31 May 2013

Gold and silver market status update

An update to my previous posts here and here on the state of the gold and silver markets as the Perth Mint sees them. Coin demand (retail and wholesale) has also eased but still good. Our retail outlet in Perth is quiet.

On the gold kilobar market, premiums have come off a bit but are still way above normal levels. This market action is confirmed by Warren "the ETF bar list guru" James at Screwtape Files who has observed a clear preference by bullion banks to choose 99.99% 400oz bars rather than 99.5% bars when redeeming physical from the ETFs as investors sell up, as the 99.99% bars can just be melted down and recast into kilobars (no refining required) and sold at a premium. Warren will have a post on his blog showing this graphically when he gets time.

On the Depository front, over the past few weeks we are now seeing net selling. It seems a bit of that is clients selling up part of their holdings and switching into equities. This may reflect what Financial Sense Newshour said in this podcast where they have clients who originally had a modest allocation percentage into precious metals but after the bull market (and no rebalancing) they are now sitting on excessive allocations of say 75%. Clients may have been induced into rebalancing with gold not showing any signs (yet) that a rapid rise is coming combined with the stock market showing gains.
We have also seen some physical collections of metal in Depository, mostly silver but minor quantities overall. The net loss in Depository is modest an similar to the percentage losses Bullion Vault, GoldMoney and BMG Bullion are also showing, according to Sharelynx's Transparent Holdings page (you'll need to subscribe if you want to see the data). The ETFs have been showing a lot more percentage losses than PM, BV, GM and BMG have, which reflects I think our more retail (strong hand) client base.

I don't know how to read this market behaviour. Weak investor sentiment like this could portend a bottom, but it could also make the market suseptible to a sell off if the April price smash entity decides to test the market's strength again as it need not worry about position limits and the CFTC catching them out.

Gene Arensberg at Got Gold Report also sees the market as “very imbalanced” and “dangerous for both sides of the battlefield.” with the largest hedgers of gold are positioned as though they see very little downside left, while on the other the Funds, while still net long gold, have put on their largest gross short position since the disaggregated data begins in 2006

Further confusing messages comes from the contrast between James Turk and the Royal Canadian Mint. James Turk reports some stress in the wholesale markets (although I think when he says that "some of the larger orders to buy bars have been moving out to as long as T+5, which is extraordinary" he is referring to kilobar, not 400oz bars, as GoldMoney isn't showing premiums or delays for their 400oz bar backed product) and that "the buyer or buyers who pushed the gold price up during the London PM fix yesterday were obviously desperate to get their hands on physical metal and were prepared to pay whatever price it took to obtain it".
Then we have this Globe and Mail article which notes that the Royal Canadian Mint's gold and silver exchange-traded receipts were trading at a 1.7% and 1% discount on Wednesday. The fact that "major investors holding at least 10,000 of the gold ETRs or 5,000 of the silver ones could also redeem them for metal and acquire holdings at a below-market price" certainly isn't reflective of a shortage in the wholesale markets.

At this time I think I agree with Gene: "We have to admire the courage of those willing to sell gold short in this, very imbalanced environment, knowing that a reversal could occur any moment and that it could be epic in its violence. Rest assured we have neither the courage nor the inclination to do so ourselves."

30 May 2013

Hedging against price changes

Slow Loris Larry asked a few questions around who loses when prices decline and how do industry participants protect themselves against price declines.

SLL: I understand that the Perth Mint does not, as it owns no precious metal. It stores allocated metal for account holders, and it backs its unallocated accounts with metal that is being refined, or fabricated, or is for sale. Being a Mint account holder, both allocated and unallocated, I know full well who is exposed to changes in the prices, both up and down. However, the Perth Mint’s ‘business model’ is apparently unique in that it doesn’t involve hedges. How about other refiners, fabricators, and purveyors of precious metal products, particularly at the wholesale level?

The Perth Mint's business model is unusual, but certainly not unique. It can also be considered a "hedge" similar to the other two common hedging methods, being futures or forwards. The reason it is unusual is because leasing (or renting) gold outright requires the person lending to you to trust you. Futures and forwards involve initial margin deposits and margin calls as the way the lender can manage their risk that you won't honor your side of the hedge.

SLL: I know, from past experience, that Local Coin Shops always know what the current going wholesale prices are, and will still phone a wholesaler when a large transaction is in the offing in order to lock in a guaranteed price that they can make a profit on. Fair enough, or they couldn’t stay in business.

That sort of back-to-back buy then sell is also a form of hedge. However, some smaller dealers do not do this and are prepared to take some risk to the price. That probably seemed a good idea while the gold price was mostly rising. However, consider this Bloomberg article:

The prospect of losses has made retailers who buy used gold and the middlemen who sell to refiners unwilling to part with metal purchased at higher costs. “Nobody is selling right now, and it’s survival of the fittest,” said Dan Nektal of 46th Street Buyers in New York, which has been in the jewelry business for three decades. “If you bought at $1,700, how can you sell at the moment? Everybody’s presuming it’s going to go back up.”

I would guess this happens because their transaction sizes are too small to hedge on futures markets. However, dealers could use FX trading or contracts for difference websites to hedge small quantities, but that does require some financial knowledge to know what you're doing.

SLL: But how about the larger operations? How do they hedge their stock against price movements, particularly to the downside, as they will profit from price increases on stock they hold but cannot let themselves be unprotected from downside risks if they want to remain in business.

I would be surprised if any larger organisation did not hedge themselves, both from price movements down and up. These businesses buy their inventory and then short it; they are hedging their stock. Consider that most of the gold sitting around in the inventories of refiners, mints, coin dealers etc is hedged and ultimately shows up in COMEX and OTC markets as a base amount of short positions.

Now some of the larger organisations may not fully hedge their inventory, say only hedging 90% of their inventory if they thought that the price would rise. This to my mind is speculation and should not be related to, or accounted for, as part of the profitability of the underlying business.

SLL: I know that spreads tend to increase when ‘spot’ prices go down, but only temporarily and sooner or later adjust to lower prevailing prices. I also understand that, eventually at least, miners will only be able to sell the partially refined metal that they produce at the lower prevailing prices. But there are lags at all stages from mine output to retail sales.

To the extent that a small operation doesn't have the volume to fully hedge every transaction, then increasing spreads are one way to manage the risk of having bought at higher prices. That would create some friction in the flow of gold through the value chain, but I don't think it would be an issue at the bigger end of the chain, as they would have much better hedging processes.

SLL: If one looks at the COMEX, which is not really intended to be a major vehicle for delivery of large amounts of physical metal, it is basically a ‘zero sum game’, or speculators’ market , with clear winners and losers on every contract. Do large bullion buyers and sellers hedge their holdings of physical metal there with paper contracts? Or is most of the necessary hedging done on the LBM Over-the-Counter unallocated market, where there are presumably also clear winners and losers, at least over time?

Futures markets don't need to physically receive or deliver metal to perform their hedging function for the industry properly. A supplier and customer can independently sell and buy futures contracts with speculators on the other side of their contracts. When the gold is ready the supplier can sell to the customer at current spot prices and physically ship the gold to the customer, nothing going through COMEX warehouses. The supplier and customer then independently close out their futures contracts. From this viewpoint, COMEX warehouse changes would only occur when there are changes in the amount of gold in the entire value chain or when there are timing differences between participants in the value chain.

Which market is used depends on the country. In the case of the US or Japan, then most hedging probably goes on in their futures markets. For countries without a futures market, possibly bullion bank OTC transactions are more prevalent.

SLL: But the main players on the LBM are the Bullion Banks, are they not? Do they hedge against price declines with short forward contracts? If so, who are their counter parties, other Bullion Banks? Or Central Banks? Or just big speculators, like hedge funds? Dumb money, in other words? Again, someone has to loose when prices go down. So who are the losers when the evil manipulators crash the COMEX derived ‘spot’ price? Or alternatively, do efficient markets just naturally balance excess supply and declining demand with lower prices?

My view is that bullion banks, like all the other participants, are mostly hedged, that they act primarily as brokers or intermediaries between speculators, small or large. Sure, they have their own speculative positions, but it would be minor compared to the entire industry's hedging requirements. It is not like they just sit there and take whatever net position the industry has on to their own books. It is a process of the bullion banks taking on a client's position and then finding another market participant to hedge that position against that makes the price move.

In respect of the inventory of gold sitting in the value chain, the futures, fowards, and leasing markets are just mechanisms by which investors effectively "own" that inventory and take the risk of changes in the gold price away from the businesses in the value chain. While the financial markets may have become a casino and dominated by speculators betting against each other, it doesn't mean in there somewhere is legitimate inventory hedging going on.

26 May 2013

Delusions so obvious

Time to catch up on some articles that caught my eye this week. First up is Charles Hugh Smith who picked up a quote that really resonated with me:

The obvious can be dangerous. The deluded man frequently finds his delusions so obvious that he can hardly credit the good faith of those who do not share them.

because I've often been on the receiving end of this. The problem with much of the precious metal commentary is that it seeks to explain market action in terms of obviousness, black and white, single reasons. I understand why this is, because many people are confused and afraid and simple comic book explanations are easy to understand, emphatic, and give a sense of control as you know the "real" (sole) reason why things are as they are. People don't want a multi-factor explanation where which factor is driving behaviour changes over time and the factors influence each other. It is too complex.

A good example of obviousness in action is this Alasdair piece (my bolding):

My reason for writing to the FSA was to establish if allegations were true that bullion owned by these two trusts was being used in contravention of custody agreements. If they had any foundation there would be an important regulatory risk for the FSA which should be drawn to their attention, and in any event needed clarification to prevent a false market. Suspicions that this was the case were fuelled by obvious conflicts of interest in the firms concerned. The sensible course for the FSA would have been to investigate the matter with the custodians and give them a clean bill of health, or alternatively take appropriate action in the event of a breach. Instead, they ducked the issue, leaving the impression that there was indeed a problem.

I couldn't have found a better example as Alasdair actually uses the word "obvious". When I see similar certain words like "will", "is", "clearly" I get cautious because it generally doesn't suggest an open mind. In this case the obvious conflict of interest is that the bullion banks are massively naked short while acting as custodian. You can read the letter Alasdair sent here where he states that "it is common knowledge they are running large short positions in those markets. The perceived conflicts of interest have led to widespread public allegations that the assets of these ETFs are being used to satisfy market deliveries in bullion markets ..."

Now whether or not this is true is beside the point I will be making, but if you want the other side then consider Kid Dynamite's comments/debate on my last post. A little more confusing is the statement by Alasdair in this post that bullion banks are now net long, so does that mean there is no longer a conflict of interest?

Anyway, my point is that Alasdair does not credit the FSA with any good faith or that that maybe the situation is not as obvious as he thinks. Here is an alternative viewpoint. Financial firms for a long time have had potential conflicts of interest between their custodial and trading arms. This is not news to regulators and they and the market have developed mechanisms to manage this. What they are interested in is evidence that these Chinese walls are not working. A conflict of interest can exist if a proprietary trading desk is short OR long. Simply quoting "allegations" based on an inference that a bank may be short would not represent anything obvious to the FSA. In addition, consider that the FSA can maybe entertain the possibility that the short position is hedged and is just market making, as Kid Dynamite asserts. Is it then ducking the issue when from their viewpoint what the FSA sees is just a non-evidence/fact based circumstantial allegation? They will expend their limited resources into investigating this when they have many other breaches to look at?

It may be entirely possible that the bullion banks are using ETF metal illegally. Certainly in most jurisdictions precious metals often fall outside financial regulations as they are real property and often not classified as a financial product, creating loopholes as discussed in my CFTC post. The problem with the "obvious mindset" is that it prevents those who hold it from developing an appropriate strategy to resolving it. They are unable to put themselves in the shoes of the people they seek to convince and rather than trying to find that person's hot button concern, they resort to "its obvious" and "you can't trust them" arguments. When these arguments are rejected because they are not obvious to the other person, the "obvious mindset" person sees it as another example of corruption/stupidity, which feeds their distrust even more, rather than "crediting good faith" to the other person.

Having said that, Alasdair's letter to the FSA is cleverly worded to appeal to the FSA's hot button concern, I just think the letter was ineffectual because the evidence presented was not convincing enough nor were the allegations "widespread" or "public" from the FSA's point of view - precious metal bloggers don't constitute "widespread public", as much as we'd like to think us blogger/commentators are that important.

On to Dan Norcini, talking about copper:

Drawdowns in copper stocks are notoriously unreliable signals however as some less-than-scrupulous players have in the past, simply bought copper, moved it out of the official warehouses and stuck it elsewhere all to give the idea that demand is robust. That allowed them to play the market from the long side claiming that supply was insufficient for current levels of demand.

Of course this would never happen in the gold or silver market. Just a thought for those who claim all of the COMEX and ETF metal has gone to China, never to return. Again, there are often multiple factors behind market behviour, it is not black and white. Maybe some of that metal is sitting in other off-market vault, helping to paint the tape?

Regarding the ETF holdings reductions, Dan calculates from recent 13F filings that "if you take the largest institutional investors combined, their selling accounted for nearly 75% of the shares being dumped in GLD", which is interesting as institutional investors hold around 50% of GLD. I think Dan sums up the recent market behaviour well:

"This is where the pressure keeps coming on the paper markets over here in the West. Institutions see no reason whatsoever to own the metal when they can better put that client money to work achieving historic gains in the US equity market bubble. As mentioned many times here - trying to fight the tape is a fool's errand. Traders have to go with the money flow. Investors had better be damned careful is all that I can say. There is a vast difference between trading and investing."

I really liked this article on hyperinflation in Diablo 3. This is a great piece of research and writing with the amusing conclusion that "if a small, straightforward economy generating detailed, timely economic data for its managers can careen so completely aslant in a matter of months, should anyone be surprised when the performance of central banks consistently breeds results which are either ineffective or destabilizing."

The author does wonder that "considering the level of planning that goes into designing and maintaining virtual gaming environments, that some measure of statistical monitoring and/or econometric modeling must have been applied to Diablo 3’s game world." My guess is they did, using the same mainstream economic thinking that informs public policy, that is why it was such a stuff up!

On to a phase space chart from The World Complex of the gold-oil ratio and silver-barley ratio. It results in a very interesting scatterplot chart in which:

the direction of the orbit is the opposite to what I had supposed it would be when I first graphed the scatterplot. I had assumed we would see higher silver (industrial activity) followed by higher oil price, leading to higher food prices, which I thought would scare people into gold. But what we observe since 1984 is the opposite--higher silver prices leads to higher gold prices leading to higher food prices (anticipating inflation?) followed by higher oil.

The peak in the Au/oil ratio in 1988 is a reflection of low oil price rather than high gold. Perhaps the high silver/barley ratio is a reflection of low food prices, which allows more savings in India and China which translate into gold demand, raising the price of gold first, and food prices secondly due to increased demand.

I'm not sure what to make of the increased noise since 1990. It may have to do with the increasing amounts of easy money in the system encouraging more participants in the commodities markets.

Well worth a click through to have a look at his chart and consider where next in the cycle we will move.

To finish some classic Jim Willie delusions:

I can guarantee you in the next several months, or a year or more, there will be NO COMEX GOLD PRICE. ... It’s all coming to a climax where gold is going to be central with a gold-trade central bank and gold priced at $7,000 per ounce.

What is encouraging is the comments to the article, with many less than impressed, so maybe people are tiring of the same old script which never seems to come true. This comment to the article sums it up:

This is classic Jim Willie gibberish. He is saying he “guarantees” there will be no COMEX gold price in the next few months, or maybe a few years. Basically, he has no clue. But hey, it sounds SO GOOD to hear if you are long the metals. Please. This kind of vague, unsubstantiated opinion, offered as a guarantee, well it really is wordless no isn’t it?

23 May 2013

Time to give up on the CFTC

Gene Arensberg has an article out on the COMEX price smash where he concludes that:
"in order for the initial 124 tonne sale to have occurred “legally” it would have had to have been 14 traders, all with zero orders open, all acting simultaneously, all acting independently, in their own self-interest, without colluding with each other to “sell-for-effect” or conspiring to foment a price smash.

In actuality, the chances that there were 14 traders who held zero open orders all acting independently, all throwing their full allowable 3,000 contracts into the gold market within a few minutes of each other are infinitesimally small."

Gene notes that hedge members have a bona fide hedger exemption "to sell more than the limit, but not without filing paperwork with the exchange" which means that "whoever blew out the gold market on April 12 is already known to the CFTC (and what documentation they used to back up their trade)."

Now I would have thought that position limits would still apply to the person whom the hedger was executing for. A quick google search brought up this 20 page client update document from a law firm. Reading through the first few pages I was confronted by stuff like this:

"To qualify as a bona fide hedging transaction under the Final Rule, a transaction or position must (1) represent a substitute for transactions made or to be made or positions taken or to be taken at a later time in a physical marketing channel, (2) be economically appropriate to the reduction of risks in the conduct and management of a commercial enterprise, and (3) either (a) qualify as one of the eight enumerated bona fide hedging transactions under the Final Rule and arise from the potential change in the value of (x) assets a person owns, produces, manufactures, processes or merchandises or anticipates owning, producing, manufacturing, processing or merchandising, (y) liabilities a person owes or anticipates incurring or (z) services a person provides, purchases or anticipates providing or purchasing, or (b) qualify as a “passthrough swap.”"

Eyes glazing over? Same here, so I then proceeded to the scroll/skim through reading method. My lay person summary: plenty of loopholes for someone to do what they want and have the CFTC running around in circles.

Now you know why the CFTC investigation into silver has been going on for years without any result.

As I said in response to this question: Do you think Bart Chilton of the CFTC is imagining things when he says its happening, or maybe he wants to be loved by the Goldbug crowd?:

"Consider that the CFTC has to deal/manage/politic two types of market participants – producers, who want prices to be high and consumers, who want prices to be low. I have seen the theory that Bart’s role is to play to or appease the consumers, which in the case of PMs means they want high prices. I really don’t know if this is the case or he is just straight up. Either way he is often very careful in what he says, and keep in mind the difference between manipulation and suppression. Bart talks of manipulation, not suppression."

To that I'd add the CFTC has to deal with a complex set of rules and regulations. When regulations get this complex market fairness and transparency is actually harmed, and the only ones who benefit are those big enough to have lawyers able to work out the loopholes.

What the market needs is straightforward commonsense rules that everyone knows in advance, just like Kid Dynamite points out in this post on cancelling trades. Or just drop the pretence and go free-for-all law of the jungle.
Having interest rates this low doesn't help, as speculators have minimal cost in holding a position for a long time (until it blows up) or taking on large positions. This just adds to the volatility.
Time to give up on the CFTC being able to control this, just like Ted Butler did.

BTW, Perth Mint once had a new hire in our Treasury department suggest we should trade on COMEX. That got laughed at (and that was before MF Global). We will take our chances in the OTC market, where at least we can pick our counterparties, do due dilligence on them, and trade on our terms.

22 May 2013

The Andrew Maguire Challenge

I love a challenge/bet and Dan at The Fundamental View obliges with a challenge to Andrew Maguire to provide his CV to justify the title given to him as a whistleblower. Dan spices it up by making it one-sided, in that Dan will "promise to never write another word about you again. In fact, I will even provide you with a free banner advertisement spot on my blog for your “trading service” for a full year."
My view/best guess on why Andrew will not provide his CV can be found here. I can't think of any reason why he would not want to supply it. Jeff Christian said he couldn't find anyone who knew of Andrew so the question I have is why would Andrew pass up the opportunity to make Jeff eat humble pie and supply his CV for verification? I have seen arguments made that Andrew is under physical threat (as per the car crash) but if so then why is Andrew going to GATA conferences, has his image on the internet, does all these podcasts and runs a business?

The comments Dan got to 24hGOLD's republishing of his article tell you a lot about Andrew's supporters. Completely missing the point and going on about issues unrealated to the point, saying Dan does not believe in manipulation of gold (what has that got to do with whether Andrew is a whistleblower), or thinking he is asking for Andrew's personal details or trading/financial details. I find it surprising that his supporters don't think any is funny about Andrew's refusal to provide even limited previous employment details.
PS -  I have to give a hat tip to Faeces Ferguson for eating his hat.

21 May 2013

Precious metal memes

I'm having a debate with The Daily Bell over their assertion that "physical gold and its delivery will cost you up toward US$2,000" in the comments to this article of theirs. Readers of this blog I think will find it interesting, as well as the diversion into questions about the Germany repatriation and central bank transparency. I also questioned their view that the London Fix was not a free market in the comments to this article.

The thing about The Daily Bell is that they track and look behind memes. Their reaction to my questioning made me ask this question in my latest comment:

You, DB, should know more about memes and their propagation than anyone else. Your willingness to look behind dominant social themes and ask who benefits is one reason why I was first attracted to, and continue to read, this site. I would suggest that you consider the possibility that memes also exist in the precious metals world. Many, like the Willie $2,000 story, don't have any malicious creator and come about from misunderstandings of how the market operates or exaggeration of a fact, mostly with the intent to just sell newsletters or product.

However, I would also suggest you consider that some may originate from the monetary or power elite you watch. The objective? To divert attention away from how the gold market really works and avoid probing questions by creating dumbed down comic book-style stories, that has the bonus of making gold investors look like nutters to the mainstream and which dissuade the mainstream from thinking about investing in gold.

I'm interested in your views on the above idea as well as from any The Daily Bell readers as to whether you think they have a blind spot in respect of precious metal memes.

15 May 2013

Why the price smash affected GLD and SLV stocks differently

A number of bloggers have observed the difference between GLD's gold stocks and SLV silver stocks in response to the April price smash. Sharelynx is reporting the following changes over the past four weeks:

GLD down 3,031,042oz (-8.23%), current stocks 33,811,468oz
SLV down 341,111oz (-0.10%), current stocks 335,666,675oz

Sharelynx also tracks all the other major ETFs, COMEX, TOCOM, Sprott, BMG, Central Fund, Bullion Vault and GoldMoney reported stocks. The change in the total of all those over the past four weeks is:

Gold down 5,576,479oz (-6.12%), current total 85,565,264oz
Silver up 912,541oz (0.11%), current total 855,911,574oz

Whether you look at GLD vs SLV or total gold stocks to silver stocks, silver is basically holding even with gold taking a 6-8% hit. The explanation I think has a lot to do with who is investing in GLD vs SLV (or gold vs silver more generally).
Latest figures from Reuters has GLD's ownership by institutions at 51.3% while SLV's is 19.6%. Deutsche Bank notes that "one-third of institutions holding bullion will probably keep it. We expect that the bulk of the drawdown comes from institutional investors rather than retail investors".

So GLD/gold holdings have dropped primarily due to institutional liquidations whereas SLV/silver holdings has held up because there are more individual "buy and hold" investors in SLV/silver.

My thesis is sort of supported by looking at Bullion Vault's numbers, as Bullion Vault is primarily a retail product (average account is $50k link). For gold over past four weeks they are only down 1.6%and for silver they are up 1.1%, which is very different to the general trend.

The investors in the Sprott funds are the strongest hands of all, with PHYS and PSLV showing zero change in ounces held (that is a joke, BTW).
PS - a couple of interesting facts from the Sharelynx numbers:
1. Both GLD and SLV have a "market share" of publically reported stocks of 39%
2. Ratio of silver oz to gold oz is almost exactly 10:1 (ie for every ounce of gold held, 10 ounces of silver are held)
3. Ratio of silver to gold by dollar value is 0.16:1 (ie for every dollar invested in gold, only 16 cents is invested in silver)

05 May 2013

Not much of a case

I stopped following blogger Dave in Denver when he wimped out of publishing a critical, but civil, comment of mine on his blog. Thankfully my readers persevere with him and have let me know he recently made the following post:

"A reader alerted me to the fact that Bron Suchecki, one of the proprietors of the Perth Mint - the notoriously untrustworthy and fractional bullion account seller - made the claim that there's plenty of 400 oz. gold bullion bars to be had on the world market. This is contrary to every news report and first-hand accounting of shortages that have been presented over the last week.

So I have this question for Bron: If there's plenty of 400 oz. gold bullion LBMA-standard bars available, how come it's taking the United States Government SEVEN YEARS to send just 300 tonnes of the said 400 oz. gold bars that it owes back to the German Government and its citizens? Tell me Bron, if you can find an ample supply of bars, how come the Federal Reserve and the U.S. Treasury can not? How come the Chinese Gold and Silver Exchange Society is now forced to back-order bars from Switzerland? LINK

I rest my case."

Lets cut to the chase. In this Market Watch article, James Turk is quoted saying:

"The problem retail buyers are finding is that the stock of small bars and coins quickly flew off the shelves, so premiums have been rising because the fabricators have not been able to produce enough new supply to meet demand,” said Turk. The situation has benefited GoldMoney because it sells individual interests in large gold bars, he said.

The reason GoldMoney has benefited is because they are able to sell gold without the high premiums that are affecting non-400oz bar retail sized products. One can confirm this by looking at their site for their buy/sell prices.

Here is the problem Dave. If 400oz bars are not so easy to find as you have so emphatically "rested your case", then how can GoldMoney sell its 400oz bar backed product without any premium beyond their normal pricing? They don't seem to have a problem acquiring 400oz bars.

Since you are certain you are right Dave, then the only logical conclusion is that Jame Turk is lying, and that GoldMoney must be running a fractional reserve operation. Personally I think GoldMoney is telling the truth and it is you that is wrong. I look forward to you denouncing James Turk as an untrustworthy and fractional bullion account seller.

I suppose also that Bullion Vault are lying when they say that "we can assure you that the spot price is the price of physical gold and silver in large-bar form right now, just as always. We go on settling physical gold and silver bars daily, picking up real physical bullion and moving it to accredited storage outside the banking world." No problem for them to obtain 400oz bars.

Interesting also that the Sprott Gold Trust, which the Fed or anyone else of size can redeem for physical, has been recently trading around (and below) spot as one can verify from the chart at their Net Asset Value page. Logically, since you are right Dave, the Sprott Gold Trust must be a fraud as well because the reason Fed is not printing money to buy up shares in the Trust and redeeming for physical is because it doesn't have the metal. Such buying action would prevent it from trading at a discount to NAV.

Finally, for those who don't consider me untrustworthy, the Perth Mint is not aware of any premium being paid for the standard 400oz bars. We have heard that 99.99% purity bars are getting a sub-one dollar premium, which makes sense as they can directly melt them down and convert to kilo bars for Asia where 99.99% purity bars are getting a premium. Interestingly, we have confirmed that the bullion banks aren't paying a premium to obtain 99.99% 400oz bars (or 99.50% 400oz bars), which is not indicative of desperation for physical on their part.

Dave seems to think that these facts are contrary to reports of shortage. The reason they aren't is because those reported shortages are for smaller fabricated forms, of which production capacity limitations are a major driver. I have not seen one report of any premium on 400oz bars and Dave doesn't provide one either, just some theory about the Fed and Germany.

The only factual backup for his claim is an article from IB Times which does not mention 400oz bars at all. What is does say is that “The premium on gold in Hong Kong and Singapore is as high as $3 per ounce, an 18-month high.”

While I agree that physical demand has really jumped up quite a bit (see here) if it was really as desperate you make out Dave surely the premium would be much more than just $3 an ounce? It is ironic that the link Dave provides as proof counters his point. It is typical of his shoot first, think later approach.

I think I'll rest my case here and let the reader decide.

With that out of the way, I would like to add my own speculations on the US-Germany redemption issue. I would suggest an alternative possibility, being that Germany does not want to incur expensive shipment costs (and risk) moving such a large amount of metal in a short period of time. It is also possible that they are wanting to obtain the physical via a loco swap, which would also reduce/eliminate shipment costs and risk if it was done advantageously over time. I was going to suggest that Germany may be waiting for leases to mature and then loco swap, but it seems they recently stopped leasing, so that theory is not valid.

The fact is no one knows the reason and my, and Dave's, reasons are both speculation. It is why I consider using a speculation/theory as proof of one's position to be not much of a case.

There is one final thing I am very confused on. You will note Dave refers to me as a proprietor of the Perth Mint. The definition of proprietor is "One who has legal title to something; an owner. One who owns or owns and manages a business or other such establishment." 

I thought everyone knew the Perth Mint was government owned. But then this means that Dave doesn't understand the definition of proprietor. Someone commented on this and Dave's response was:

"Yes I know exactly who and what he is, you dingus. I was using the term "proprietor" euphemistically. I guess they haven't gotten to that part of your lesson on Sesame Street."

OK, so Dave knows the Perth Mint is not privately owned, but then the definition of euphemistically is "The act or an example of substituting a mild, indirect, or vague term for one considered harsh, blunt, or offensive." As in saying "economic with the truth" instead of "liar". Both say the same thing.

So what exactly is the harsh, blunt or offensive term that has the same meaning as "proprietor"? I am totally at a loss understand what the point/insult is supposed to be. Or is it possible Dave doesn't understand the meaning of euphemistic? Dingus indeed.

02 May 2013

Questions from TF Metals Report readers

Have got engaged in some discussions on TF Metals Report. Since I've spent a bit of time responding, may as well share with readers of this blog here in one convenient spot and for my easy of reference in the future.


victori: "I guess Bron Suchecki will make no mention of this in his blog (unless he's got something bearish to say?)"

Do you actually read my blog, this is what i said on April 22, so ZH is 8 days late: "The most interesting thing about this price drop is the reaction of retail clients, who have gone crazy like its 2008. The Perth Mint's bullion website has been having traffic problems and we've had lines at our Perth retail outlet. Depository buying is relatively more subdued, but still the volumes are up."

Purplefrog: "he lumped registered and unregistered together to make his point about how much Comex still has. I guess that is the same as allocated and unallocated. Am I correct in viewing those two categories as totally separate?"

Registered and eligible are both physical real metal, neither are unallocated or paper. While eligible is not "registered" for delivery, I included it because the fact that the owners keep it in COMEX deliverable form and in COMEX warehouses means they have an eventual intent to sell it back into the futures market. If they took it off eligible there would be costs to get it accepted back as eligible.
The recent moves in JPM's vault from eligible to registered demonstrate this.

Nick Elway: "If the physical-paper price connect becomes glaringly obvious, will Bron then be able to admit it?"

I am very interested in a physical-paper disconnect. It was the key part of my pesentation at the Gold Standard Institute seminar in 2009 on COMEX, see here http://goldchat.blogspot.com.au/2010/07/degrees-of-distrust.html and it is intimately linked with backwardation in gold. In the blog you linked to the quote from Jim Sinclair tells you what market to watch for the paper physical disconnect, and it ain't 1oz coins. Or do you disagree with Jim Sinclair?


Adolf_Hitler: "You wrote:"While eligible is not "registered" for delivery, I included it because the fact that the owners keep it in COMEX deliverable form and in COMEX warehouses means they have an eventual intent to sell it back into the futures market."

SLV has allegedly 15.001,355 ounces of silver in JPM NY, which is a COMEX warehouse. So you seem to admit that SLV or JP Morgan, which is the custodian bank of SLV, wants to dump the SLV silver into the futures market, AKA, make delivery?

If so many people want to sell physical silver in the futures market, then why is the level of registered silver so low? It's now 45,945,448 ounces. That's equal to the level of Sept 2006.
The ratio of registered vs eligible is now 1:2.6. That's equal to the level of Q1 2001. "

SLV itself doesn't buy or sell metal, it is the Authorised Participants (AP) who do that. If there was selling of SLV by investors, then the AP's would buy those shares, tender the shares to SLV for physical ex-NY and then sell futures against that physical, which they would deliver into the future. This is just an arbitrage and explains why SLV would hold metal in a COMEX warehouse as it makes the arbitrage of keeping SLV's price in line with silver prices easier.

Any amount of SLV stocks in COMEX figures would overstate the coverage ratio as SLV stock is not available to the market, unless SLV holders are selling.

With your registered vs eligible ratio what you are missing is that it is just a book entry to change eligible to registered. So if you just look at registered and go OMG its about to run out, you will get caught because it is so easy for the seller (who has been "hiding" their intention to sell by hold eligible) to instantly switch to registered. That's why I prefer to look at both together.


Adolf_Hitler: "3. You wrote “Any amount of SLV stocks in COMEX figures”(eligible silver) would overstate the coverage ratio as SLV stock is not available to the market, unless SLV holders are selling.” And you also wrote “I prefer to look at both (registered silver and eligible silver) together.”

These 2 sentences contradict each other. You want to include the eligible silver to calculate the coverage ratio. And you also admit that including SLV silver, which is eligible silver, will overstate the coverage ratio."

They do not contradict each other, I admitted that any inclusion of SLV stocks is overstatement however that doesn't mean you throw the baby out with the bathwater and completely ignore ALL eligible as you want to, particularly when the SLV stocks are potentially in play if their is net selling of SLV. Eligible + registered it not perfect, but better IMO than just using registered.

I side with the Doc on this issue, we'll just have to agree to disagree, see here:

"The most emphasis on COMEX silver inventories is placed on registered, as technically, this is the only silver that is available for delivery to longs. Theoretically, if 34 million oz worth of longs stood for delivery in September, the COMEX would default, as only 33 million ounces of registered silver remain.

In actuality however, I believe that the TOTAL silver inventories are what matters. Eligible silver supplies meet exchange requirements- they are simply not currently offered for sale by the owners. Clearly this silver would become available at a certain price. I also believe it likely that the owners would likely be strong-armed or forced into converting their eligible supplies into registered should things become desperate for the cartel."


Nick Elway: "Thanks for your link http://goldchat.blogspot.com.au/2010/07/degrees-of-distrust.html from 2010. While your Phases 3 and 4 of distrust didn't envision the recent paper price drop I would guess today's removal of gold from "the system" puts us in your Phase 4 of distrust.

The quote of yours that I commented on was your words "I have been trying to kill this[physical-paper disconnect] meme ever since it first appeared in 2008" http://goldchat.blogspot.com.au/2013/04/chill-out-dudes.html

If you've been publicly and forcefully trying to kill an idea for 4+ years then I wonder (cognitive dissonance effect) what would be your threshold to admit the idea has some validity? If the Perth mint was having to pay 10 per cent over the London fix to source bullion would that be enough? Would 50 per cent be enough? When would you quit trying to kill the meme and instead support the meme? Does the Perth mint count as a large enough buyer for its purchasing experience to be a valid measure?

In summary, if it isn't revealing a trade secret, can you tell us if the Perth mint has (or has not) had to pay more than x percent premium for bullion for minting in the last 2 months? At what x would you consider there is a physical-paper disconnect?"

The meme I've been trying to kill is the idea that the price of retail coins/bars is indicative of a physical-paper disconnect, not the idea of a physical-paper disconnect for wholesale forms of metal. This may not have been clear as I assume readers of that blog post are familiar with my prior posts on that matter.

We are currently not paying any premium for raw gold or silver. I don't think there is a specific level which constitutes a physical-paper disconnect. A few dollars wouldn't but $10 over spot would. What I am looking for is desperation by bullion banks when they are bidding for our excess (above coining and small bar needs) refining output, which could be indicated not just by what premium they are willing to pay, but say us being contacted by counterparties we don't normally deal with, wanting 400oz bars for shipment into London rather than kilo bars to Asia etc. Other factors would be backwardation.

I wouldn't say we are in Phase 4 because backwardation isn't there as described. A lot of Fekete's work is based on backwardation rather than just price drops (or rises) as the key indicator of stress, so I would place more emphasis on backwardation.


Fred Hayek: "You seem to present a false dichotomy, the ETF's have either everything they say or nothing. Why? This is silly. There are as many intermediate possibilities as there are putative holdings. Only if you pretend that one must accept a false dichotomy of possibilities, all or nothing, does Andrew Maguire's thesis make no sense."

I get the distinct impression from Andrew Maguire's work that he believes the ETFs have the metal, which is why I presented it as binary. Anyway, I don't see a partial coverage theory as making much sense. I mean, if you can get away with 80% cover when the auditors come around (the same auditor who does GoldMoney), then why hold 80%, why not 70% or 60% etc? And once you have whatever fractional amount in the vault, then would each additional ETF share sold or bought not require any physical, in which case my point is valid that those sales or purchases don't have any impact on physical price.

Strawboss: “defined a falling level of inventory in GLD as being in level 4 (the worst), implying that it signals a severe lack of trust on the part of investors to have their gold held by a counterparty. Would like to hear your thoughts on the recent GLD drawdown and what it means in terms of "trust in the system".”

Those phases were just a theory so I’m not saying it will play out that way, however, the phase 4 I suggested included ETFs balances declining AND persistent backwardation and at longer maturities. As we only have backwardation in the near contract, I’d say we are still in 2nd phase maybe moving to 3rd.

When I hear of 99.99% purity 400oz bars in London attracting a small premium, which is very unusual, then it tells me we are in a very interesting market situation. I would note that I’m not hearing that the bullion banks paying a premium to get 99.99% purity 400oz bars, so it is not a real squeeze yet.

TF: “Though your questions strike me as disingenuous”

I don’t play games, everything I do is straight up.

TF: “The reason I use "inventory" is the misleading assumption placed by others in the media and financial services that the gold "owned" by the fund is actually the sharholder's. Meaning, who owns the GLD's gold? From where did it come? From whom is it leased/loaned/hypothecated/rehypotecated etc?”

How the metal in the ETFs was sourced does not affect the ETF Trust’s title to it - the metal in ETFs is not encumbered. I address that idea here http://goldchat.blogspot.com.au/2010/08/gld-leasing-and-encumbrances.html

TF: “The scam of it all is the very misleading assumption that every ounce in the world is 1:1...that every "owner" of an ounce is the only person/entity with a claim on that ounce. This is why I use the terms "alleged" and "inventory". You, of all people, know that this is how the current, fractional reserve bullion banking system works, yet you come here and set up this simple, straw man A/B argument in an attempt to accomplish what?”

The metal in the ETFs is allocated, not unallocated. Unallocated is fractional, not allocated. As specific bar numbered allocated metal is not leased (as per my link above), then leasing/hypothecating does not give allocated multiple claims.

For allocated to have multiple claims requires the custodian to fraudulently give the same bar number to multiple people. No doubt you consider that a reasonable possibility. I consider it unlikely. Why? Because why would a bank engage in a straightforward case of criminal fraud/stealing which requires a large number of employees to be complicit in (vault staff, internal auditor, external auditors, risk & compliance department, traders) and thus have a high chance of being found out when that bank can engage in far more profitable manipulations of a virtual financial engineering nature where there is sufficient vagueness as to valuation and risk of the financial instrument that can be debated with auditors and accountants and thus give room for excuses for the few traders involved?

Consider the recent ABN Amro story which I blogged on here http://goldchat.blogspot.com.au/2013/04/chill-out-dudes.html which many think is a case of default on allocated gold. Sorry, not true, as when you read the conditions of those accounts and on page 6, section 4.3 it is clear it was an unallocated account. That is how the game is played. Why worry about having to shift the same bar around for multiple clients when instead you can use shifty wording in an agreement and rely on idiot clients who don’t read what they are signing?

Tabberto: “but you clearly doubt the manipulation/JPM meme”

I believe in manipulation but not suppression. One is short term, the other long term. Many of the manipulation and suppression theories are simplistic comic book stuff. Often why people consider me anti-manipulation is because I critique these theories. Doesn’t mean I don’t believe others, like this http://goldchat.blogspot.com.au/2009/06/death-of-gold.html : “To kill gold you don't manipulate its price, you manipulate its volatility.”

Tabberto: “Am baffled as to why you would frequent such an establishment as this if that is your view”

I have TF’s posts in my RSS feed, but don’t follow the individual comments as I’ve got a couple of hundred RSS feed to scan through each day. However, people often email me about specific comments which is how I find out about them.

Tabberto: “high-horsing over specific language while ignoring elephants in the room dilutes valid contributions, we may all be guilty of this but I felt I would point it out (as exemplified by your nitpicking over language both with Turd and Maguire previously).”

I nitpick because if ones starting point or fact is wrong, then the whole conclusion can be wrong. Getting the details right is important. The ABN Amro story is a good example. Because few have bothered the research the story it is now accepted by many as a case of allocated default. What that has done is just missed the real story of default on unallocated obligation to deliver physical (indicating fractional backing) and educating people on checking the terms of their storage agreements.

Tabberto: “Do you think that the investigation into Silver manipulation by the CFTC is still 'ongoing' only because despite there being no evidence someone forgot to advise the public? Do you think it is beyond the CFTC to understand the subject?”

I consider it completely ridiculous that it has taken this long and that makes the whole affair suspicious IMO.

Tabberto: “Do you think Bart Chilton of the CFTC is imagining things when he says its happening, or maybe he wants to be loved by the Goldbug crowd?”

Consider that the CFTC has to deal/manage/politic two types of market participants – producers, who want prices to be high and consumers, who want prices to be low. I have seen the theory that Bart’s role is to play to or appease the consumers, which in the case of PMs means they want high prices. I really don’t know if this is the case or he is just straight up. Either way he is often very careful in what he says, and keep in mind the difference between manipulation and suppression. Bart talks of manipulation, not suppression.

Tabberto: “Do you recognise that placing and then immediately pulling 'fake' trades on a non-collating platform as a market signal would constitute market abuse or manipulation?”

Yep. Manipulation is a continuum with differing views on what constitutes unlawful or unethical behaviour. Traders I’ve spoken to see most of it as just part of the “game”, like a boxing match to see who is stronger. I tend more towards the ethical end but not na├»ve to think that you can walk in and put all your (price) cards on the table and not get screwed.

Tabberto: “Do you feel there is any issue with price discovery overall in Precious Metals?”

Not generally. Then again, Perth Mint has never traded on COMEX. We shop around each week to find the highest bidder for the 5 to 6 tonnes of gold we refine, which mostly goes into Asia. If a bullion bank want a few $100 million of gold, they have to pay up. Can't get any more free market/brutal price discovery than that.

Tabberto: “Do you think that the London Gold Pool did actually exist in the 1960s and if it did why on earth would it not be operational now when it is needed more than ever?”

Yes it existed but that is ancient history – we were on a gold standard then and that was just what is now called FX and reserves management. I think the central banks these days are no so aligned in their interests that they would be willing to co-ordinate on gold, the game now is the value of your fiat vs other country’s fiat.

Tabberto: “Do you think the huge volumes in short timeframes on COMEX are pure and natural stop-tripping long-puking or do you believe that there is collusive shorting taking place that helps turn a sell-off into a waterfall??”

No it is suspicious and regulators should be looking into that as it is not rational selling behaviour, unless you are trying to hunt for stops, which is “trading” as discussed above.

Tabberto: “Do you consider the ETFS joint-custodying and then mixing bars up at HSBC (we all know that GLD/SPDR and ETFS were co-mingled as it was proven through Pythonesque means) to be a problem or maybe a good thing?”

I don’t think many vaults these days operate on a physical segregation “cage” type basis for numbered bars. It is just not practical and provides no additional safeguards. If there is a pallet with 32 x 400oz individually numbered bars on it then you know from your computer records which person owns which bar and you can pull that bar out at any time. How does putting each bar on 32 pallets or in boxes and recording in the computer that bar #1 in box #1 belongs to client A and bar #2 in box #2 belongs to client B etc make it any more “allocated” than recording in the computer that bar #1 on pallet #1 belongs to client A and bar #2 on pallet #1 belongs to client B etc? It doesn’t.
But that sort of physical segregation makes running the vault a lot more complicated and take up a lot more space, increasing storage costs without any increase in allocation-ness.

Tabberto: “are you happy with open pallets a la SPDR as the correct way to custody Gold in light of the above? A Genuine query of someone who should know about good practice.”

See comments above. That is how all vaults are operated. Are you saying the pallets should be covered up somehow? What exactly is the problem you have with this way of storing?

victori: “Your Conclusion: "That tells me there isn't any stress in the wholesale markets." Versus Jeff Clark's conclusion: "...You should know that supply among wholesalers is as every bit as tight as the retail side..." How do you explain this differing conclusion between you and Jeff Clark?”

Jeff Clark was talking about wholesalers dealing in 1oz and other retail forms. I’m talking about wholesale forms and quantities, that is, 1 tonne lots of gold kilo bars or 400oz bars.

01 May 2013

As if the rays of the sun were turned into solid form

I did an eight minute interview today on local Perth radio on the Perth Mint and gold. Got a bit poetic towards the end on why primitive man was attracted to gold, which a few collegues thought was funny as I'm supposed to be the analytical numbers person. My inner goldbug coming out.
You can find the mp3 of the interview at the corporate blog.