Webinar for Beginners to Gold

If you are new to gold the webinar below I recorded yesterday will be useful. The main presentation goes for about 50 minutes and covers

• The Rational Case for Gold
• The Irrational Nature of Gold
• The Four Types of Gold Investor
• What to Buy
• Who to Buy From
• Where to Store
• Gold or Silver, or Both?

Then there was 1 hour of Q&A that cover a lot of questions beginners have.

https://www.zadelpropertyeducation.com.au/webinar-live-gold-silver-replay/

This blog has been silent for a few years as I have been writing weekly for ABC Bullion at https://www.abcbullion.com.au/investor-centre/pdf

I have some topics to write about but trying to find the time in a booming gold market like we have now is proving difficult. A good problem to have.

Monetary Metals Closes First Gold Fixed-Income Deal at 5%

What was that about gold being a sterile asset?

FREEDOMFEST LAS VEGAS, Nev., July 15, 2016—At FreedomFest, Monetary Metals announces that it has closed its first gold fixed-income deal, to finance the gold working inventory of Valaurum. The initial amount of gold meets Valaurum’s current needs, with room for expansion driven by its growth. The interest rate is 5 percent of the gold, paid in gold.

Read more here and check out the revamped Monetary Metals website.

The two ways gold could repeat the 1970s

Even though investors are constantly told in disclaimer boilerplate that “past performance is no guarantee of future performance” the siren call of historical price charts is hard to resist. In the case of gold and silver, it is impossible to avoid projecting the 1970s bull market on today’s price action due to its epic nature and perfect representation of Dr. Jean-Paul Rodrigue’s bubble behaviour.

Gold bulls would argue that economies and financial systems have not been healed and accordingly the gold price top in 2011 was only a mid-cycle peak similar to the peak of $197.50 in December 1974. In chart form this claim manifests as per below.


Read more here.

Is gold stretched?

 

Last week I wrote about the gold silver ratio as a way of determining which represents better value. Since then the ratio has moved higher, with gold outperforming silver on its move above $1,100. This has brought with it a number of bullish articles and while the move is encouraging and supports the idea that gold may have bottomed, in relative terms gold looks stretched to me at this time if we take a step back and look at the bigger picture.

Read more here.

In August I did an analysis of the ideal percentage allocation between gold & silver. This assumed one picks a percentage allocation and sticks with it. Another investing approach is to switch between gold and silver based on one's view of which metal will outperform the other in the future. One way to determine the point at which to switch is to use the gold/silver ratio.

Read more here.

The Gold Warrior

“Fourty four years after the end of the Bretton Woods System global central banks have manipulated the cost of risk in a competition of devaluation leading to a dangerous build up in debt and leverage, lower risk premiums, income disparity, and greater probability of tail events” says Chris Cole of Artemis Capital in his recent paper titled Volatility and the Allegory of the Prisoner’s Dilemma: False Peace, Moral Hazard, and Shadow Convexity.

Izabella Kaminska at FT Alphaville, praised it as “rare glimpse into his imaginarium” but I wonder if this was also a way to downplay its talk about tail event risks which are “equated with a loss of faith in the entire dollar system”. Precious metal investors will consider it far from imaginary and find much to agree with [read more]

Interview on Precious Metals

On Friday I recorded an interview with Kerry Stevenson of Symposium, a firm which focuses on events promoting Australian resource companies and precious metals. The podcast was posted today and you can listen to it here. Kerry asks me how I got into the precious metals business and we discuss the purpose of precious metals in a portfolio. I talk about why I own gold, how banking has changed, money and debt and the Ponzi-like instability introduced into an economy if money is created for non-productive purposes. I also discuss how economies have been able to get away with excessive debt issuance, making mockery of calls for a reckoning.


The interview was a teaser for the Precious Metals Investment Symposium which will be held in Sydney on October 26-27th. I will be speaking on the Tuesday on:


Why hasn't the bullion banking system failed?


For years commentators have said that the failure of bullion banking is imminent and futures will default, yet nothing has happened. Why have they been so wrong? Bron will look into the mechanics of the paper/physical nexus to answer the question: will Paper always beat (pet) Rock?


The talk will partly cover the material in my fractional reserve bullion banking series of posts, but in a more easy to understand graphical way.


Kerry and Marcus have put together a really good speaker list, in addition to the mining company presentations. Well worth $199 for an early bird ticket. Look forward to meeting and chatting with my Australian readers in Sydney.


While I'm on conferences, I will also be speaking at Mines and Money in Hong Kong April 5-8th. I'm talking to our dealers in the region to see if they can line up some client seminars in Hong Kong and Singapore around that time.

Skewness in gold and silver

Blogger John Koning recently posted on the negative skewness (or as he says: bulls walk up the stairs, bears jump out the window) of the stock market. He notes that “there are plenty of famous meltdowns in stocks, including 1914, 1929, 1987, and 2008, but almost no famous melt ups”. To demonstrate this, he produces a chart of 22,013 trading days since 1928 grouped by the daily return and showing the percentage of days that were negative.

 

The chart below replicates Koning’s figures but I have also included gold and silver London Fixes since 1968 for comparison, which is the longest data set I have. [read more]

Are platinum & palladium worth adding to your PM portfolio?

Reuters reported last week that “South Africa’s mining industry, unions and the government have committed to a broad plan to stem job losses, including boosting platinum by promoting the metal as a central bank reserve asset”. This is apparently an idea put forward by the World Platinum Investment Council in late 2014.

The idea got me thinking about the role of platinum and palladium in a precious metal portfolio. Generally I shy away from recommending them due to their lower liquidity compared to gold and silver and more volatile and industrial nature. As a theoretical exercise I thought I would extend the work done in this and this post to include platinum and palladium.


In those previous posts I was only dealing with two metals, which with 1% incremental changes only involves 101 different percentage allocations to run through. With four metals and a 5% increment, I was looking at over 1,771 different portfolios (assuming my macro was working correctly!)


Also, because I only had pricing data for the platinum group metals from mid 1990, I have just run the simulation from July 1990 to July 2015 with $100 being bought each month (total cash invested $30,000). The result in the chart below. [read more]

A rally that is not meant to be sold

In this interview, Jim Sinclair says that “we are going into unprecedented deflation, and it’s the reaction of central banks around the world to the concept of deflation that brings about hyperinflation” and the resulting increase in the gold price is therefore “a rally that is not meant to be sold. What is coming up in front of us is the Great Reset where currencies wear their gold like ladies wear a necklace, and the most beautiful necklace will be the strongest currency.”

 

I find this advice dangerous because many people reading it will go away thinking “OK, so in the next gold bull market I shouldn’t sell”. However, how will you know if the initial bull market is just a speculative bubble that will bust or the start of a hyperinflation?

Secondly, the “great reset” and “beautiful necklace” references are to countries going back to (some) version of a gold standard. Some gold standards involve free trade of gold, but the last one involved expropriation and making gold illegal to hold. If Jim is right and countries want the strongest currency, then that would imply they will want all their citizen’s gold, in which case you get expropriated at some pre-reset price. [read more]

What is the best gold & silver % allocation for Australian investors & does rebalancing matter

Following on from yesterday’s post, I chart the:

1. the best gold and silver percentage allocations for Australian investors by the year one starts investing
2. “times increase” of the 100% gold, 100% silver and 50%/50% strategies for Australian investors
3. percentage difference between the two total ending USD values of a rebalance versus a simpler no rebalance/buy in the same proportions each month

Read More

The ideal percentage allocation between gold & silver

There are three major types of Perth Mint Depository investor:

1. Those that only buy gold
2. Those that only buy silver
3. Those that buy 50% gold and 50% silver

There are others who include platinum, or have different percentages, but the above three types are a significant majority of our clients. I find it interesting that most investors who weren’t strong goldbugs or silverbugs and couldn’t decide between them went with a simple 50/50 strategy. This begs the question: is this a good strategy and what is the ideal percentage allocation one should make between gold and silver?

To answer this I have assumed an investor saving regularly for retirement, for simplicity $100 a month, including rebalancing each month to bring the value of gold and silver held back to the target percentages. I also assume an investing period of 25 years, on the basis that one does not start saving serious money until 40 (see this post for the investor lifecycle logic behind this) and retires at 65.

I then ran through every combination of gold and silver percentages to come up with a total value at the end of the 25 year investing period (which is 300 months, or $30,000 in total cash invested).[read more]

How much gold should you have in your portfolio?

Amid a sea of mainstream media gloomy gold gloating, this unemotional article from Financial Times’ Alphaville blogger Matthew Klein asking the question how much of your portfolio should be in gold is worth a read. The first part discusses the idea that each person’s optimal portfolio depends upon their unique personal circumstances and risks. For example, if you have a stable job like a tenured professor, you could afford to have a more risky portfolio than a casual labourer. Matthew then asks, so “do you have liabilities [ie risks] that gold can usefully hedge”? [read more]

The power of gold and rebalancing in a portfolio

Have a post up on the corporate blog on the permanent portfolio and specifically the Australian fund Cor Capital which has implemented the strategy. It shows a safe and consistent return that I think argues well for the strategy's inclusion in retirement accounts. Read more here.

Being aware of the true nature of unallocated accounts

For those new to precious metals, this guide put out by Global Precious Metals out of Singapore is straightforward and draws attention to a number of important things to consider when buying and storing precious metals, with little bias to their own offering. Plus you don't have to provide an email to access it, like many free guides require (h/t Bullion Baron for tweeting about it).

 

I've met Vincent and Nicolas (on an introduction from Grant Williams, who is a Non-Executive Director in the business) and these two guys know their business. You may be surprised why I'd mention/recommend a competitor, but at the Perth Mint we believe in diversification of your holdings and know many of our larger clients hold precious metals in multiple locations, so I don't think there is any point trying to "keep" all of a client's business to yourself, against their own interests. Vincent has a handy diagram to illustrate location diversification (although of course I'd add Perth as one of the stable safe jurisdictions).

 

I'd like to draw attention to Vincent's discussion about unallocated accounts. He says "that most investors holding an unallocated account are not aware of the true nature of such account" and I certainly think this is true. Vincent advises that "if the account documentation mentions insurance, chances are high that this is not an unallocated account". I would also suggest looking for very clear wording in storage agreements as to whether the metal is on or off balance sheet of the provider, what they are doing with the metal, how it is stored and so on. I have seen a number of unallocated accounts, usually offered by small coin dealers, that are completely vague on this and that is a warning sign. If the facility is not clear on exactly what they are doing, then stay away.

 

That is why you'll find the Perth Mint is very upfront about its unallocated and how it is different than the high risk fractional stuff offered by banks. Vincent notes that "those offered by reputed refineries are probably the safest option" as they are backed by the inventory of the company but he also says that such facilities are usually "only reserved for professional dealers (with the exception of the Perth Mint". In the case of the Perth Mint, this will not always be the case. Perth Mint stopped offering unallocated silver and gold will eventually close to new investors as well, as there is only so much metal we need for our operations (tip: you can tell something is not a Ponzi scheme if they close it to new inflows).

 

Regarding ETFs, one point I'd add to Vincent's concerns is to look at the diagram he has and note that the more people involved, the more fingers that can be pointed when something goes wrong, a point I made in this article.

 

One part I'd disagree with Vincent is on the London Bullion Market where he says that "a run on the London Bullion Market doesn't appear probable, but very likely", although I agree investors should stay away from this market if they are buying gold as insurance. I did a whole series of posts on the fractional bullion banking system, starting with this post, and whilst it is not easy going, it explains why this system has defied claims that its failure is imminent. That is not to say that it is safe and won't blow up, but the case for its instability is overplayed I think when you look at how it works (and can be backstopped by central banks, if they have the physical to do so) in detail.

Money, trust and gold

This is a companion piece to Tuesday's Love the Gold post, focusing on gold's role when people lose trust in money.

 

Izabella Kaminska is journalist/blogger I follow at FT Alphaville and her personal blog because she is an original thinker and hates gold (I'm not interested in gold haters with clichéd thoughts). Her work is demanding often because she is several steps ahead and I'm scrambling to catch up, often it is because she makes logic jumps that are evident in her mind but could do with more exposition, but sometimes she is just wrong.

 

This post from August on one of her favourite topics, money, is an example of all three. I just want to focus on the trust issue. Izabella notes that there is a whole range of monies (eg central bank base money, bank issued money, shadow banking) which for most of the time everyone treats equally. All these monies are thus mixed up or entangled. Problems happen when "a corrupted money type has been entangled amongst the remaining virtuous stock in the system" and "the more entangled it is, the greater the flight of capital to a clearly definable and unentangled money type in response".

 

So when people "start to question whether other people’s judgments about what is truly meaningful or not were correct at all" and where there is not "enough surplus stuff in the economy to ensure that money retains its purchasing power" to what clearly definable and unentangled money does capital fly? Not gold according to Izabella, as this "carries too much risk" nor anything else except the monies of :

1. someone who everyone trusts, and who everyone knows adds value (like a respected government)
2. someone who you know has something you need, and thus someone you can be sure has already added value (a collateralised money)
3. someone you can be sure will allocate the things you give him so wisely that there will be more of the stuff you value (like a reputable interest-paying investment institution)

The situation Izabella doesn't consider, and what I'm interested in, is to what does capital fly when:

1. people lose trust/respect in government because it is issuing money well beyond the meagre value it adds (or its bureaucratic inefficiency + stupidity result in net negative value)
2. Minskian ponzi borrower dynamics means that collateralised money is overvalued
3. a combination of point 2, lax regulation and skewed incentives mean banks unwisely create/lend money  

Izabella gets to the answer when she notes that "it's worth remembering that ancient cultures tended mostly to use gold for trade with strangers they did not trust", although she thinks it is debatable whether "gold counts as virtuous money stock". I would concede that when people begin to distrust monies #2 or #3, most will run to #1.

 

However, consider Izabella's point in this post that "today’s modern cities are ... huge hubs dedicated to information gathering and stand-alone consumption. But they also happen to be society’s most vulnerable pressure points, due to their dependence on supply chains". We live in a massively complex system, which, when its "distribution channels (the nervous system) have become clogged whether that’s due to natural disaster, famine, war, disease or corruption (over consumption by the few)" inflation is the result.

 

When money loses its purchasing power, Izabella notes that "well being and richness is ultimately determined by physical coercion, intimidation tactics, cartel-like organisation or self-sufficiency." And the group of people in the best power position to protect their well being and richness with oppressive tactics? Government and its bureaucracies. That's when people will run from money #1 to gold.

How I Learned to Stop Worrying and Love the Gold

Bullion Baron had an excellent post out last Monday on how cash is not some bedrock asset without risk, based on a Barry Ritholtz statement that it is a huge investment mistake to hold an asset which you can never envisage selling. On the assumption you've read the post including comments by Cullen Roche and Kid Dynamite, here are some thoughts.

 

Cullen's comments that you hedge your equity exposure with non-correlated assets (excluding gold), options and insurance misses the point. He says these "provide you with a certain future value in the case of catastrophe" but I think his definition of catastrophe differs markedly from that of gold investors. His hedges are just promises, which to gold investors are likely to fail in a real catastrophe. Cullen, who represents the views of Mainstream Investor Adults (MIAs), only envisages a catastrophe sufficient to cause significant damage to his portfolio, but not that much that the insurance contracts wont be honoured. Convenient. MIAs are doing a Barry: saying that there is nothing that would change their view that their proposed insurance promises will not work. They are effectively dismissing Kid Dynamite's scenario of "when people are *desperate* to allocated out of cash", that is, hyperinflation.

 

OK, so MIAs sees zero chance of SHTF, so they holds zero gold - that is logically consistent. But the only way this makes any sense to me is if MIAs believe that financial panics will not get out of hand because government or central bankers will do something to prevent it. I guess the lack of a complete breakdown after the financial crisis gives MIAs a reason for this view, and gold investors would have to concede that. However, readers of this blog, as diverse and disagreeing as we are, would all argue I bet that the underlying problems are not fixed. Maybe some new Committee to Save the World will come along and get us out of the next blow up, but gold investors don't see a zero chance of no blow up, so they don't hold zero gold. How much depends on how confident they are in these masters of the universe.

 

Side Note: I think it is interesting that MIAs who put their faith/trust in governments and central bankers to manage the economy, and not gold, don't see the contradiction in the fact that those very governments and central bankers hold gold themselves. If gold is such a stupid investment, doesn't that make governments and central bankers stupid? In which case you shouldn't trust them. In which case you need some gold.

 

Cullen/MIAs then argue that gold is a poor form of insurance because its value is extremely volatile and uncertain. Volatile and uncertain - I couldn't agree more. This is what you should expect from an asset that reflects the sum total views of the market about the likelihood of governments and central bankers losing control. That is a very difficult thing to analyse and come to a view on so we should expect diverse views on the matter, and the whipsawing in the gold price reflects the changing balance of sentiment between MIAs and, dare I say, the less naïve. As an aside, I would note that WGC research shows that gold can reduce the volatility of a portfolio without sacrificing returns and also help to reduce potential losses for tail risks, but lets stick to the facts here.

 

Anyway, even if gold has no benefits for portfolios during normal times and the occasional (recoverable from) tail risks, and as such is a poor investment, what MIAs miss is that gold will perform in a real catastrophe. Putting up with gold's volatility is something the buy-gold-for-insurance investors do for that hedge. Whilst MIAs may see gold's value as too volatile and uncertain, I'd suggest that we can be certain gold will be valued during catastrophes. This because the narrative (there I go again with Ben Hunt) or common knowledge around gold is that it is a safe haven in such extreme circumstances: everybody knows that everybody knows gold is where you run to when the SHTF. MIAs think this is a "faith put", that it is a myth that gold "warrants a price premium well above its cost of production". That is very logical, but we aren't talking logic here, we are talking human behaviour, perception and belief.

 

I can understand why MIAs who analyse stocks and bonds using hard numbers find this too fuzzy. Indeed some goldbugs who read this blog find Ben Hunt's work too wishy-washy. I am a hard numbers person myself, but surely the MIAs will concede that markets can be irrational (Dot Com, QED)? In which case, I know that when people get fearful they will run to gold. Irrational? Maybe, but rational me accepted that gold will "work", when I need it to. So just get over it and Learn to Stop Worrying (about its irrational volatility) and Love the Gold*.

Profiting from the delta between stupidity & fact

Tekoa Da Silva has an interview out with Rick Rule with a great headline: Speculative Profits Are Made On The Delta Between Stupidity & Fact.

 

It is a bit long at 77 characters, Tekoa could have simplified it to Rick Rule: Speculative Profits on The Delta Between Stupidity & Fact, which is 68 characters, just shy of the magic 65. But other wise it is brilliant, combining name recognition; "speculative", a hot word in the gold blogosphere; "profits", which implies you'll make money; "delta", which makes it sound technical and intelligent; and switching Rick's use of opinion in the original quote with "stupidity", a much more emotional word. Maybe Tekoa is a subscriber to John Winklebottom's service?

 

Anyway, the money quote from Rick is:

 

Remember that making money in speculation is done by taking advantage of the delta between opinion and fact. It has been said by many knowledgeable observers that the market in the near term is a voting machine. In the long term it’s a weighing machine. Speculative profits are the delta between the way people vote (which is always stupid) and what stuff weighs.

 

In the article he is talking about mining equities but in offline email discussion with a bunch of gold iconoclasts, the point was this stupidity/fact delta equally applies to the tabloid end of the gold blogosphere. They make money selling stupidity and you can make money trading on fact.

 

Coincidentally, a few days ago in another email discussion I had with a pro market trader he made the following comment:

 

I noticed just now that someone had forwarded you that fine example of someone who understands nothing about how metal is used nor invested in writing about that of which he is ignorant. That’s what I love about the precious metals markets: They are full of fools who make it easy to make money betting against them.

 

What's that saying about not knowing who the sucker is at a poker table?

If gold in a forest is withdrawn by a wholesaler and no one is around to buy it, does it make the price move?

One project I’m currently working on at the Perth Mint is the replacement of our website. This involves topics like SEO, “authority”, page rank etc and how to achieve such. It’s hard not to get cynical about it, particularly when you come across tips for “Ultimate Headlines” like:

• Maximum character count is 65 before being cut off in search results
• Numbers + Adjective + Target Keyword + Rationale + Promise; Ex. 10 Simple Steps You Can Take Today That Will Make You Happier
• [Adjective] & [Adjective] [SEO Keyword Phrase] That Will [Highly Desirable Promise of Results]; Ex. New and Useful Content Marketing Trends That Will Drive You More Traffic

I probably should have chosen “The Shocking Truth About Gold Demand That Will Explain Gold’s Price Action” for the title of this blog post, but I decided to go with something cryptic (based off If A Tree Falls) that ignores the rules as part of my ongoing policy on this blog of writing stuff that most people don’t want to read.

 

As has happened every time gold has experienced a large fall in the past, most of the gold blogosphere was out with their reassuring talk because that is what sells – confirmation you made the right decision. Central to a lot of that was the idea that “real” demand was shockingly high. Before I address that, some off-topic ramblings to get out of the way:

 

Ramble #1: To answer my own question, no, Comex kilobar withdrawals don’t “works as an indicator of a bottom” in the medium term :P Whilst I did note a lack of “any positive narrative developing around gold that would drive big fund money” and that “the strong dollar story is the biggest risk to gold breaking $1180” the fact is I didn’t call the drop, primarily because Perth Mint was still seeing good kilobar demand and premiums and I thought that the Chinese would be enough to support the market (kilobar premiums have increased on this drop BTW, so recent Chinese demand stories are not just permabull BS). It seems my advice on the 18th of September that “you might want to trade against” my call, was the right trade. Anyway, I’ll continue on with my “predictions” not because I’m trying to be a guru, but to provide an alternative view using data points (eg kilobar premiums, market narratives) that others don’t which you can factor into your own decision making process.

 

Ramble #2: If you’re not seeking reassurance, which probably means you bought gold for insurance and it is only has a modest weighting in your portfolio, these posts are worth reading for an alternative to the current permabull memes:

• Paul Craig Roberts and the Spread of Disinformation
• Gold Bug Psychology Must be Neutered
• Metals Perpetually Suppressed?
• Gilded Cage

Ramble #3: Steven Saville of The Speculative Investor has started a blog which includes debunking like this and this. Added to my RSS feed list and recommend including in you reading list.

 

Ramble Ends

 

One of the most enduring permabull memes is the physical-paper disconnect. I’d suggest what the permabulls are now experiencing with their declining sales/subscriptions and need to turn off comments on their blogs/forums is a permabull-price disconnect. The gold price has disconnected from their constant stories that “demand” for gold is strong. The readers are asking questions and thinking heretical thoughts.

 

The problem stems from a simplistic idea of what demand is, as well as selective focus on positive demand reports and ignoring negative reports. The game of internet marketing requires dumbing issues down into 65 character headline stories easily understood by lay readers. Taking a nuanced approach by delving into the detail is counterproductive because it introduces ambiguity and requires the reader to think, hard, when what they want is comforting reassurance. It just leads down a path with lots of unanswerable questions and denies the writer the ability to craft dramatic self-assured headlines.

 

As an example, consider the difference between wholesale market withdrawals versus end consumer demand. The point of the headline to this post is that withdrawals by a wholesale participant (eg jeweller) may or may not be reflective of demand that will actually affect the price. If the purchase by the wholesale user is offsetting sales to consumers, then the wholesale movements are reflective of price-affecting demand. However, if the wholesale user is stocking (or destocking), then they would hedge that acquisition and the impact on the price would be zero. How much of the Comex or SGE movements are price responsive or price neutral? We don’t know for sure.

 

For an example of this issue, consider the World Gold Council’s quarterly Gold Demand Trends report. This has two jewellery demand figures – fabrication and consumption (which “is equal to fabrication plus/minus jewellery imports/exports plus/minus stocking/de-stocking”). It is worth also looking at page 16 of the 2014 Q2 report where they discuss the difficulties of estimating supply and demand figures, highlighting the difference in Chinese jewellery fabrication demand between CPM Group, Metals Focus and GFMS.

 

Then you have the issue of manipulation, where someone could move stock between visible exchanges/warehouses and OTC opaque vaults to give the impression of strong demand or excess supply. Then add in the use of gold in speculative cross-border arbitrage or commodity financing deals and we have some uncertainty as to what "real" demand is.

 

The above is the reason I don’t look at total Comex movements and instead focus on kilobar movements only, as it is a highly specific product in demand in a specific region. Even so, it is not an entirely reliable metric, although I suppose I should follow the fashion of the day and instead of blaming myself, blame the bullion banks who found out I had shone a light on their otherwise secretive activities and when their dis-info agents failed to convince people that my kilobar theory was wrong and the suspiciously rounded figures were just fraudulent, they purposefully moved kilobars out of Comex into their unseen OTC vaults to discredit me and stop people from paying attention to the numbers.

 

Finally, even if we could get accurate figures, as Robert Blumen explains in this excellent article, quantities demanded (and therefore supplied) have “no causal connection with the gold price”. The problem with Robert’s analysis for our permabull writers is that his true drivers of the gold price - supply and demand schedules – “are not scalar quantities and cannot be measured; they can only be observed indirectly through the gold price itself”. Ouch, that won’t do, the price fell and they need analysis that proves the falling gold price was “wrong”.

 

I would take issue with Robert’s statement that investor schedules can’t be measured – on exchange traded products the depth of bids and offers, and how they change over time, give some limited insight into these preferences. Unfortunately such data in the gold market is limited, but highly important. Consider if you heard that a quantity of one home was bought in your street for $100,000 during the last month. That is useful, but it would be more useful to know that only one home was up for auction during that period and there were five people bidding for it. However, your view of that one $100,000 sale would change if you were told instead that three homes were auctioned and there were only one or two bidders per home.

 

Robert’s article also addresses the flow/stock issue, which I covered in this post noting that “what drives the gold price I would therefore argue, is not so much demand, but to what extent existing holders of the 170,000t will withhold it from the market”. Even so, the price as set by the marginal buyer and marginal seller affect, in sort of feedback loop, the behaviour of the existing holders. For example, everyone in the street sees that one $100,000 sale and thinks their home is worth around $100,000, but should a fair proportion of them attempt to sell their homes, the chance of them all getting $100,000 will be slim and the price would fall. That might not happen if they had information that the number of homes auctioned was three and the number of bidders was poor.

 

I also think that while Robert is logically correct that quantities have no causal connection, he is underplaying the fact that people believe they do, or probably more accurately, people believe everyone else believes they do. Robert also notes that “trading continues because people are always changing their minds about what they want to own” but his article doesn’t consider what influences people to change their minds.

 

The conclusion is that the relationship between price and demand is complex and ambiguous, subject to feedback loops and human interpretation. That is why I’ve taken to Ben Hunt’s game/narrative theory approach.

 

So where are we now? While we have seen reports of retail demand surges, mostly silver, and the Perth Mint’s kilobars premiums have moved up from previous strong levels, the fact is that Western professional market selling has overwhelmed China and other sources of demand. Perth Mint has seen a little selling from Depository clients, but nothing of note but not any surge in buying. We are not getting the same retail reaction we did on the April 2013 drop. From a technical point of view I get much confidence in drawing lines from chart levels over 5 years old – investor circumstances/perceptions have changed. Until we see Western money move back into gold we won’t get any sustained and meaningful price move. On that front the pro market narrative is all negative:

 

Bloomberg: “There’s just not one typical investment idea that’s supportive to gold right now,” George Zivic, a New York-based portfolio manager at Oppenheimer Funds Inc., which oversees $245 billion, said by phone Nov. 5. “With the potential of rates increasing, dollar appreciation, it becomes synthetically expensive to hold gold as some sort of a portfolio hedge. And then you have the reality of no real concerns of inflation.”

 

Mineweb: Half of the 27 respondents surveyed on Wednesday and Thursday predicted gold prices will breach a critical support at $1,100 per ounce by the end of this year. ... "U.S. dollar strength should impact gold on a short-term basis," said John Meyer, analyst at brokerage SP Angel. ... "The drivers of a sustained rally in gold are ephemeral at best," said Tai Wong, director, metals trading at BMO Capital Markets in New York. ... "The mood of investors could not be more bearish for precious metals," said Thorsten Proettel, commodity analyst at LBBW.

 

I quote these guys not because I think they know what they are talking about, but because this is what similar pro investors are reading and what they think everyone else thinks about gold. On that basis the outlook is poor and in uncharted territory. Sorry. We’ll just have to sit and watch how this plays out over the next few months.

Gold forecaster with 100% accuracy says gold to remain weak

I have found a gold forecaster with a 100% accuracy rate. Below is a chart of two of his recent predictions.

The first arrow marks the 15th of January when he said to "use narratives, not just charts, to tell if gold's bottom may be near", noting that mainstream commentary was a "precursor to more bullish narratives. It also gives confidence to smart money to start to get into the market"

The second arrow marks the 15th of March when he said that he "would not be surprised to see it correct down" and that "there will be corrections on the climb back up" during the rest of 2014.

Of course the forecaster is me, and the 100% accuracy rate is misleading as I've only made these two calls in the entire time I've blogged (here and here), but hey, since when does the full truth matter in click baiting headlines?

Now given that my sample size is only two forecasts, you can probably bet against my next call as there is no way I can maintain a 100% accuracy rate. I'm not ready to make a call for a bottom in this correction so at this time will just expand on the March 15 comments I made in an interview with Al Korelin.

In that interview I noted negative premiums on the SGE were possibly indicative of bullion banks having overestimated Chinese New Year demand (BBs stockpile ahead of these high demand periods, see here for some evidence of this). Perth Mint has seen some on and off weakness in kilobar premiums recently and this was confirmed by Ed Steer noting that JP Morgan received exactly 160,750.000oz of eligible gold into their Comex warehouse on March 20. This is exactly 5 tonnes, which readers of this blog know is indicative of kilobars. If the Chinese are so hot for gold right now, why is JPM putting kilobars into a NY warehouse?

For a current read on the market I think you have to take a narrative approach I discussed in that January 15 article - and that is mainstream financial markets narratives, not goldbug narratives, as that is where the big money is. Where is that narrative now? First this Business Insider article quoting Goldman:

"we see potential for a meaningful decline in gold prices towards the level implied by 10-year TIPS yields, which our rates strategists expect to rise further this year, and reiterate our year-end $US1,050/toz gold price forecast. More broadly, we believe that with tapering of the Fed’s QE, US economic releases are back to being a key driving force behind gold prices"

And this from the Australian Financial Review via Macro Business, quoting some nobody and SocGen:

"Gold is going to be somewhat problematic from an investment standpoint over the next six to 12 months. We’re probably looking to a relatively higher and quicker increase on rates, which is a headwind for precious metals."

"We continue to believe that the economic momentum in the US shows further improvement, we reiterate our very bearish outlook for this year. Prices could drop below $US1,000. I would not rule that out."

The important thing is these people believe this stuff, that the US is "improving" and they will trade gold accordingly. I think it is also worth noting Dan Norcini's repeated comments that this price run up was more about short covering than new longs, and he is representative of the Comex floor "narrative".

I also note the Zero Hedge article on China Commodity Funding Deals regarding gold, which has some potential to be negative for gold, despite what some may say. Most likely their "don't worry, it is bullish for gold" interpretation comes from a lack of understanding of the deals as they probably haven't got access to the professional market commentary on that topic. That is for another post, but I will note I brought this issue to your attention in September 2012 and ZH and others who are now jumping on it could have found out a lot earlier from these articles (good background reading if you're keen) June 2013, August 2013, September 2013, December 2013 and finally from Koos Jansen, who you'd think gold bloggers would read, with this quote indicating the risk: "some enterprises in China use gold leasing from banks to solve their short-term funding problems in the hope of buying back the gold at lower levels to repay the lease. However they can be short-squeezed when gold moves higher"

So at this stage I think the risk is to the downside but will hold off on a bottom call until I can see some shift in the mainstream narrative.