27 November 2013

So who are the The Liars and Cartel Apologists?

Craig Hemke (TF Metals Report) had a recent post where he asked:

"Who is Jeffrey Christian and what is his business? How about his pals ErikT, Bron and Kitco? What are their motives? What about sites like Screwtape and "personalities" like Kid Dynamite? Who supports them and what drives their interest? ... Who is Kid Dynamite? Who really are Jeanne d'Arc, the crew at Screwtape and the bloggers of the Kitco boards? What are their names and what are their real jobs? What is Jeffrey Christian's background and who are CPM Group's clients? Who are his sources and from where does he get his information? What is CPM's business model and how do they profit? How about Kitco and The Perth Mint? Perhaps they can explain how pooled, unallocated accounts work. I'm not alleging fraud or malfeasance but I do think that folks need to know where there might be conflicts of interest in this fight."

I responded to Craig's questions in respect of the Perth Mint here, and a copy of the text is appended to this post for the lazy. The other people mentioned can answers for themselves if they care, but for what it is worth, below is what I know of who they are. As an overarching comment, none of them are related to each other/co-ordinate/work together or have "support" from shadowy forces as far as I know.

I suppose I should also "confess" that I am in email contact with the people below from time to time. This may be confusing to some, but I don't have a problem corresponding with people even though I may disagree with some of the things they say/believe - and I don't agree with everything Erik, Kid, Warren or Jeff say. Everyone has different experiences and thus brings different facts to the table, so I am happy to engage with people I disagree with as I may learn stuff. In fact I seek out people who disagree with me as I think that is an important way to ensure one does not fall into group think and make sure you are getting to The Truth.

Erik Townsend

I suppose Erik was mentioned because of the editorial "Debunking the Post-CFTC Precious Metals Fearmongering Campaign" on Financial Sense and for the comments on this Peak Prosperity article (in which Jeff also comments).

There is nothing secretive about Erik from what I can tell from his website, he "is a retired software entrepreneur turned hedge fund manager. Erik has actively traded energy, grains, and precious metals futures markets since 2008."

Erik interviewed me on arbitrage in June 2012 for Financial Sense. Since the Perth Mint doesn't trade futures, I see Erik as one source for information on gold futures from a traders point of view, which he provides on Financial Sense each week.

Kid Dynamite

Kid was a "a trader at a major Wall Street investment bank" for eight years and appears to have retired I guess. Traders aren't known for being shrinking violets, hence Kid's sometimes aggressive blogging style when "trying to correct erroneous hype all over the internet" which gets under the skin of most of his targets.

Kid is not a goldbug and just sees gold as a trade, and I value that non perma-bull non perma-bear agnostic approach when everyone seems to be in one camp or the other. His trading experience at a big bank is also useful to understand how trading desks work, which helps in working out what the bullion banks are/could be doing.

I'm not sure how Kid got on to precious metals BS, but my take is noob investors getting mislead by BS into positions that aren't right for them is one of his hot button issues.

Warren James (Screwtape Files)

Firstly, Screwtape is a group blog but that doesn't mean that they all agree with each other or endorse each other's blog posts. I don't know the other Screwtape bloggers much, but have met Warren in person a few times.

Once can best understand Screwtape Files by their work on Wynter Benton, which they say "was a defining moment for this blog - at first we were believers of the message" but they came to the conclusion that it was a fraud and "could be considered one of the most successful silver pumpers of 2011". The Screwtape Files bloggers were initially driven by a theory that a number of websites were part of a coordinated pump and dump scheme, which is similar to what Craig implies with his question of "who supports them"? Screwtape eventually came to the conclusion that the websites were just run by regular people.

Warren originally contacted me about the ETF bars lists as he had seen the claims the bars lists were fake and thought he could prove it via statistical analysis of a history of all the bar lists. I didn't think they were fake and I suppose I could have ignored him as I disagreed with him, but he was serious enough to come to Perth on his own dime to talk about it, so I thought I should meet him. We spent a few hours on it and I went through what signals/trails the data should show up if they were fake, what Warren called vectors for investigation.

I kept and open mind on it and thought well if he can find evidence than that will be huge news, so was happy to give him as many vectors to look at. While Warren didn't find any evidence of fakery, his bullion bars database has provided some very interest insights into the way bullion bank run vaults and I his work on it is essential reading for anyone trying to understand how bullion banks work.

Warren is a real person (see his photo in this post) and just an average guy working in IT and I'm four nines (ie 99.99%) sure he has nothing to do with The Cartel.

Jeffrey Christian

Craig has a lot of questions directed at Jeff, which I find puzzling as the answers are all available on his website, such as his background, his clients (producers, consumers, investors, governments), his business model (consultants/advisors fee-based). The funny thing is that Jeff is far more closely aligned with Craig and other goldbugs than with bullion banks. Hard to believe? Consider these examples:

Against conflicts of interest: "commodities research and advice is best delivered by independent experts who do not work for banks, brokers, mining companies, or any other entity that has interests that could conflict with the best interests of the clients"

Alerting people to the fractional reserve bullion banking system (Feb 2000): "Banks treat their metal deposits in much the same way as they do deposits denominated in money, as the reserve asset against which they lend additional money to borrowers."

Competes against bullion banks, highlights their conflicts of interest (Oct 2002): "A producer should use an advisor such as CPM Group, which is not trading against the producer. Banks and dealers have a conflict of interest between their own trading positions and the hedges they advise their clients to take" and (Jan 2000) "Hedgers should not rely on their trading counterparts for hedging strategies. These entities take the opposite side of the hedge transactions, have inherent conflicts of interest, and always keep their own best interests in mind, even if these are the short-term best interests and arguably not in the banks’ own long term best interests."

Jeff also says in this discussion forum that he has sued Goldman Sachs, "testified on four continents and written extensively about the need to regulate OTC derivatives" (see here and here), "denied re-entry into their home country as a form of harrassment, had their computers hacked into and files deleted, and their phone tapped".
I would bet that if I gave Craig the above quotes without mentioning it was Jeff, he would be very interested in interviewing the guy. Seems to me like there is common ground between the two. If Craig is after The Truth, then surely he can ignore/put differences aside to interview Jeff on bullion banks' conflict of interest and what regulations are needed, his suing of Goldman Sachs and harassment. I know there is zero chance of that, but at least I tried to build some bridges.
Appendix: Response to Craig's questions in respect of the Perth Mint

You asked what the Perth Mint’s “agenda” is and to explain our Depository accounts. First up, the Perth Mint was created by the West Australian government to (key bits from section 10 of Gold Corporation Act):

  • to recover, extract, process, smelt, sample, refine, assay and work gold and anything containing gold;
  • to mint, make, issue, buy, sell, distribute and otherwise deal in coins
  • to provide storage and safekeeping facilities to international standards for gold and other valuable objects;
  • to maximise the value added to and export income derived from gold production through the development and marketing of things containing or relating to gold;
  • to promote and develop markets for gold in Australia and elsewhere;

Those are our motives. We sell more gold and make more profit if the gold price is going up, that is our conflict of interest. We have been government owned for 114 years because gold mining employs a lot of voters, and thus our job is to do the above to keep the industry strong. We are also state government owned, not federal, so neither Australia’s federal government or central bank controls us or tells us what to do – we exist to benefit the state of Western Australia.

Unfortunately, the Perth Mint’s government ownership means we are public servants and thus cannot comment on policy matters or be critical of our own or other governments policies or actions – as public servants should not be using what are the public’s assets as a platform to advance their own political beliefs – and in the end holding gold as reserves and using it and other currency reserves to manage exchange rates and the economy is a policy decision, politics. This is why you don’t see us commenting on these matters or being involved in organisations like GATA. Indeed my personal blogging activities push this line somewhat and have on occasion caused angst internally.

You may legitimately be cynical about this, but as the only truly commercially focused West Australian government entity, with not one bureaucratic government appointment in the organisation, be assured that we are aware we would sell a hell of a lot more coins and bars if we were privately owned and could do and say the things Eric Sprott does, for example. We keenly feel that restriction on our ability to market gold (as there is a modest bonus if we exceed budget), but know it is not our role to advocate policy and thus we focus on adding value to Western Australian gold production.

As to the Depository, it is but one part of the Perth Mint and we make more money from our refining and coin/bar businesses, but it seems to attract attention. We offer three storage types:

Allocated – this is the real deal. As I said in an earlier comment, you can come in and look at your bars and if you want to be sure we aren't just doing a switch, scratch or write on them with a texta so you can tell if you get to see your exact bars back again. Few allocated services will allow you to do that.

Pool Allocated – this is the same as GoldMoney, a pile of bars backing client accounts with a published bar list.

Unallocated – this is our working inventory backing client accounts, 100% backed and not lent our, explained on our website here:

“Unlike other depositories, which are merely warehouses, The Perth Mint is a manufacturer of precious metal products and one of the world's largest refiners. Accordingly, the Mint has a substantial requirement for physical metal to support these operations.

To fund this work-in-progress inventory, the Mint traditionally borrowed metal from bullion banks, at cost. At the same time, there were investors storing metal with bullion banks and others, at cost.

The Mint realised that if it took deposits directly from investors, it could cut out the intermediary and create a win-win situation: the Mint wins by obtaining free funding for its inventory and investors win by getting free 100% backed storage.”

So our unallocated cuts out the bullion banks and denies them leasing revenue from us and storage fees from investors. Maybe you might now understand why I get confused when people think I’m part of “the cartel” especially since anyone bothering to read my blog, where I’ve covered fractional bullion banking, confiscation and manipulation for years, will see I’m far from an apologist.

20 November 2013

Interview with Al Korelin on China

Forgot to mention that I did an interview with Al Korelin on the weekend chatting about China with Rick Rule. Goes for about 10 minutes and you can download it from here, segment 4.

While I'm posting, will mention this post from Miguel Perez-Santalla of Bullion Vault about Star Trek and gold - makes a good point about gold's enduring value:

"It just so happens that in this Star Trek episode which was aired November 11, 1989, the Ferengi, an aggressive profit centered alien culture show up at negotiations with a bag full of gold bricks. This episode to me expresses two things. First is that the writers for Star Trek believe that thousands of years into the future gold will have value. Secondly, that 24 years later after having aired the show gold still holds value."

12 November 2013

More on bullion bank reserves, delta hedging and coat checking

Below is a response to FOFOA's seven part comment to me here on his Gold as a FOREX currency post.
FOFOA: “You can call the slack in the flow their "stock" if you want to, but if there's more flow coming in than going out, then the BBs will accumulate reserves. If there is more going out than coming in, then their reserves will decline.”

This statement makes it sound like BBs are benevolent entities that manage the difference in flow for the market. If investors do not want to buy (sell) unallocated, then the BB will not accumulate (divest) reserves. There is also a separate borrow/lend market, and again, the impact on a BB’s reserves is driven by client action, not the BB.

As you say, the unallocated account holders bear the burden of funding the BB’s reserves, from which it logically follows that BB accumulation/divestment of the “flow” is dependent on unallocated account holder willingness to hold unallocated (or futures etc).

FOFOA: “unallocated credits are not necessarily lent into existence such that the offsetting asset is automatically a promissory note from a borrow, especially ever since the price of gold started rising in 2001 and it no longer made much sense to borrow in an appreciating unit.”

Interesting comment. Certainly the miner hedging has declined over that period, hence the drop in lease rates. I would note that this comment contradicts the goldbug theory that CBs and BBs lend paper gold into existence to supress the price of gold.

FOFOA: “So around 32 LBMA bullion banks which maintain ounce-denominated books (the very definition of a bullion bank) have their reserves stored in the vaults of the 6 bullion banks which are both LBMA-recognized custodians and also the clearing members of the LBMA. Talk about pooling reserves!”

No, this does not follow at all. The non-clearing BBs only need to hold balances with clearing BBs sufficient to settle their net trading with other non-clearing BBs. No BB’s physical or paper (ie on-call liquid) reserves HAS to be held in London with a clearing BB.

The point of the non-clearing BBs is that they have competitive advantages and specialisations with certain client bases in different geographical areas and so deal worldwide and hold physical gold outside of London (as do the clearing BBs).

Loco swaps, for example, are a common transaction and can be settled without needing any clearing in London. For example, Soc Gen could have metal in a Swiss bonded warehouse but have a client in HK who wants to buy. They could call ANZ, whose strategic focus is the Asian region, and do a loco swap of COMEX gold for gold that ANZ holds in HK. EFPs perform a similar function on futures markets.

So non-clearing BBs could hold all their reserves in physical outside of London and only need run some unallocated balances with clearing BBs.

FOFOA: “Are Goldman Sachs' gold reserves, which are deposited at JP Morgan, physically allocated to GS or unallocated bookkeeping credits? The answer is that they are obviously unallocated credits. … Why would the reserves of 30+ non-custodial bullion banks be held in allocated storage in the 6 clearing members' vaults? They wouldn't, of course.”

I don’t see “obviously” and “wouldn’t, of course” as arguments. I don’t see you explaining why it is obvious. Non-clearing BBs could easily hold allocated with a BB if they have exceeded their credit exposure to that bank. While the limits these banks grant each other are large, and they have netting or set-off arrangements, there are still limits and those limits can be used up by other divisions of the bank. In such situations the bullion division of a bank may therefore have to resort to allocated, as I noted here.

FOFOA: “I'm sure you'll dismiss or at least dispute this notion as well, but just think about it. It makes perfect sense, even if it doesn't fit into your limited view of the gold market from your little corner that happens to be mostly physical.”

Very condescending: “limited view” and “little corner”. As they say, if you can dish it out: I’m sure you’ll dismiss the notion that it is not obvious that non-clearing BBs’ reserves are unallocated credits with clearing BBs, but if you think about it, it makes perfect sense, even if it doesn’t fit into your limited view of the gold market with no practical experience of working in the industry and sitting in your little blogging corner making theories up from behind a keyboard.

FOFOA: “They would be unallocated bank-to-bank credits much the same as domestic commercial bank reserves held at the Fed are unallocated dollar credits. … non-custodial bullion banks are essentially depositors or deposit holders at the 6 LBMA clearing banks just like commercial banks have a reserve account at the Fed.”

So I assume that your proof that non-clearing BBs’ reserves are unallocated credits with clearing BBs is that this is how fiat money works. The problem with the analogy is that Fed reserves system works because the banks know that there can never be a shortage of reserves – the Fed can just digitally print them. That does not hold in bullion banking, as you can’t print physical gold. I would suggest that this one significant difference means that bullion banking dynamics and institutional structures will be different to those of fiat banking.

My best guess is that bullion banking operates along free banking lines, which I have discussed with costata and Michael H on your blog here. I found it interesting that you never engaged in that discussion, or remember you ever considering the idea elsewhere. Maybe because free banking means the system self regulates the amount of paper gold and thus won’t blow up?
FOFOA: “the system as a whole could be much more thinly reserved since 84% of the banks' reserves are fractionally reserved on a different level, the LBMA interbank clearing tier, for which we have only very limited insight.”

So we have a limited insight into the LBMA interbank clearing tier, but “obvious” insight that the non-clearing BB’s must all hold their reserves as unallocated? To the extent that a BB holds unallocated with other BB’s instead of physical as reserves, then yes it is tiered and the overall fractionalisation is higher. However we have no idea of how much physical reserves clearing or non-clearing BBs hold.

FOFOA: “I don't think I've ever seen you give your explanation for the astonishing volume. I have, in the post above, but I've never heard what you think explains an average of 170 trades per bank, per day, each averaging almost a tonne per trade.”

I’m surprised you are surprised. Your post just said that paper gold traded in FOREX markets and had carry (and funny in a post about carry trades no mention of GOFO was made, which is the carry rate). What is the big deal, any online FX service lists XAU as a currency to trade, the fact that it has an ISO currency code, these two should tell you gold is part of the FX market. As to volume, I covered that in this 2009 post:

“the very fact that gold is no one’s liability and cannot be printed means it attracts a disproportionate amount of trading and speculation. Why is it assumed that 12.7% is excessive and unreasonable? Could not the 12.7% figure be proof of the special monetary nature of gold, proof that it is the King of Currencies?”

That post and the 12.7% turnover figure was pre-survey, which reported daily turnover of 5,400t a day. Latest GFMS figures have CB stocks at 29,597t and investors holding 34,820t. 5,400t by 64,417 stock gives 8.4%. If you said that half of that stock was long-term holders and thus not traded and should be excluded, it gives a turnover of say 17%. When compared to similar figures for fiat money it is not “astonishing” at all and is a great indicator of gold’s liquidity.

As to the number of trades per bank, well I do consider that astonishing - astonishingly low. Knowing how many trades we do with clearing BBs each day, there is no way that is actual number of trades given the number of counterparties the BB deal with at that top tier. There is some sort of aggregation going on in the LBMA survey to give such a low number. Just another reason I am no so quick to draw conclusions or extrapolations from that survey until I understand the methodology.

FOFOA: “such tremendous volume, especially if the BBs are, as Christian says, only leveraged 10:1?”

I am not sure I understand the link between turnover and fractional reserve ratio (which is what the 10:1 is referring to). You can have a 100% reserve system and still have many multiples of turnover. Leverage, yes, will increase turnover, but leverage and fractional reserve ratio are different things.

FOFOA: “what could possibly be offsetting their net exposure given that the volume is ten times higher than the gold futures markets (and 100 times higher than GLD's daily volume)? Physical?”

Again, I don’t get the link between turnover and net exposure. Anyone could buy and sell back the same ounce multiple times during a day and be left with no net exposure at the end of the day. The BBs could intermediate (make markets) between FX desk traders all day and have no exposure.

I would argue that the greater the leverage employed (and these FX platforms and contracts for difference market themselves on the leverage you can use) the less likely these speculators are to hold a position overnight. They add a lot of turnover and liquidity but at the end of the day do not add the sort of massive net positions you think they leave BBs with which require BBs to “delta hedge”.

FOFOA: “Do you even understand how the banks use these? Here's an email from FOREX Trader which I posted back in June of 2012 … The only answer I can think of is that they hedge it by going long correlated (but not identical) assets. What's correlated with paper gold? Silver, copper, euros, crude oil, interest rates, yield curve spreads, whatever.”

“I can think of” – sounds like he is guessing at what it is? If you read through FT Alphaville’s articles and associated links it is not clear that it is totally about using correlated assets. A lot of it is using derivatives of the underlying asset to synthesise the underlying asset’s performance.

It is easy for your FX trader to say “I made a quick delta-0.7 using some regression and eyeballing” and another thing to actual implement it for the sort of volumes you are talking about and sustain that without slippage/loss.

Indeed, as this Reuters article says: “traders say that much of what happens at "Delta One" desks -- the focus of the UBS loss -- and in other parts of the business is driven by banks betting their capital to make a profit in what is known as proprietary, or "prop," trading.” That is, Delta One desk are no more than speculative trading, gambling. No surprise that UBS’ and Soc Gen’s blew up.

FOFOA: “This is the age of complex derivatives, and to dismiss them being used in the "gold" market, especially given the incredible volume reported in the LBMA survey, simply because you don't see them being used in your little physical corner of the market, is simply silly.”

There you go again with the condescension. The Perth Mint may not deal in this sort of risky stuff, but we have deep contacts into the BB market. I’ve asked a BB dealing desk managers about this delta hedging in another context and it was laughed at. He said he had enough trouble getting his middle office (risk) to approve an offset of gold in different locos, let alone something as unstable as complex mix of unrelated but partly correlated assets. You believe your source (by the way, has he/she ever worked on a bullion desk) and I’ll believe mine.

FOFOA: “this coat-check room view since January of 2011, but I didn't come up with it. … But it is obviously the correct view if you give it proper consideration.”

Who cares the source, you’ve endorsed it and appropriated it as part of your view of the market. And again with the “obvious”, I mean I think what I’m saying is obvious but that line of argument doesn’t seem to persuade you for some reason.

As I said, I can see ETFs (any of them) being drawn upon via stock borrowing, but I dispute that a BB can park reserves in it.

FOFOA: “The coat-check room view only applies to GLD, and not to any other ETFs, gold or otherwise. It's not an ETF thing, it's only a GLD thing, because GLD is the LBMA's gold ETF. … because the LBMA is head and shoulders above all other gold selling organizations. And that's very simply why GLD is 10 times larger than other gold ETFs. Not because of marketing (PHYS arguably has better marketing), but because it's the LBMA's gold ETF, and the LBMA had that much gold to put into its ETF!”

What do you mean by “GLD is the LBMA’s gold ETF”. The WGC is the one who sponsored (funded) GLD and created it. The reason it is the biggest is because it was the first and the WGC had been marketing to institutions well in advance of its launch (indeed, some US and UK money was funnelled into the Australian gold ETF because GLD was delayed). It is crazy to say PHYS has better marketing, you have no idea of the machine that the WGC deployed at the institutional level to sell GLD.

And can we please not use “LBMA”. The LBMA does not have any gold, or run vaults or trade. Please be specific. Are you talking about all the BBs, or just the clearing BBs, or only a few of those?

FOFOA: “If someone wants to capture a GLD discount-to-NAV arbitrage opportunity, it suffices to buy GLD and sell spot unallocated (XAUUSD). Then you wait until the selling pressure in GLD has abated, and you square your position. No redemption necessary. GLD is so large that, even if institutional investors dump it, someone else, including the bullion banks, will take it instead of allocated if it is cheap enough. But why redeem?”

The BBs redeem because they have to pay 0.4% management fee on GLD when holding unallocated with a clearing BB cost them a lot less than that and if you have your own vault, the cost of storing the physical yourself is zero. In that case, why wouldn’t they redeem?

FOFOA: “It's one way a bullion bank could turn a dead asset (surplus reserves) into a live one. …”

You didn’t need to go to all that trouble with the T accounts, as steps 1-2 are what DP said and you have answered my question “so you're saying collectively the BBs went naked short 2000t of ETF gold” with a yes, but they delta hedge themselves, which is what I guessed in my response to DP. So the whole coatchecking IN thesis rests on delta hedging. Given I don’t think delta hedging is reasonable for that amount of gold and for the time period involved, we’ll just have to disagree.

Can you just clarify one thing – how much of GLD are you claiming came from excess reserves, that is, how much of it was delta hedged (at its peak)?

FOFOA: “Before GLD, there was a storage cost associated with sitting on excess reserves, but the banks had no choice but to eat that cost.”

As I said to DP, “the marginal cost to a bullion bank to hold physical reserves is zero (vaulting is primarily a fixed cost business), there was/is no pressing need to create ETF's to save costs by parking metal in an ETF structure.”

FOFOA: “now there was also an opportunity cost in addition to the storage cost of sitting on "excess" reserves.”

Not sure what you mean by opportunity cost. I’m guessing the fact that you can invest the excess cash from selling GLD shares less the lesser amount needed for that perfect delta hedge. Have you considered as well that under your theory the BBs didn’t need GLD to manage any excess reserves as they could have just delta hedged any client long positions rather than accumulating physical (and it is just as easy to borrow physical gold as it is to borrow GLD). GLD coatcheck in theory requires delta hedging, but once you believe in delta hedging you don’t need GLD coatcheck in theory.

FOFOA: “the LBMA could be using GLD shares in its internal clearing process, only redeeming them when the underlying physical is needed to restock the subterranean stream, that is, for physical allocation or delivery. No need to redeem simply for interbank clearing, just transfer the shares.”

No, the LPMCL Clearing software, AURUM, and the associated SWIFT metal instructions do not allow for equity transfers, it is a metal (ounce) system only.

FOFOA: “I realize that you're trying to be Bron-the-Debunker, superhero destroyer of precious metals charlatans and defender of rational analysis, but with this GLD drain issue, I sometimes wonder if you really can't see how irrational your physical arbitrage view appears, or if you're just sticking to your guns.”

It seems pretty irrational to me for you to stick to your guns about a complex coatcheck/GLD/delta hedging when there exists another Occam’s razor explanation: after 2008 gold developed a narrative among institutional investors that it was an uncertainty hedge, lots of money piled in, pushed gold price and ETF holdings up, the narrative changed now that everyone thinks the economy is getting better and the money (and gold) flew out.

FOFOA: “And yes, I did see your latest post asserting that PHYS redemptions might be due to an arbitrage opportunity rather than a general shift in preference toward physical.”

I said “It is a bit hard to say if it is arbitrage or just a holder(s) from long ago getting out” the latter being a shift in preference toward physical. So it could be either.

FOFOA: “PHYS lost what, a little over one tonne in the last 5 months? GLD has lost an average of 46 tonnes per month for the last 10 months. That's well over a third of its holdings in less than a year.”

What interests me, is if BBs are desperate for physical and failure the fractional reserve system is imminent as some claim, why are we not seeing much physical redemption from PHYS, especially when a BB is paid to do so?

FOFOA: “I must admit, I don't envy you gold sellers right now.”

Thankfully the Perth Mint doesn’t “sell” gold, so I don’t envy them either. Insurance/protect wealth reasons for buying gold are boring and don’t attract clicks but are evergreen. Those who went for clicks and dramatic headlines and tried to sell gold on other reasons now face a credibility problem.

FOFOA: “in general, what is your argument for buying physical gold right now?”

Because even “if you don't expect a financial, economic or currency crisis”, you can’t be 100% sure at this time. Nor can you know if Freegold is right. If either happen then you have some protection. If neither happen, then any loss was just your insurance premium.

FOFOA: “We can resume the survey discrepancy debate if you want.”

I’m just going to have to find the time to write it up in an appropriate way and send questions to the LBMA, that is the only way to resolve it.

07 November 2013

Physical redemptions from Sprott precious metal funds

Kid Dynamite drew my attention to some redemptions from Sprott precious metal funds. Below is a table showing the redemptions in ounces since the beginning of this year (PSLV had has no redemptions).

Date Gold (PHYS) Platinum (SPPP) Palladium (SPPP)
Jul 2nd 400    
Aug 1st 8,354    
Sep 3rd 12,500    
Oct 1st   104 236
Nov 1st 17,260 280 660

We know these are redemptions because the prospectus says that redemption notices will be processed on the last day of the month (as long as received before the 15th of a month) and thus show up on the first day of the next month.
The question is why are people redeeming. If you look at the historical premium/discount to NAV for PHYS, PSLV or SPPP you will see that PHYS and SPPP have been trading at a discount to NAV of up to 1% and 1.5%, respectively. So if you are a largish holder who can take 400oz bars, why sell your shares at a discount when you can get the physical for 100% of NAV with fees of $5 a bar and $5 per ounce delivery (if you can't arrange your own, which you'd want to because $5 an ounce is nuts for any decent amount) or zero delivery cost if you have an account with the Canadian Mint. Note that PSLV has had very little time trading at a discount to NAV so we don't see any redemptions for it as you can sell on market at a fair price.
My guess is these are most likely physical redemptions as cash redemptions are done at a 5% discount to NAV (or a volume-weighted average price) so it makes no sense to redeem for cash and lose 5% when you can sell on market and only lose 1%.
So the Sprott funds are presenting a nice little arbitrage where you can buy gold at a discount. It is a bit hard to say if it is arbitrage or just a holder(s) from long ago getting out. As long as it continues to trade at a discount we should continue to see these redemptions. The discount is persisting I think because to-date only 2.4% of PHYS has been redeemed, which is probably not enough to move the price.
With all these claims that the bullion banks are out of physical reserves and about to blow up, it is unusual why we aren't seeing much more redemptions out of PHYS, especially since the bullion banks could do it at a discount, effectively getting paid to take PHYS' physical.
Maybe they don't believe PHYS has the metal - that is a joke by the way, which will only make sense to those who remember all the spin about how the PHYS and PSLV premium was an indication that people trusted the Sprott funds more because they were backed by real metal, as in logically then, those people should believe the fact the funds are trading at a discount means people must now not trust the Sprott funds. Lesson: don't ever pay a premium for a closed end fund, no matter how good the story.
Maybe the other reason is that the bullion banks aren't actually that desperate. There is nothing stopping them from coatchecking (comment dated Nov 6 7:00PM)out of PHYS, although I'm not sure what the borrow situation on PHYS has been like. And if  the bullion banks have "hit the bid" to loosen up metal from GLD, well the same effect happens to PHYS, so why would a bullion bank not step in and buy up PHYS shares being sold by weak hands to get hold of its physical?
Anyway, just some opinions/thoughts at this time (not facts) and something to watch.

Update: 19,200 withdrawn from PHYS on Dec 2.

06 November 2013

FOFOA - more on LBMA survey and Coatcheck

I have been tardy in responding to this FOFOA comment. For new readers, this LBMA discussion is a follow on from this and this.

FOFOA: "It is well known that banks use delta hedges or complex derivatives based on correlated assets and currencies in these high-volume markets, which provides a reasonable explanation for how and why "paper gold" could have expanded so much in one quarter."

This is the crux of our disagreement. You believe this statement is reasonable, hence it explains the LBMA survey discrepancy and you thus see no point in questioning the survey. I think the delta hedges idea doesn't hold, as I said in this post:

"My reaction is driven by a gut feeling that 7,576 tonnes paper creation hedged by some synthetic construction "using correlated asset derivatives" is just unrealistic. An oft made point about gold is that it is not correlated to other assets and indeed its correlation to them changes over time. As a result I am skeptical that one could construct an ongoing synthetic long gold position which would not blow up - just look at the problem JPM had with its CIO's synthetic credit portfolio.

The thesis is that 7,576 tonnes of paper gold was created in Q1 2011. The assumption is that this is not a one off and the outstanding paper gold position is much larger. I understand the FX and other markets are large but if the banks have been doing this for some quarters and not just Q1 2011, then we may be talking some significant positions in the "correlated assets", giving rise to the "whale" problem that JPM had/has."

As a result I believe that, just like you have shown a flaw in Sprott's analysis, that there is flaw in the LBMA methodology. Their approach may be fine for their purposes, but I cautious of reading anything more into it because I don't know the approach or assumptions they took. I was not looking for an "explanation that would better fit your narrative" but exploring how the survey was constructed to see if it had any methodological problems.

What I do not understand is why you are so sure there aren't any problems with the survey? You seem quick to accept it and don't express any caution. That is why I throw back the claim of not investigating or questioning further because it fits your bias, or at least the first explanation you came up with. Much the same as TF, who didn't bother to enquire futher as to why COMEX deliveries were not showing any fractional ounces.

FOFOA: "As far as the Trust is concerned, the bullion banks are already the owners of record of all existing shares. They don't even need to pry them out of strong hands in order to redeem. They can potentially redeem at any time they want."

Yes all GLD shares are held in street name. But this doesn't mean they are held by the few bullion banks who need to coatcheck - many of the AP's are not bullion banks. So a bullion bank facing physical redemption pressure elsewhere can only rely on the GLD shares of clients it acts as broker for.

Anyway, what you are proposing is that a bullion bank acting as broker just redeems the GLD shares backing the GLD shares they owe their clients, making them naked short GLD. While it is legal for a broker to lend out shares (which might give them counterparty exposure, but no price exposure), I'm not sure if it is illegal for a broker to just liquidate shares and go naked short (certainly naked short selling is illegal, but coatcheck is talking about going naked after selling). However, I suppose given ethics these days we would have to assume it isn't.

So the proposed coatcheck transaction results in the GLD share liability of the brokering division being backed by some gold asset held by the bullion banking division of the bank (note, the brokerage division's loss of the GLD share asset is offset by the removal of the bullion banking division's unallocated liability to the client who wanted and got the physical ex-ETF, so the banking group doe snot have any price exposure). While I consider it doubtful that within a banking group such netting would be allowed, I will concede that our creative bankers could just have the brokerage lend the GLD shares to the bullion division, with the GLD share loan collateralized by the bullion division's gold loan book or other asset, thus meeting any stock regulator requirements.

So the above is an open thought process where I'll now agree coat checking is possible.

VTC: Since serving as an extra reserve of the LBMA clearers was one of the main rationales for the creation of GLD, they are not going to change the way GLD operates.

This, however, I will dispute on two grounds. First, having being involved in discussions with the WGC and others in the early days of the creation of the ETFs, this was not the main rationale or driver of the project IMO. Second, as the marginal cost to a bullion bank to hold physical reserves is zero (vaulting is primarily a fixed cost business), there was/is no pressing need to create ETF's to save costs by parking metal in an ETF structure.

ETFs simply reflected a shift in strategy by the WGC towards investment demand and saw the ETFs as taking physical off the market. To the bullion banks they were just another way to earn brokerage and trading fees - we are talking 2002/2003 here when the ETFs were being developed, there was no belief in a gold bull market nor any chance of stress on the fractional reserve bullion banking system.

Confusion in Beijing's gold shops on price manipulation

I received an email from someone who is Chinese with investments in Australia giving a view from the average person in China:

"Gold community in China is much different from western world. The customers are mostly old people (not discribed Chinese Dama [Bron - means middle aged married women]). Their only purpose is to preserve their savings (to against inflation) which earned by hard working of their whole life. When we go to Beijing's biggest gold shop and see some old couples sitting there, looking at gold price chart monitor with hopeless eyes (someone even have heart attack), we are filled with anger. Those good natured and hard working people, they don't chase equities or any kind of riskier investment, they buy gold for safety only. But now, the community is mostly hurted.

As for me, I only have a little gold less than 1% of my assets, but my very old father have a lot. He exchanged 25% of his savings to gold. When every week he met and ask me about gold's "cliff drop" and "volatility" and depressed several months, I can't explain to him exactly what happened. Chinese mainstream media are full of copies of wall streets comments and suggestions, I can't explain to my father clearly what is bullion bank's manipulation and I don't know how to make him happier. Such cases are numerous in China.

Bullion banks are not only making people suffer loss, but also destroying good faith and human logic. CMEgroup says Bullion banks' participation in gold/silver market is to "provide liquidity", but most of end buyers don't need such "liquidity" in the market. Bullion bank's trading is only for their own profit. Those "value-add" profit should belong to customer, miners and even you and your mint.

The problem come from huge naked short in thin time with no news in mid night electronic trading session or London fix, but sadly mid-night electronic session is afternoon in China, that triggers heard attack and depression of old people.

SGE already delivered 1782.997 metric ton in 2013 till October 25, about 15-20 times than Comex, we can't imagine why world price is controlled by a few of US banks."

Unfortnately it seems the average Chinese is no better informed than the average Westerner that we operate in a FIRE economy these days. That is why SGE's larger physical deliveries don't matter, as the ZIRP free money drives leveraged speculation in all markets, gold included. Simply the weight of this money in the gold market overwhelms the non-leverage money from the "good natured and hard working" just looking for safety.

So even if you got rid of fractional reserve banking, futures markets and manipulative trading tatics (which would help), you would still have this volatility as large investors could still borrow money at little cost and leverage up the little bit of their own money to buy a lot more gold. The consequence of that leverage is that it only takes a small change in price to threaten to wipe their capital out, resulting in quick and rushed liquidations back out.

And don't think that "China" is somehow not part of the problem. The same FIRE dynamic is in play in China as well, see this article or this on arbitrages using gold.

There was a great article out a few months ago called On the Phenomenon of Bullshit Jobs where he asks why predictions of a 15-hour work week never eventuated even though productivity increases could allow for it. He proposes that "rather than allowing a massive reduction of working hours to free the world’s population to pursue their own projects, pleasures, visions, and ideas, we have seen the ballooning" of bullshit jobs "as if someone were out there making up pointless jobs just for the sake of keeping us all working".

I propose a related phenonenom - that we are in a bullshit economy.

I am not confident that this is sustainable, which is why I have some gold insurance in my retirement savings account. All I can say to investors is to realise the bullshit FIRE dynamic that drives markets these days, be aware that this will result in large price swings, don't get all excited if we have a quick price rise as it could just be hot money that will flow out again, and remember gold is insurance to protect your wealth, not grow it.