14 August 2013

PM Bug forum comments on backwardation

Those who are not bored to death with the backwardation/gold bank run narrative may find my comments on this PM Bug forum thread of interest, which was in response to this post of mine. I've cut and past some of them below for the lazy readers, but to get the correct context of Mr/Ms Unbeatable's probing questions you need to read the thread. I'm working on some posts on GOFO/backwardation to further expand on my comments in this post.

Originally Posted by Unbeatable:
Hmm.... When he sees 400oz bars attracting a 'special premium' he will let us know?The two biggest gold consumers India & China are paying a $30+ premium an ounce over spot, a 600%+ increase over what they paid in previous years!?
The premium in India and China is not for 400oz bars, but for smaller forms and particularly in India there are import duties and other taxes that go into the premium. The demand in India and China is high, but it is not translating into premiums for the raw wholesale form (400oz bars).

Originally Posted by Unbeatable:
Hmm... When he sees bullion banks desperately bidding on Perth Mint's refining output he'll let us know?
My statement was about bullion banks and 400oz bars. Your quote is referring to demand for coins, two different markets. You are missing the whole point of my comment, which is that retail level demand, premiums do not reflect a shortage of gold at the wholesale level and a run on the fractional reserve bullion banking system.

Originally Posted by Unbeatable:
Hmm.. When he sees restrictions on how much gold can be bough he will let us know? 'the Reserve Bank of India banned import of gold by domestic consumers through bank credit' ' Gold coin and bar sales stopped in India' 'Pakistan temporarily bans gold imports'
You are misquoting again. The restrictions I was talking about was restrictions by GoldMoney and Bullion Vault, not any restriction in any market. I picked GM and BV because they buy 400oz bars for their pooled storage products. If there was a shortage/run on the wholesale gold banking system then GM and BV would have problems sourcing 400oz bars. They are not.

Originally Posted by Unbeatable:
But to be blunt (And as I think you know full well yourself), the idea that you'll see the overt stress indicators that you suggest coming from the bullion banks actions themselves is quite frankly absurd because the day they show provable supply side issues is the day they default.
Nope, it is not a sudden event, it will build up over time and signals will be given, see http://www.goldchat.blogspot.com/201...strust.html‎ (that does need some refinement but the basic idea is there). Bullion banks, just like any bank, will do everything they can to drag out and avoid a run, they aren't just going to throw their hands up at the first sign of trouble. Those "do everything" will be gradual at first and will be visible to us in the wholesale market who know what to look for.

Originally Posted by Unbeatable:
Which is why I showed how each of the indicators are already clearly manifesting themselves in the gold market. (& though you repeatedly try to pretend that there is this massive separation between stresses in demand in the retail and wholesale market, they are in fact completely interlinked.)
There is separation between retail and wholesale. Most of the retail problems/premiums are driven by production capacity shortages rather than shortages of raw gold or silver. For example, during the 2008 financial crisis the blogosphere was going crazy about shortages of silvers, particularly, yet the Perth Mint was shipping in 20 tonnes of silver each week from London for about 20 weeks on end. Go and have a look at my blog around that time.

The indicators you mention are just indicators of strong end user demand, not a run on the bullion banks nor any stress at that end. India premiums reflect the restrictions the Govt has put on, something they have been ratching up for a long time well before this talk of a run/stress and driven by a CAD problem. It hasn't affect demand much at all - instead of the shipments of gold we sell going to India they have suddenly started going (demand coming from) dubai and thailand, funny that.

Originally Posted by Unbeatable:
1. In times of demand stress the bullion banks are the ones supplying many mints with additional refining input never mind bidding on the output?
Nope, got that wrong. US Mint, yes needs to get metal from the market but the two other big ones - Canadian Mint and Perth Mint - are refineries so they source their own metal and in fact have excess left over after coining needs. Perth Mint refines around 6 tonnes a week and we use 10%, maybe up to 20% if lucky, for coin production. The rest we turn mostly into kilo bars and then sell it to the highest bullion bank bidder - it is that premium on kilo bars that tells us how desperate they are, in addition to where it is going and what form, gives a lot of info.

Originally Posted by Unbeatable:
2. I'd imagine the bullion banks have preferential contracts in place and ones that prohibit you, a Perth Mint employee from disclosing market sensitive information, so I take your 'I will let you know' with a pinch of salt.
We work with a range of bullion banks and have no exclusive supply arrangements. While we have customer privacy requirements, that does not stop us from making general statements about what we are seeing. And there is no such thing as market sensitive information in bullion - it isn't an equity.

Originally Posted by Unbeatable:
3. If the bullion banks were having issues, instead of people like Perth Mint employees letting the public know about it, I'd expect them to go out and try to convince people of the opposite - 'Don't worry there are not wholesale supply issues' & shi*, look, here you are...
Actually, it would be more logical for us to hype up shortages so that we could increase coin and kilo bar premiums and make more profit. I've rarely seen any market comment coming out of the major refiners talking about how crap demand is. Shortage hype is used by coin dealers to 1. get people to buy now 2. pay excessive premiums. Perth Mint has a bit more integrity and we stick to the facts. Why do you think Perth Mint and I get so much crap on the gold blogosphere - because we are wrecking their sales patter.

Originally Posted by Unbeatable:
So rather if I was looking for supply problems in the 400oz wholesale market, I'd look for signs of additional central bank leasing, particularly the Bank of England who are a key source of supply in times of stress. & shi* look a story just in the last two weeks that the BOE may have leased up to 1300 tons in the 400oz wholesale market in the first half of the year
You are on the right track here, a run is about liquidity, so the first action of a bullion bank experiencing a run will be to lease/borrow gold (not buy), which should show up in increasing lease rates (which has the effect of decreasing GOFO) - although lease rates are still quite low compared to stress periods in the past but trending up.

The 1300t story is another beat up, see here http://www.screwtapefiles.blogspot.c...or-layout.html the BoE said that the figure that Alasdair relies on for his whole thesis cannot be relied upon.

Originally Posted by Unbeatable:
Or I'd look for signs that Bullion Banks are running short of supply and/or are being forced to help one another out. & shi* look at how much of JPM's inventory has been removed this year and also this story from just yesterday
Those sort of inter-bank transfers are standard part of market clearing http://lpmcl.com/

Originally Posted by Unbeatable:
But as these don't constitute hard evidence, & people like Potemkin would say 'Rumours, words, stories...' I chose to bring up provable supply side shortages &/or unprecedented demand in the gold market which is of course what creates the wholesale market problems you are witnessing above.
Signs of increased demand and just signs of demand, not a bank run and does not cause a bank run as the bullion banks just act as a broker between buyer and seller and let price manage it. It is only unallocated holders taking delivery that creates a run and possibility of default. That shows up in lease rates and the futures/forward market first.

Originally Posted by Unbeatable:
Really!? How many hours do you think it will take from the time they announce purchasing restrictions to Gold Money to the time they default? I think you know that this is the very last thing they will do, if they don't actually just default first.
First sign will be premium increases, that is the key signal. And it won't be explicit purchase restrictions, more like delays due to "transport issues" etc.

Originally Posted by Unbeatable:
If there are demand stresses for gold, I think it's (painfully) obvious that they would rather do their best to try cut demand from the biggest gold consumer, India. (EDIT: Which is obviously why I brought up the restrictions in India and outright temporary import ban in Pakistan as being very indicative of shortages in the wholesale market.) As this would ideally (For the bullion banks) have the effect of decreasing demand for their good delivery bars in that market and also freeing up mint output sourced from the mines & scrap, so that it could then be used to refine new 400oz delivery bars for the bullion banks as opposed to coins and smaller bars for retail.
See my earlier comment on India. The Indian restrictions aren't doing anything to stop demand, it is just being smuggled. The Indian Govt actions are just about making their CAD figure look better to financial markets.

Originally Posted by PMBug:
Bronsucheki, are you able to confirm or deny this claim (at least as it pertains to the Perth Mint) from Bill Haynes?
No can't confirm it directly as we aren't being given any 100oz (ex Comex) or 400oz (ex London ETFs) bars by bullion banks to melt and recast into kilo bars. However, we are seeing good demand for our refining output into kilo bars for shipment into China, Dubai and Thailand, so the Bill and Tekoa reports fit in with that.

Originally Posted by Unbeatable:
Hi Bronsucheki, thanks for taking the time to give such a detailed response and for doing it in a pretty reasonable tone despite how confrontational mine was. Also especially considering that you work & have considerable knowledge in that area vs. me who doesn't.
No problem, don't mind being challenged. This time is different to 2008 and certainly more stress, I'm just not sure there is a run on yet, but it is finely balanced I think. We are seeing very high premiums on kilo bars, premiums we haven't seen for a very long time.

In addition, we did hear that 99.99% purity 400oz bars were attracting a premium in London (but the normal 99.5% purity wasn't). Mostly likely explanation for that was that 99.99% purity 400oz bars could just be melted and recast into kilo bars (which are generally preferred to be 99.99% purity in Asia/India) without needing refining. Screwtapefiles blog did some good analysis on the number of 99.99% vs 99.50% purity and what was being withdrawn from GLD, but nothing conclusive yet.

So certainly this is all very unusual and you're right to be cautious.

Originally Posted by Unbeatable:
So I'm surprised during the period of unprecedented demand this year that you didn't have to source any additional supply from the LBMA in London again?
Perth Mint is primarily a gold refiner and we get silver as a by-product of that gold refining. Normally the silver was enough for our coining needs but in 2008 the demand was so high we had to source silver externally. Since then we have picked up some more silver refining so have enough silver now, even with higher demand.

Originally Posted by Unbeatable:
You also say the majority of your non coin production is being made into Kilo bars for the highest bullion bank bidder. But I was under the impression that the bullion banks dealt in the larger 100 & 400oz bars & that the 1 kilo bars would be more for the retail investment market?
1kg = $40,000, not exactly "retail" by most definitions! Bullion banks deal in any size - they cover all markets. 100oz gold bars are primarily a US market size. 400oz bars are usually used for investment, bulk long term storage, they are not really convenient for use in industry/jewellery/mint as you need a big caster to melt 400oz, plus 400oz is 99.5%. So, particularly in Asia, the smaller 1kg in 99.99% purity is preferred by jewellers. Plus when I talk about kilo bars wholesale, that is selling in half or one tonne lots, eg $20m to $40m deal size.

Originally Posted by Unbeatable:
But the import taxes/duties in India are 8% that would be $104 an ounce, far higher than the $30 premium the media is using. Doesn't this mean that the $30 premium is the premium they're paying prior to import duties/taxes being applied?
Yes correct, the $30 would not include that import tax, but I believe there are some other duties/fees and often bullion banks selling into distributors in India include shipment and finance deals in the price, so I'm not sure the $30 is the full premium. However there is still a large premium in that market reflecting the restrictions and driving the smuggling, so I probably pushed my point too hard there. The premium is also highly volatile as the Indians are very price sensitive.

Originally Posted by Unbeatable:
this is perhaps the first time we have seen this happen laterally between two vaults
Has ZH been following these comex reports for the past ten years? I doubt it. I am sure if I had the time and went through all the reports I would be able to find this happening many times. One also needs to consider that if a BB is doing other movements/transfers as well as to another BB's vault, that is not going to be visible as the aggregate number would combine both. So one cannot say this is unusual.

Originally Posted by Unbeatable:
Today I see another negligible 4k ounces went from Scotia to JPM and JPM converted a massive 70k ounces from there 360k registered total and moved it onto their 100k eligible total.
The transfer from registered to eligible is why one needs to add both stocks together and compare that to open interest, which is what I did in this post. The current coverage ratio for gold is 17.7% and silver 24.5%. Looks like plenty of metal for redemptions.

Originally Posted by Unbeatable:
Personally I think at the very least a Bullion Bank run is in progress at JPM and I think even though the writing is on the wall, the others are just trying to help JPM make it to some pre-determined end date.
How long do you think banks runs last for? I note no commentator is really putting a date out there, except Jim Sinclair "because of the continued fall in gold inventory that within in 90 days or sooner the Comex must change its delivery mechanism". Personally I think by mid-Oct Comex will still be going on as per normal and the BBs will still be around.

Originally Posted by Unbeatable:
My question to you is, having seen how these unusual transfers have continued since my original post do you still think
As noted above about ZH, I question whether there is any proof these are "unusual transfers".

Originally Posted by Unbeatable:
My question to you is would you agree that the banning of buying gold on consignment did have the effect of considerably decreasing India's overall physical gold demand for 1-2 months (incl. smuggling)?
Yes, as India had a relatively open gold import system the sudden rule changes crimped legitimate imports but the smuggling network was not in place to take up the slack so that would have had the net impact of restricting demand. We have recently seen a pick up in demand from other countries which tells us smuggling has started back up.

I disagree with Eric Sprott that western central bankers "called up" India and asked/told them to do these import restrictions to help them out. I agree more with Jim Rogers on this "Indian politicians who suddenly blamed their problems on gold. The three largest imports to India are crude oil, gold and cooking oil. Since they can’t do anything about crude and vegetable oil, the politicians said India’s problems were because of gold, which, in my view, is totally outrageous. But like all politicians across the world, the Indians too needed a scapegoat."