25 April 2013

Chill out dudes

OK, it is all getting a bit silly out there on the gold interwebs, particularly in respect of the supposed physical-paper price disconnect. I have been trying to kill this meme ever since it first appeared in 2008 but it seems the idea of production capacity shortages seems too difficult for many to get.

The "real" price of gold isn't what you pay for a 1oz coin on eBay. As Mish says "Premiums on small denomination coins is not the same a general premium on physical gold itself." But don't take his or my word for it, here's what Jim Sinclair says:

"For many retail investors around the world they are dialed into the paper market in various exchanges. The second market is a small one, but popular among retail investors, and that’s your corner or even major coin dealers. But neither of those are in fact the real gold market, which is the cash market for gold. This is the cash market for 400 ounce deliverable fine gold bars. That represents the true price of the market on any given day. ... for the physical market, not the coin dealers, but the real market, the 400 ounce deliverable market and Asian type settlement ..."

So what is going on in this real market? Well, don't look to Jim Willie who thinks that "those who purchase metals in bulk are having to pay $2000 or more an ounce for gold in the Asian markets". I work for the Perth Mint and we sell tonnes and tonnes of gold kilo bars into Asia every week and we'd be lucky to get a few dollars of premium above the so-called fake paper spot price. That tells me there isn't any stress in the wholesale markets. So COMEX and LBMA aren't going to be failing any time soon.

Then we have the ABN Amro story with John Embry claiming that "the Dutch Bank ABN AMRO came out and literally said that if you have allocated gold with us, you can’t have it. That, to me, is a default". Sorry, not true, thanks to About.Ag who found this link to the English translation of the conditions of those accounts and on page 6, section 4.3, it says:

"1. You have no right to the physical precious metals which you invest. However, under certain conditions, you can physically obtain the precious metals. ... 3. You cannot always physically receive the precious metal. ... In that case, you therefore have no rights or receivables vis -à-vis DBN or the bank."

Sounds like a classic bank unallocated account, which unlike the Perth Mint's, is not necessarily backed by physical. So it is not a case of default.

Final example is Bill Downey's claim that "the London physical platform that buys and sells physical gold gets locked up. The system freezes". When I told Dan at The Fundamental View that there was no "the" London platform, he followed it up and discovered that:

"The screen shot in the article is not of a "physical" market but just a trading platform from a bank (one of many, each BB has their own platforms) for trading spot unallocated XAU/USD FX pair. The post made it seem (to the unaware) that this was "the" London platform. – Mr. Downey acknowledged this error in his email to me. ... His articles made it seem as though the system “shut down and locked people out from placing orders”. To his credit, Mr. Downey admitted to me that this could not be proven and that this was simply speculation on his part. He did admit that orders could still be phoned in."

Simply speculation on his part. This price drop seems to have resulted in a lot of that. Look, it is great news that retail investors have gotten a bit smarter and are buying on price drops rather than chasing the price up like they have in the past, but it does not portend the end of the (paper gold) world, yet.

If you want to be a little smarter, consider what I said to Ed Steer today, "buyers really need to go for the cheapest physical they can and be a bit more flexible on who makes it...or go from coins to bars. Paying high premiums just because you want a certain brand or bar size, just means your money buys less ounces, which takes less ounces off the market."

I note that Sprott's gold trust is trading pretty much at spot. So if you are a suspicious goldbug, which is why you want physical, then doesn't it make a lot more sense to buy the trustworthy PHYS at spot and then when this rush dies down, to sell your PHYS and buy physical coins/bars at more reasonable premiums? Funny how none of the physical pumpers mention this. That's because they can't make money off exorbitant fabrication premiums if you buy PHYS rather than their coins.

Like the post title says, Chill Out, and think a bit deeper about the memes being pushed on you. To help with that, suggest reading this speculation that Andrew Maguire is a US Federal Reserve double agent. That site is a joke by the way, for those without a sense of humour, although the question of why Andrew hasn't produced a CV to stick in Jeff Christian's face is valid and something that puzzles me and some on this Kitco forum thread.


  1. It's comforting to read a little down-to-earth, not-so-common sense for a change.

  2. About how many tonnes do you sell per week?

  3. Excellent piece ... good job.

  4. Thanks bron. Hope u can withstand the crazies


    Bron from an earlier comment,


    Depository has not seen the same sort of volume jump as shop/online coin/bar sales. Also a bit more selling.

    We refine around 300t a year, so that is 6t a week we sell. Can't reveal premiums, but when a bullion bank is buying $50 million worth of gold, they certainly aren't paying retail."

    23 April, 2013 11:27



  5. And the premiums are fab premiums, not premiums on spot.


  6. @Milamber


  7. Common sense at last! Thanks Bron.

  8. Hi Bron, thanks for your reasoned perspective. I see you quote Sinclair's KWN interview. He also says

    "...But here is the important point, as long as the physical market sells at a significant premium above the paper price of gold, the COMEX warehouse is going to be significantly drained. You will also see the market, between various dealers and interbank 400 ounce gold bars, will also act like a vacuum in terms of the exchange warehouses. Meaning that will also serve to deplete the COMEX inventories."

    Couple of questions:

    1.) would you agree with him that if 400oz bars begin selling at a premium over the "paper price of gold" the COMEX will be drained?

    2.) I take it that you are not seeing such a premium so how would you characterize the changes in COMEX inventories currently being seen?

    3.) How would one calculate the premium of 400oz bars over the "paper price of gold". In other words what is the "paper price of gold" that one would use? Gold ETF price, a particular COMEX futures contract price etc?


    BTW I found your interview with Erik Townsend last year on arbitrage extremely informative. It seems like the conditions Jim is describing would result from arbitrage between COMEX and the 400oz bar OTC spot market. Is that right?

  9. MikeB - note that COMEX uses 100oz bars, not 400oz London Good Delivery bars...

  10. Hi Kid,

    I was trying to understand if Bron agreed with Jim about the conditions that would cause the Comex inventories to drain. Bron seemed to be agreeing with Jim that the real physical market is not coins but the market for 400oz bars and I was trying to understand what other parts of Jim's views he agreed with.

    Upon reading Bron's post again, I am now a bit more confused because of his reference to "...so-called fake paper spot price."

    So if the physical market is the 400oz bar market and not the coin market nor COMEX nor the LBMA market with associated "paper spot price", then how does this 400oz physical market work? I was assuming the 400oz "physical" market was the LBMA OTC spot market but apparently that is not the case. Who has visibility into it and its associated premium to the other market gold prices?

    Can you provide some clarification KD?

  11. Thanks for addressing this Bron.

    What do you make of this tweet from Jim Rickards? He was having dinner with some "big fish" and said this:

    Jim Rickards ‏@JamesGRickards 24 Apr
    #MrGold was at the table. Says physical to paper spreads are at all time wides; $4 in Istanbul, $2.50 in London. Physical going its own way.

    I assume he is talking about very large transactions here?


  12. " I was assuming the 400oz "physical" market was the LBMA OTC spot market but apparently that is not the case"

    yes - that is the case.

    and no, you and I cannot see those transaction prices. we can, however, see the pricing of other instruments which own 400oz silver bars, like PHYS and GLD and IAU, and we can see the prices of contracts that settle in 100oz bars, like COMEX futures, and there are no premiums on any of those items.

  13. Thanks for your quick reply KD. So when Bron wrote ...

    "I work for the Perth Mint and we sell tonnes and tonnes of gold kilo bars into Asia every week and we'd be lucky to get a few dollars of premium above the so-called fake paper spot price."

    What do you think his definition of "so-called fake paper spot price" is?

    I'm trying to get to the bottom of what commentators mean when they talk about the price of gold determined by the paper market, the price of gold determined by the physical market and the potential divergence between the two.

    I believe the commentators who use these words would consider the price of a COMEX gold futures contract the paper price of gold. Would you agree that is their view?

    Do you have a different definition?

  14. Thankfully I just wrote on what the spot price is http://www.perthmint.com.au/education-spotprices.aspx

    What you are asking for re paper price is not really possible to lock down. Note that OTC trading in London is done in unallocated gold which can then be allocated into 400oz bars, so really paper and physical are bound together.

    The issue of differences between COMEX prices for 100oz bars and London OTC for 400oz or Istanbul is just a case of loco premiums and discounts, which thankfully I also wrote on here http://www.perthmint.com.au/education-loco.aspx

    $2.50 for London loco gold is the more relevant figure, but that is only 0.16% and i assume it is relative to futures/forwards price. However to really extract the premium you have to take off the time value of money. Rickards comment is scant on details so it is hard to work out what the $2.50 is relative to - COMEX futures, London fowards, and what duration - are all info we need to work out whether it is meaningful.

    I'll do a post on the COMEX stock drop today sometime.

  15. A $2.50 premium for something that costs over $1400/oz doesn't seem to be much of a premium.

  16. Yes exactly. Who you gonna believe, Rickards or Willie's $2000/oz price?

  17. Thanks for the insights Bron.

    I guess what I'm interested in is whether there is any increase in premiums at all - even if they are very, very slight.

    The recent correction in gold seems to have resulted in large volumes in retail. Wholesale - perhaps not as much but still higher than usual - correct?

    Retail is obviously struggling with demand. If there is absolutely no change in wholesale premiums, that suggests the market is very liquid, and the settlement mechanisms can cope well with increases in demand.

    Another would have led me to believe that transactions of large size for delivery would need to be done off-market due to physical liquidity constraints.

    Is this no longer the case? Was it ever the case? I appreciate your thoughts.


  18. Premiums on kilo bars were strong before the crash and continue to be, but nothing IMO indicative of stress.

    Liquidity - every market has different amount of liquidity, or how big a trade you can do before you start to affect the price. For gold that is around a few tonnes. Above that and you have to "work" the order, in other words try and hide your buying to avoid tipping off other traders who will try and front run you.

  19. Thanks for that - clears things up.

  20. Thanks - that clears things up for me

  21. Hi Bron,

    Thanks for the link on spot price determination. So there you write:

    "This spot price is updated by the bullion desks of the big banks and is, in effect, a bulletin board or forum where these banks can publish their prices."

    So does everyone with access to these Reuters or Bloomberg "bulletin board" feeds only see the multiple "spot prices" from each BB/entity that uploads prices or does Reuters/Bloomberg also provide some kind of proprietary aggregate of the prices in the form of a single number?

  22. They aggregate it into one feed. Next to the price is a code of the bank who provided it, so as you watch it change you see the bank name change as well.

  23. Hi Bron,

    I enjoy reading your work.

    You wrote: 'So what is going on in this real market? Well, don't look to Jim Willie who thinks that "those who purchase metals in bulk are having to pay $2000 or more an ounce for gold in the Asian markets". I work for the Perth Mint and we sell tonnes and tonnes of gold kilo bars into Asia every week and we'd be lucky to get a few dollars of premium above the so-called fake paper spot price."

    I know you read Another/FOA/&FOFOA so I'm curious what do you make of Another's claim that large orders of Bullion are traded among large players at prices multiple times that of the 'so-called fake paper spot price?' Similarly what is your opinion of FOFOA's recent posts 'Think like a Giant 2' and 'Checkmate?'

    You also wrote: "Liquidity - every market has different amount of liquidity, or how big a trade you can do before you start to affect the price. For gold that is around a few tonnes. Above that and you have to "work" the order, in other words try and hide your buying to avoid tipping off other traders who will try and front run you."

    If anything above a few tonnes will start to move the price then consider that following:

    The Chinese Government alone has enough FX reserves to buy the entire United States Treasury gold stock (8,000 tonnes) 12 times over at today's prices.

    The following 'developed' counties : UK, US, Switzerland, Netherlands, France, Italy, and Germany, have roughly 58% of their FX reserves in Gold vs. only 2.6% for the following 'developing' countries: Thailand, Indonesia, Taiwan, S.Korea, Japan, India, and China. If these 'developing' countries were to move to just 10% allocation in gold vs. the current 2.6% that would represent an increase of over 8,000 tonnes.

    Now it's no secret that many of these countries would like to increase their gold holdings to such a level and they do have the currency reserves to do it. What then could be the problem, perhaps the market is not 'liquid' enough at the current 'so-called fake paper spot price?'




  24. I don't believe in the multiples of spot theory. The relative lack of liquidity of gold compared to stock and bond markets is widely known and why we may see large buyers and sellers (usually central banks) do off market trades at spot. This also occurs in stock markets. There is no need for a buyer to pay more than spot because the seller also wants out and if they sell on market they will push the price down. It is just game theory between these large sellers and buyers which ends up with a price equal to spot.

  25. Aloha & G'Day Bron!

    -v comment on the US Treasury gold reserves which are something like 8,133t or 261 mil Au ounces if you combine what the US Treasury keeps at the US FED NY vault. Can anyone find a bar list on UST gold?

    I sent a letter to the US Treasury Mint recently. Here is the address:
    Customer Service Center
    United States Mint
    2799 Reeves Road
    Plainfield, IN 46168-7700

    I asked if I could buy 1mt of their reserves for $1,357,3735USD at their official rate of $42.22 per ounce. I have yet to get a reply, but I might be on a terrorist list by now!

    That would be a ~97% discount to the current COMEX price. I do not know any other commodity whose single largest holder insists on pricing its reserves at such a market discount. Certainly the US does not price its oil reserves at $2.80USD per barrel, which is the 97% equivalent to the US Treasury gold pricing. I mean ... what a huge dislocate. I speculate the US Treasury keeps that "official price" because any increase would be seen as a measure against the value of a USD. The US Treasury knows that Nixon ended the gold convertibility in 1971 yet they price their reserves as if we are still operating on a gold standard. Year after year for decades it seems nobody questions that pricing and it is accepted as what? Just a kooky US Treasury doing their schtick?

    Okay, I know that Congress would have to approve my US Treasury gold buy, but maybe the US Treasury will shed some light on why they insist on their antiquated price mechanism when they reply to my letter. If they do! I sent a similar letter to George Bush in 2006 asking if he would allow me to quit paying into Social Security if I disowned any future claim to any of my benefits. I am still waiting for that reply also!

    Australia is ranked #37 in gold reserves with about 80t. What is your take on such a US Treasury dislocate and does the Aussie treasury price their gold reserves at a 97% discount to the Perth Mint price? Is there a published bar list for the Aussie reserves?

  26. Why the US values it at a historical price is beyond me. Australia and many other countries value their gold reserves at current market prices.

    Central banks do not publish their bar lists and rarely where it is stored or if it is lease (Australia is an exception in that regard and is very transparent, currently only leasing a few tonnes out of 80).

  27. Thanks very much for your cool and calm inside analysis. I always welcome you view Bron...

  28. This bullion baron post http://www.bullionbaron.com/2013/05/rumors-of-my-death-have-been-greatly.html has additional information on the ABN Amro story with a letter from the bank.