More Deception About the COMEX

The title of this post is a play on this TF Metals Report post. In it TF claims that deposits into JPM's stocks as shown on recent CME Gold Stocks report "are bullshit. Either completely fabricated and falsified OR simple paper claims. It's one or the other due to the simple statistical improbability of three consecutive round numbers totaling exactly 10 metric tonnes."

He then concludes that "this eligible gold deception currently being employed by The Comex is just another indicator" of "the end of the fractional reserve bullion banking system is rapidly approaching. Keep stacking and prepare accordingly."

I find it interesting that even though TF thinks that "this latest move is so brazen in its audacity" and says that "since no one else is talking about it, maybe I'm just crazy", he doesn't think to qualify his analysis. No TF, you are not crazy, you just didn't bother to do any research before jumping to a conclusion.

On the first page of the CME's gold futures rulebook it says:

"Gold meeting all of the following specifications shall be deliverable in satisfaction of futures contract delivery obligations under this rule:

1. Either one (1) 100 troy ounce bar, or three (3) one (1) kilo bars. ...

6. Upon receipt of the gold bar by the Licensed Depository who must also qualify and be designated a Licensed Weighmaster for gold, each gold bar shall be weighed in the lot measured to 1/100 of a troy ounce (two decimal points)."

Since gold kilo bars are cast to exactly one kilo, they all weigh the same - 32.15075oz. Under point number 6 that is then rounded down to 32.15oz. So 32.15 x 6000 kilos (ie 6 tonnes) gives the "statistically improbable" 192,900.000oz that TF observes.

I would note that in the wholesale markets kilo bars (as well as 400oz bars) are usually sold in 1 tonne lots, so it also makes sense that movements occur in the 1 tonne lots that TF considers a suspicious sign.

So TF's conclusion in his post is wrong because he didn't bother to check that COMEX allows kilos bars and that every kilo bar is recorded as 32.15oz, which multiplies out to the exact ounce figures.

I would also note that unlike kilo bars 400oz bars (and I believe 100oz silver COMEX ones) are odd weight, ie bars can be + or - of the target weight within approved tolerances - it is done this way because it is cheaper than casting bars to an exact weight. This is usually done by measuring out granules to the weight before then putting them into a mould and melting them. 400oz/100oz bars are casting by pouring from a crucible and relies on the skill of the pourer to fill the mould as close as possible to the target weight.

I was surprised that TF would not know the rules of his own futures exchange and one that he analyses and comments on, but it seems that he is not alone, with others republishing TF's post approvingly - GATA, Jesse, Harvey Organ & Bill Holter, Silver Doctors, Brother John F to name a few.

I can see why that may be, as kilo bars are primarily a size in demand in the India/Asian region rather than the US, and most of the bars in COMEX I guess would be 100oz. I note that the rulebook specifies a minimum of 99.5% purity whereas kilo bars for the Asian market are generally demanded to 99.99% purity. As it costs more to make 99.99 than 99.5, a bullion bank isn't going to put 99.99 kilo bars into COMEX and may not be able to use 99.5 COMEX bars to meet Asian demand without re-refining. So we sort of have two separate kilobar markets.

The end result of the above facts is that kilo bars in COMEX I guess would rare. Therefore, TF was on to something when he saw kilo bar movements into COMEX, the problem is he got the analysis completely backwards.

If Asian demand is high and a bullion bank can get good premiums on 99.99 kilobars, they are going to ask refiners to turn all mine dore into 99.99 kilo bars. So if we see 99.5 bars going into COMEX then it may be an indicator that Asian demand has eased. Maybe JPM had commitments with refiners to buy their output for a period of time, and if Asian demand had eased then they may have just asked their refineries to make 99.5 (for all we know maybe those deliveries were 99.99 kilo bars) and they are just parking them in their COMEX warehouse, waiting for Asian demand to return.

This Tuesday report from Reuters confirms the theory: Asia Gold-Chinese prices at a discount on credit crunch fears:

"'The rise in borrowing costs in onshore China plays a crucial role. People don't want to keep the metal and they try to dump it to raise cash,' said one precious metals trader in Hong Kong. Another trader said there had not been a significant drop in demand but liquidation of stocks was taking its toll on prices."

So if you were a trader, TF's advice to "keep stacking" on the basis of the unusual CME delivery figures was actually backwards - it was possibly a sell signal.

TF should keep an eye on the CME reports - if there are movements of round ounce tonne lots, indicative of kilo bars, out of the warehouses then it may be an advance bullish signal of Asian demand returning.

Unfortunately, I don't think TF is listening as six days ago I left comments to his post explaining the above kilo bar issue and he has not made any correction to his clearly incorrect post. Maybe he thinks I'm just an "ardent Cartel apologist and disinfo agent". A pity, as round ounce tonne lot movements looks like a good trading signal - if only you know how to read it.

Correction Nov 5th: After a discussion about this post with TF (see here, here and keep scrolling) I would like to clarify that I didn't intend to mean that TF's "keep stacking" was trading advice. My intent was to say IF you were a trader then you may have read his post as bullish. TF also noted that he was not following the comments on the original post, hence he missed by comments, so it was not a case of not listening.

I will also give props to TF for publishing my comments, which is more than I can say for some bloggers who remove comments that are critical of them.

Tax Office investigates $65m GST fraud in bullion market

Australian Federal Police issued a press release today alleging "companies fraudulently claimed GST credits and failed to report GST correctly. They formed syndicates to conceal the true nature of their activities and to avoid detection."

GST is a Australian sales tax of 10% that applies to precious metals that do not meet the definition of investment. It likely that the fraud involves scrap gold or silver where GST is payable. Note that it is being classified as "organised crime" which allows the police to invoke proceeds of crime laws so the people behind it can't hide behind the bankruptcy of the companies involved.

Gold and the Permanent Portfolio in Australia

On my way back from the Gold Symposium a couple of weeks ago I caught up with Davin Hood who runs the Cor Capital Fund, which is based on Harry Browne's Permanent Portfolio investment strategy (Craig Rowland's blog is a good source for information on this strategy). David's view (see his latest Quarterly Investor Report) is that "this is not a normal business and credit cycle and that global central bank policy will have unintended consequences that may result in asset bubbles, volatility and losses for concentrated investors and speculators" and as such, the Permanent Portfolio approach that Cor Capital employs covers these risks by having a "portfolio prepared for a range of outcomes at all times".

This agnostic approach is best demonstrated by Davin's answer to the question of why the gold price has not responded to the recent US government debt ceiling drama: "We don’t know but we don’t really care. It is only ever the fast money that rotates into or out of an asset in anticipation of others doing the same. ... In an environment where there is a loss of confidence in the US dollar and US bonds owning a hard asset that is liquid will protect the wealth of our unit holders, even when taking potential Australian dollar appreciation into account. Within the Cor Capital Fund this is of course not a ‘bet’ we are making but just a risk we are covering."

Cor Capital follows the strategy of a fixed 25 per cent in each of Australian Equities, Australian Fixed Interest, Australian Cash and Gold (unhedged, and held at the Perth Mint) but has a much tighter rebalancing band of +/-1.5% or more compared to +/-10% under Harry Browne.

Most of the work done on how the Permanent Portfolio performs is done in a US context (like Craig's book, also worth reading if you are interested in the concept) so I was interested to see that Davin has done a back test of the strategy in the Australian context which shows since 1970 (see page 10 of the Information Memorandum):

	Cor Strategy	Australia Equities	Australian Cash
Annual Average Return	10.5%	10.6%	9.1%
Std. Dev. of Annual Returns	8.9%	23.9%	4.5%
Value of $1 invested in 1970	$62.12	$66.20	$37.27

This is similar to the US studies, which show a good, low volatility return. Now I'm not making a recommendation to invest but I think this strategy has merit and is worth investigating. Even if you are not comfortable with the 25% allocations and have your own allocations between asset classes, the idea of forced rebalancings back to your target allocations is a good discipline to follow IMO.

Unfortunately, Cor Capital is currently limited to "sophisticated investors", which means an initial investment of $500,000 (lesser amounts may be accepted but you would have to demonstrate net assets of at least $2.5 million or gross income of $250,000).

Why gold's contango suggests central bank interference

In Faux Gold Arbitrage I mentioned that Tom makes the case that if anything, backwardation should be the normal state for gold. His paper arguing that case is in the clear on his site here and was also noted by GATA here.

Tom's argument is that backwardation, and not contango, should be the natural state for gold and thus the fact that gold has been in contango for "essentially all of the last 25 years strongly suggests central bank interference with the gold market." It is a counterfactual, trying to guess at how gold would behave relative to fiat if there was no manipulation.

It contrasts with those who focus on the short history of gold in the post gold standard world and observe that gold backwardation is rare, like James Turk in this piece for GoldMoney where he notes that "Gold backwardation is an abnormal condition" and "has only happened two times since this bull market in gold began back in 1999, and each prior occurrence lasted only a few days." Tom's article basically says that just because it is rare, doesn't mean it is abnormal.

James' view is based on the assumption that "interest rates are a reflection of risk" and that a currency "has a higher interest rate because it is more likely to be debased by government and central bank policy (i.e., lose purchasing power)". I think this is only looking at the supply side of the equation, and ignores demand for borrowing money. So for an economy with poor prospects there may be little demand to borrow and interest rates can fall even though no fiat is being printed.

James then says that "interest rates today result from heavy-handed central bank manipulations, thwarting real and accurate price discovery by the market" and that "market forces overpowering central bank manipulation can explain what is now happening in gold". But Toms says if contango has existed while markets have been manipulated and backwardation occurs when market forces overpower, then logically isn't backwardation the natural state for gold?

Tom makes a number of other points (including the point that money is often in backwardation, see my post on that here) and I recommend reading his paper as it will get you to think more deeply about gold, its monetary nature, and what backwardation really means.

CPM Group/Christian's Silver Summit presentation on Andrew Maguire

While Kitco broke the news of Jeff Christian's Silver Summit presentation, where "at the end of his silver market presentation, [gave] what he considers Maguire’s true employment history", they only reported some of the details of what was presented.

Whether you are pro or con Andrew, it does help to know eactly what Christian claimed. So I did something unusual in the blogosphere, and just contacted the source for a comment. Below is the text of Jeff's last slide, FYI:

Who Is Andrew Maguire?

Andrew Thomas Maguire, formerly Andrew Gerhard Maguire

Born 4 June 1951 in Germany British citizen

1980s: Sundry jobs in England

  Car salesman at Henleys, a car dealership, London

  Car leasing agent at H.R. Owen car dealership, Old Brompton Road, London

  ICS, start-up insurance courier company

1989: Immigrated to Canada and started a vehicle leasing company, Custom Lease Capital Inc. Operated for around five or six years, it appears.

Late 1990s: Day traded his own account.

2004: Started another vehicle leasing company: Auto Direct Leasing and Rentals.

2005: Left his wife and family and moved back to England. Apparently unemployed for two years or so.

Circa: 2008. Had a job in a financial institution in London which reportedly collapsed in the financial crisis. Reportedly was at Lehman, which he denies. Not clear what position he held.

Andrew says the above is "is totally inaccurate" in an email to Turd Ferguson:

"An article contrived by CPM Group's Jeffery Christian based upon spuriously sourced information and published this evening on Kitco News is attempting to question my 35+ year banking history and is totally inaccurate and I will be responding to this shortly. As most know, I have brought Jeffery Christian’s integrity into question on numerous occasions and this is no more than an attempt to discredit my work in exposing the unallocated bullion banking system of which he is a primary architect."

Andrew then followed up with the following comment in a King World News interview:

"Obviously I am going to be dealing with this in more detail next week, but there was no mention of my over 35 years of banking history -- as I said, I’ll put this farce to bed next week. So what if I have other business interests aside from trading? No company I’ve ever been associated with has ever gone bankrupt."

I have plenty of thoughts on this story but as it is still developing, anything I write will be incomplete without Andrew's response, so I'll hold off until then. In any case, no matter how it plays out, there is an important lesson in this story for goldbugs regarding "the cartel" that I will also cover.

Trip to Sydney & Melbourne

Next week I will be in Sydney for the Gold Sympoisum on 16th and 17th. A good selection of speakers, looking forward to those from Jeff Berwick, Louis Boulanger, John Butler, Dan Denning, David Evans, Chris Powell and Rick Rule. I also understand that BDO Tax Consulting will be covering tax issues with investing in gold, which should be useful in clarifying this often confusing area.

On Saturday the 19th I will be in Melbourne for the International Coin Show with a few speaking slots, the program includes:

11.00am Bullion Coins and their Markets - Ron Currie, Perth Mint Sales and Marketing Director

11.20am Factors Driving the Gold Price - Bron Suchecki, Perth Mint Manager, Analysis and Strategy

11.40am Stacking Precious Metals - Gold Stackers and Silver Stackers

1.00pm Gold Confiscation in Australia - Bron Suchecki, Perth Mint Manager, Analysis and Strategy

2.00pm Silver Stackers Discussion Panel - Ron, Bron, Ben and Mark

Look forward to catching up with any of you who are going to these events.

China Surreptitiously Acquiring Gold Via The Perth Mint?

I've got a post up on the corporate blog addressing a comment by Jim Rickards in a recent Financial Sense interview where he said that on the dip in the gold price to $1,200 China bought 600 tonnes from The Perth Mint.

Also, a couple of weeks ago I did a corporate post answering this question from a reader, for those interested:

"If there is an event (why I would be buying precious metals as insurance for) that sky rockets the price of the metals what is the chance that I will be "paid" in fiat currencies rather than in the actual metals? Especially when the currencies are plummeting and the PMs are skyrocketing. If gold will be paid in paper isn't it paper gold?"

Apologies for the lack of posts on this blog, have been busy with work. There are a number of draft posts in the works that have been nagging me to finish.