on the surface may just be another accident waiting to happen...who really knows...

    so in my mind, it's a game of cat & mouse - not only would I need to know how to trade/invest profitably when surely I don't have full information, especially when the house is competing against you and in markets like we have today, but also I need to worry about where I can put my dollars - so now I need to research what I would consider the safest entity. Thus, I take a gamble it will stand just long enough so that it is either a) standing long enough so I can transfer my dollars out to another 'safer' entity or b) it's one of the last entities standing

    And then one has the issue of if you don't get your physical gold now, you might not be able to get it later.

    imo, too many headaches, too much risk, would rather spend my time and energy elsewhere and be able to sleep at night with knowledge that physical gold removes all counterparty risk.

  8. Seer, given there are different views internally on what constitutes competitively sensitive information, it will be a while before I start to put out some data, but I will get something out there.

    Larry, between bullion banks gold is traded in 1000oz lots generally. Below that and the spread they quote you will widen, assuming they will trade with you at all for less than that.

  9. Thanks for the update Bron - it's good to know that some real numbers will be forthcoming at some point.

    And just to be sure: you seem to see "The London Trader" as a somewhat credible source?

  10. London Trader I think tends to talk his book and hype, so I don't pay too much attention to him.