Sucking silver through a straw

On Friday there was a big move in precious metals, with gold up $25 to around $1135 and silver up $0.70 to around $15.20. In percentage terms the silver move was much more dramatic, approximately 4.8% compared to gold’s 2.3%. The move was in reaction to US non-farm payroll numbers, but in this recent post, Keith Weiner at Monetary Metals goes behind the headline grabbing move and looks a little deeper into what it tells us about scarcity in the silver market. [read more]

Coin Shortage FAQs: telling a real shortage from a capacity shortage

Temporary coins shortages first started in 2008 after the global financial crisis and they have occurred repeatedly since then. Don’t get caught up in the marketing hype the next time a shortage occurs – if you follow the advice above on how to tell if it is a real shortage, or just a production capacity shortage, then you will be able to keep calm and carry on stacking (economically). [read more]

Perth Mint sales surge on back of US Mint shortage

Well it hit us a lot quicker than I thought, with a big increase in demand for our products out of the US and Europe for both gold and silver http://research.perthmint.com.au/2015/07/15/perth-mint-sales-surge-on-back-of-us-mint-shortage/

Silver shortages, again

Some thoughts/observations on the US Mint suspending silver eagle sales http://research.perthmint.com.au/2015/07/10/silver-coin-shortages-again/

How to know when there is a real physical-paper disconnect developing

FastMarkets are reporting intermittent shortages of 400oz bars in London with premiums for physical delivery "as high as" $0.50 an ounce. In May 2013 I reported that

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

I therefore put a question in to FastMarkets via Twitter to clarify if the premiums are for 9950 bars, which would be much more significant than if it was just for 9999 bars and am waiting for a reply. The detail is important here, particularly when another source quoted in the article says that "there is gold available in London."

The Perth Mint has not seen such premiums and certainly the bullion banks aren't paying a premium to acquire 400oz bars from us. A journalist at Reuters told me today that "We spoke to one of Switzerland's biggest refiners yesterday and they said that business is quiet at the moment. No mention to shortage of any form of bars." (guarantee you aren't going to hear that on KWN).

This report is a good opportunity to discuss how to know if there is a real physical-paper disconnect occurring. The key is to look at the premium above spot for wholesale metal, which is 9950 400oz bars for gold and 9990 1000oz bars for silver.

Shortage of retail forms of gold and silver, that is anything less than 400oz/1000oz, does not necessarily tell us about whether there is a real shortage, and thus price disconnect, in the wider precious metals markets. A lot of people really struggle with the concept that coin shortages may be the result of production capacity shortages, see here and here, for example. You have to rule out production issues first, which in my opinion will be hard to do as when we get some real retail demand I don't think the industry can cope, as I discussed here.

The reason premiums on wholesale forms is the indicator is because the spot price is the price for unallocated, that is, paper gold in London. That is how most trades are settled and if you want physical then a separate physical redemption instruction is issued. As such the industry works on premiums to spot for whatever form and in whatever loco (as spot gold has different prices in different locations).

The problem with this way of pricing (spot + premium, or pay me unallocated gold + $ premium for physical) is that it "hides" any physical-paper disconnect that may be occurring.

For example, say the gold price is stable at $1200 but 400oz bars start to become rare and hard to get, and the premium to acquire them reaches say, $10 an ounce. Then what will happen is dealers will be buying unallocated gold at a "spot" of $1200 and redeeming the unallocated and paying $10 premium separately. However, what will be reported by Reuters and Bloomberg data feed services (on which all the websites rely) is just $1200, not $1210.

This idea of unallocated spot + premium is heavily embedded in most of the industry. To them, loco premiums/discounts and premiums for various forms of physical are normal. They do not think about a physical-paper disconnect and initially may just see premiums on 400oz as unusual but not extraordinary. They certainly won't initially see the premium as a potential precursor to a bullion bank run and so may not consider it worthy to write or commentate about - their frame of reference is that the existing system has survived in the past and thus will continue to survive.

Unless you are in the professional market you won't see this occurring. I will endeavour to report on it if we see it, but you don't have to rely on me as there is another indicator. I would suggest keeping an eye on Bullion Vault or GoldMoney. These two services are backed by 400oz bars. If there is a real shortage of 400oz bars and thus premiums being asked, then you should see one or both of these being reported by these two services:

1. A widening of their normal buy/sell spread, or additional fee on purchases, to cover the premium they are being charged on 400oz bars.

2. They stop taking in new clients due to an inability to acquire 400oz bars.

Now some people, like Jim H, may think that I am not "really here to support me, the common man, [but] the State, who ultimately holds the key to your paycheck" and thus you can't believe what I say about shortages or premiums in the wholesale market, but I doubt anyone thinks that James Turk and GoldMoney are part of the Cartel, so I think you're safe watching them for signs of that a real physical-paper disconnect is developing. Anything else is probably rumor and hype.

 

Added 6/9/2023: https://www.bloomberg.com/news/articles/2022-05-19/boe-gold-trades-at-rare-discount-in-sign-of-central-bank-selling via https://gata.org/node/21949

Gold stored at the Bank of England has been trading at an unusually low price, in a sign that central banks may be shedding some of their holdings.

The Bank of England’s vaults contain 5,676 tons of bullion, one of the largest stockpiles in the world, which it holds on behalf of other central and commercial banks. Gold held by central banks is typically bought and sold between large institutions in bilateral trades at prices usually within a few cents of the market rate.

In recent days, however, gold at the BOE traded as much as a dollar an ounce beneath benchmark London prices, according to traders familiar with the matter. Such a big discount usually indicates a big institution like a central bank selling a sizable amount of reserves to raise US dollars or other currencies, one of the traders said. ...

The BOE gold discount has narrowed since the dollar-an-ounce margin, but remains large by normal standards, said the people, who asked not be identified discussing private information. Bullion has slipped more than 12% since peaking in March, leaving it close to unchanged this year.

https://gata.org/node/21189

Gold at BOE Commands High Premium, Signaling Central Bank Buying

Thursday, May 27, 2021

https://finance.yahoo.com/news/gold-boe-commands-high-premium-194455336.html

Gold stored at the Bank of England has been selling for unusually high premiums recently, signaling that central banks may be back in the market buying.

The gold in the Bank of England's London reserves -- one of the largest stashes of bullion in the world -- is stored and sold on behalf of other central and commercial banks as opposed to being owned by the Bank of England itself. It usually trades within a few cents an ounce of gold held at other London vaults run by commercial banks such as JPMorgan Chase & Co.

But in the past week, gold sold from the Bank of England has traded for as much as 50 cents above benchmark London prices, according to bullion traders. These premiums are at least in part being driven by buying from the Bank for International Settlements, which regularly trades gold on behalf of the world's central banks, a person with direct knowledge said, asking not to be identified because the information isn’t public.

The BIS bought as much as 1 million ounces of Bank of England metal from various commercial banks at a premium of 30 to 40 cents recently, one person said. The premium for gold at the Bank of England rose to as much as 50 cents an ounce late last week before tapering off to about 20 to 40 cents, according to bullion traders. That compares with a range of zero to 20 cents during normal circumstances, the traders said.

The buying may be a sign that one or several central banks are increasing their gold reserves, bullion traders said.

Coin shortages and rationing are in our future

The extraordinary demand for precious metals coins following the 2008 global financial crisis caught the minting industry by surprise, resulting in never before seen coin rationing and shortages.

It seems not much has changed, with recent reports that the UK Royal Mint ran out of 2014 Sovereign gold coins due to "exceptional demand", as well as the continuation for over one year of an allocation program first put into place early 2013 by the US Mint on its ever popular silver Eagle bullion coins.

While these recent events have been limited to specific coins, with availability of other leading bullion coins like the Perth Mint’s gold Kangaroo not affected, it does seem to indicate that worldwide minting production capacity is still unable to meet demand surges. I have been talking about this issue for some time, as in this July 2012 interview and here.

The 2008 global financial crisis did result in private and public mints expanding their production capacity. The Perth Mint, for example, has spent over $50m since 2008 on improvements to existing machinery as well as new and expanded facilities.

However, it is little appreciated that the bottleneck in the global coin minting process is blank (planchet) manufacture. This is a far more complex process than simple stamping of a coin, particularly around purity and accurate weight control. As a result, blank manufacture is a process that benefits from economies of scale and thus few mints these days make their own blanks, outsourcing the process to a limited number of private and public suppliers, of which the Perth Mint is one.

If you dig deep, you will find that many of the coin supply problems come from underestimation of demand and the resulting exhausting of blank inventories. Often, blank suppliers are mints themselves and can face conflicts where they earn more by prioritising blanks for internal use rather than supply externally. Running higher blank inventories is often not an option, due to the cost of funding the high dollar value of the inventory.

To get an idea of how high coin premiums can go when coin demand overwhelms production capacity, consider this chart from Nick at www.sharelynx.com

The 2008 premiums were celebrated by some at that time as a proof of a physical-paper price disconnect and a "good thing". The fact is that there was plenty of supply of the raw gold or silver (the Perth Mint at one stage was shipping in 20 tonnes of silver each week for weeks on end from London with no problems). High premiums are actually not a good thing, because it means that the same money buys (and takes off the market) less ounces.

 

Notwithstanding the capacity expansion by blank suppliers over the past five years, in my opinion there is no way the industry can meet the demand that would occur were precious metals to see even a small bit of interest from the mass market. While cast bars are a lot easier to make and refiners have much more casting production capacity, I am not even sure if it could meet sustained mass market demand.

For now 2008 style shortages and rationing don't seem to be on the horizon but the fact that the UK and US Mint are having supply issues on a few of their product with metal prices at these low levels is an idicator that as prices rise and (re)attract investor interest, shortages and rationing may become a reality of coin buying life again.

Tight physical supply

Readers have asked me to comment on Koos Jansen's report of tight physical supply. There are a few interesting observations made in the article I have some comments on.

1. "sometimes when they get gold in, it’s coming from the back corners of the vaults. He knew this because these were good delivery bars marked in the sixties"

This is not unheard of. In June 2006 the LBMA issued a note saying that "in the past year, an increasing number of gold and silver bars have been re-appearing in the market after having been held for many years in vaults (whether in London or elsewhere) ... some of these “deep storage” bars may no longer be regarded as acceptable, either because of physical defects or poor marking." They followed this up in Oct 2007 with another clarifying note.

Unfortunately, Warren James has not had time to develop an aging analysis of the bars in the ETFs from his bars database, and the age of those being redeemed, which would provide additional information on how far down the barrel the scraping is happening.

Given the first reports of deep storage bars come from 2006, it is not surprising that "sometimes" refiners see old bars. If they had said they "often" or "frequently" got old bars, then that would be a lot more interesting.

2. "there have been several times this year on which they were unable to source gold, this shocked me. They’re bringing in good delivery bars, scrap and dore from the mines, basically all they can get their hands on. This gentleman has been in the business for 37 years, he was there during the last bull market in the late seventies. I asked him when was the last time this has happened, that he was unable to source gold, he said never"

All I can say is that the Perth Mint hasn't heard of any problems sourcing 400oz bars out of the bullion banks ex-London at this time, so I'm not sure what to make of it. The quote is third hand, I wonder if "unable to source" was meant as "unable to source at par" but that subtlety was missed. I reported in May that 99.99% 400oz bars were attracting a premium, maybe it meant 99.5% bars are getting a premium now? The wording however seems clear about outright inability to source.

3. "They put on three shifts, they’re working 24 hours a day, and originally he thought that would wind down at some point. Well, they’ve been doing it all year. Every time he thinks its going to slow down, he gets more orders, more orders, more orders. They have expanded the plant to where it almost doubles their capacity. 70 % of their kilobar fabrication is going to China, at apace of 10 tons a week. That’s from one refinery, now remember there are 4 of these"

Perth Mint is seeing good demand for kilo bars from China, but nothing like the premiums we saw earlier this year. We refine around 5-6 tonnes a week, so those numbers accord with what we are doing.

4. "in China there are 6 LBMA refineries but he has never seen a Chinese gold bar, they’re keeping it all"

Warren confirmed this when investigating Dominic Frisby's statement from HSBC about it, and in this follow up. Of all the ETF bar lists that Warren downloads he hasn't see one Chinese gold bar yet. No doubt no newly mined gold is getting out of China.

5. "What I do know is that we are on the threshold of a situation that has never occurred before. A squeeze is imminent, it could take 3 months or 6 months, but all I know is that it’s coming, and I know that with 100 % certainty."

I've seen a lot of 100% certainty that the fractional bullion banking system is about to blow up, starting in 2008 from the financial crisis. What I watch for is bullion banks desperately bidding on our refining output, as I said in this post or "just watch Bullion Vault and Gold Money - which are backed by 400oz bars and which deal in that market every day - for reports of difficultlies in getting 400oz bars and restrictions on how much gold can be bought, and/or if they start to add on a "special" premium to their spot price." I'm not seeing that desperation by bullion banks, nor premiums from Bullion Vault or Gold Money on 400oz bars, so at this stage no confirmation.

PM Bug forum comments on backwardation

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

Originally Posted by Unbeatable:

Hmm.... When he sees 400oz bars attracting a 'special premium' he will let us know?The two biggest gold consumers India & China are paying a $30+ premium an ounce over spot, a 600%+ increase over what they paid in previous years!?

The premium in India and China is not for 400oz bars, but for smaller forms and particularly in India there are import duties and other taxes that go into the premium. The demand in India and China is high, but it is not translating into premiums for the raw wholesale form (400oz bars).

Originally Posted by Unbeatable:

Hmm... When he sees bullion banks desperately bidding on Perth Mint's refining output he'll let us know?

My statement was about bullion banks and 400oz bars. Your quote is referring to demand for coins, two different markets. You are missing the whole point of my comment, which is that retail level demand, premiums do not reflect a shortage of gold at the wholesale level and a run on the fractional reserve bullion banking system.

Originally Posted by Unbeatable:

Hmm.. When he sees restrictions on how much gold can be bough he will let us know? 'the Reserve Bank of India banned import of gold by domestic consumers through bank credit' ' Gold coin and bar sales stopped in India' 'Pakistan temporarily bans gold imports'

You are misquoting again. The restrictions I was talking about was restrictions by GoldMoney and Bullion Vault, not any restriction in any market. I picked GM and BV because they buy 400oz bars for their pooled storage products. If there was a shortage/run on the wholesale gold banking system then GM and BV would have problems sourcing 400oz bars. They are not.

Originally Posted by Unbeatable:

But to be blunt (And as I think you know full well yourself), the idea that you'll see the overt stress indicators that you suggest coming from the bullion banks actions themselves is quite frankly absurd because the day they show provable supply side issues is the day they default.

Nope, it is not a sudden event, it will build up over time and signals will be given, see http://www.goldchat.blogspot.com/201...strust.html‎ (that does need some refinement but the basic idea is there). Bullion banks, just like any bank, will do everything they can to drag out and avoid a run, they aren't just going to throw their hands up at the first sign of trouble. Those "do everything" will be gradual at first and will be visible to us in the wholesale market who know what to look for.

Originally Posted by Unbeatable:

Which is why I showed how each of the indicators are already clearly manifesting themselves in the gold market. (& though you repeatedly try to pretend that there is this massive separation between stresses in demand in the retail and wholesale market, they are in fact completely interlinked.)

There is separation between retail and wholesale. Most of the retail problems/premiums are driven by production capacity shortages rather than shortages of raw gold or silver. For example, during the 2008 financial crisis the blogosphere was going crazy about shortages of silvers, particularly, yet the Perth Mint was shipping in 20 tonnes of silver each week from London for about 20 weeks on end. Go and have a look at my blog around that time.

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

Originally Posted by Unbeatable:

1. In times of demand stress the bullion banks are the ones supplying many mints with additional refining input never mind bidding on the output?

Nope, got that wrong. US Mint, yes needs to get metal from the market but the two other big ones - Canadian Mint and Perth Mint - are refineries so they source their own metal and in fact have excess left over after coining needs. Perth Mint refines around 6 tonnes a week and we use 10%, maybe up to 20% if lucky, for coin production. The rest we turn mostly into kilo bars and then sell it to the highest bullion bank bidder - it is that premium on kilo bars that tells us how desperate they are, in addition to where it is going and what form, gives a lot of info.

Originally Posted by Unbeatable:

2. I'd imagine the bullion banks have preferential contracts in place and ones that prohibit you, a Perth Mint employee from disclosing market sensitive information, so I take your 'I will let you know' with a pinch of salt.

We work with a range of bullion banks and have no exclusive supply arrangements. While we have customer privacy requirements, that does not stop us from making general statements about what we are seeing. And there is no such thing as market sensitive information in bullion - it isn't an equity.

Originally Posted by Unbeatable:

3. If the bullion banks were having issues, instead of people like Perth Mint employees letting the public know about it, I'd expect them to go out and try to convince people of the opposite - 'Don't worry there are not wholesale supply issues' & shi*, look, here you are...

Actually, it would be more logical for us to hype up shortages so that we could increase coin and kilo bar premiums and make more profit. I've rarely seen any market comment coming out of the major refiners talking about how crap demand is. Shortage hype is used by coin dealers to 1. get people to buy now 2. pay excessive premiums. Perth Mint has a bit more integrity and we stick to the facts. Why do you think Perth Mint and I get so much crap on the gold blogosphere - because we are wrecking their sales patter.

Originally Posted by Unbeatable:

So rather if I was looking for supply problems in the 400oz wholesale market, I'd look for signs of additional central bank leasing, particularly the Bank of England who are a key source of supply in times of stress. & shi* look a story just in the last two weeks that the BOE may have leased up to 1300 tons in the 400oz wholesale market in the first half of the year

You are on the right track here, a run is about liquidity, so the first action of a bullion bank experiencing a run will be to lease/borrow gold (not buy), which should show up in increasing lease rates (which has the effect of decreasing GOFO) - although lease rates are still quite low compared to stress periods in the past but trending up.

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

Originally Posted by Unbeatable:

Or I'd look for signs that Bullion Banks are running short of supply and/or are being forced to help one another out. & shi* look at how much of JPM's inventory has been removed this year and also this story from just yesterday

Those sort of inter-bank transfers are standard part of market clearing http://lpmcl.com/

Originally Posted by Unbeatable:

But as these don't constitute hard evidence, & people like Potemkin would say 'Rumours, words, stories...' I chose to bring up provable supply side shortages &/or unprecedented demand in the gold market which is of course what creates the wholesale market problems you are witnessing above.

Signs of increased demand and just signs of demand, not a bank run and does not cause a bank run as the bullion banks just act as a broker between buyer and seller and let price manage it. It is only unallocated holders taking delivery that creates a run and possibility of default. That shows up in lease rates and the futures/forward market first.

Originally Posted by Unbeatable:

Really!? How many hours do you think it will take from the time they announce purchasing restrictions to Gold Money to the time they default? I think you know that this is the very last thing they will do, if they don't actually just default first.

First sign will be premium increases, that is the key signal. And it won't be explicit purchase restrictions, more like delays due to "transport issues" etc.

Originally Posted by Unbeatable:

If there are demand stresses for gold, I think it's (painfully) obvious that they would rather do their best to try cut demand from the biggest gold consumer, India. (EDIT: Which is obviously why I brought up the restrictions in India and outright temporary import ban in Pakistan as being very indicative of shortages in the wholesale market.) As this would ideally (For the bullion banks) have the effect of decreasing demand for their good delivery bars in that market and also freeing up mint output sourced from the mines & scrap, so that it could then be used to refine new 400oz delivery bars for the bullion banks as opposed to coins and smaller bars for retail.

See my earlier comment on India. The Indian restrictions aren't doing anything to stop demand, it is just being smuggled. The Indian Govt actions are just about making their CAD figure look better to financial markets.

Originally Posted by PMBug:

Bronsucheki, are you able to confirm or deny this claim (at least as it pertains to the Perth Mint) from Bill Haynes?

No can't confirm it directly as we aren't being given any 100oz (ex Comex) or 400oz (ex London ETFs) bars by bullion banks to melt and recast into kilo bars. However, we are seeing good demand for our refining output into kilo bars for shipment into China, Dubai and Thailand, so the Bill and Tekoa reports fit in with that.

Originally Posted by Unbeatable:

Hi Bronsucheki, thanks for taking the time to give such a detailed response and for doing it in a pretty reasonable tone despite how confrontational mine was. Also especially considering that you work & have considerable knowledge in that area vs. me who doesn't.

No problem, don't mind being challenged. This time is different to 2008 and certainly more stress, I'm just not sure there is a run on yet, but it is finely balanced I think. We are seeing very high premiums on kilo bars, premiums we haven't seen for a very long time.

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

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

Originally Posted by Unbeatable:

So I'm surprised during the period of unprecedented demand this year that you didn't have to source any additional supply from the LBMA in London again?

Perth Mint is primarily a gold refiner and we get silver as a by-product of that gold refining. Normally the silver was enough for our coining needs but in 2008 the demand was so high we had to source silver externally. Since then we have picked up some more silver refining so have enough silver now, even with higher demand.

Originally Posted by Unbeatable:

You also say the majority of your non coin production is being made into Kilo bars for the highest bullion bank bidder. But I was under the impression that the bullion banks dealt in the larger 100 & 400oz bars & that the 1 kilo bars would be more for the retail investment market?

1kg = $40,000, not exactly "retail" by most definitions! Bullion banks deal in any size - they cover all markets. 100oz gold bars are primarily a US market size. 400oz bars are usually used for investment, bulk long term storage, they are not really convenient for use in industry/jewellery/mint as you need a big caster to melt 400oz, plus 400oz is 99.5%. So, particularly in Asia, the smaller 1kg in 99.99% purity is preferred by jewellers. Plus when I talk about kilo bars wholesale, that is selling in half or one tonne lots, eg $20m to $40m deal size.

Originally Posted by Unbeatable:

But the import taxes/duties in India are 8% that would be $104 an ounce, far higher than the $30 premium the media is using. Doesn't this mean that the $30 premium is the premium they're paying prior to import duties/taxes being applied?

Yes correct, the $30 would not include that import tax, but I believe there are some other duties/fees and often bullion banks selling into distributors in India include shipment and finance deals in the price, so I'm not sure the $30 is the full premium. However there is still a large premium in that market reflecting the restrictions and driving the smuggling, so I probably pushed my point too hard there. The premium is also highly volatile as the Indians are very price sensitive.

Originally Posted by Unbeatable:

this is perhaps the first time we have seen this happen laterally between two vaults

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

Originally Posted by Unbeatable:

Today I see another negligible 4k ounces went from Scotia to JPM and JPM converted a massive 70k ounces from there 360k registered total and moved it onto their 100k eligible total.

The transfer from registered to eligible is why one needs to add both stocks together and compare that to open interest, which is what I did in this post. The current coverage ratio for gold is 17.7% and silver 24.5%. Looks like plenty of metal for redemptions.

Originally Posted by Unbeatable:

Personally I think at the very least a Bullion Bank run is in progress at JPM and I think even though the writing is on the wall, the others are just trying to help JPM make it to some pre-determined end date.

How long do you think banks runs last for? I note no commentator is really putting a date out there, except Jim Sinclair "because of the continued fall in gold inventory that within in 90 days or sooner the Comex must change its delivery mechanism". Personally I think by mid-Oct Comex will still be going on as per normal and the BBs will still be around.

Originally Posted by Unbeatable:

My question to you is, having seen how these unusual transfers have continued since my original post do you still think

As noted above about ZH, I question whether there is any proof these are "unusual transfers".

Originally Posted by Unbeatable:

My question to you is would you agree that the banning of buying gold on consignment did have the effect of considerably decreasing India's overall physical gold demand for 1-2 months (incl. smuggling)?

Yes, as India had a relatively open gold import system the sudden rule changes crimped legitimate imports but the smuggling network was not in place to take up the slack so that would have had the net impact of restricting demand. We have recently seen a pick up in demand from other countries which tells us smuggling has started back up.

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

Norcini: Gold is not in backwardation

In my last post I was not saying that what we see now on COMEX and with GOFO is not important – remember the mugger in Crocodile Dundee still had a knife – just that his switchblade is small compared to Dundee’s much larger “full” backwardation knife.

There is a lot of confusion about the definition of backwardation. Here is a quote from the Dummies series of books:

"When a market is experiencing backwardation, the contracts for future months are decreasing in value relative to the current and most recent months. The spot price is thus greater than the front month, which is greater than future delivery months."

Note their use of plural – "contracts" and "futures months" - as these other links also do, from the first page of a google search on "definition backwardation":

Wikipedia - "The resulting futures or forward curve would typically be downward sloping (i.e. "inverted"), since contracts for further dates would typically trade at even lower prices."

McClellan Oscillator - "Backwardation means that forward contracts are priced lower than nearer term contracts, or spot"

Investopedia - "Backwardation is the same as inverted when futures prices are lower than spot prices."

This is what I understand by backwardation when one uses that word in a general sense about a futures market. Having said that, I think it is valid to talk of a specific month being “in backwardation” even if that is not exactly a precise use of the term. What I have a problem with is describing what we are currently seeing in gold as a general backwardation and playing this up as a sign of the failure of the fractional reserve bullion banking system. It is not.

Last word on this I'll give to Dan Norcini:

"gold is not in backwardation and has not been at any time whatsoever on the Comex during the entire time this backwardation talk commenced and picked up some gullible followers"

The post is worth reading in full because he explains the need to look at current bid/ask rather than last price for the further out contracts due to lack of liquidity and the difference between backwardation and the basis (or strong basis as he calls it when spot is above futures). He also makes the following statement:

"When we do however see a STRONG BASIS PLUS a BACKWARDATION STRUCTURE ON THE FUTURES BOARD, then we have the real deal."

I covered similar ground this in 2010 post, saying that that occasional "backwardation" in the shorter months is just the start, or first sign, of a breakdown in the system. Calling what we see now in gold as backwardation proper overstates the phase we are in.

I think the other issue with backwardation is that it is a concept that comes from commodity markets. In this post I question whether such a commodity type interpretation of backwardation is appropriate for gold. Aren't we told that gold is a monetary asset with high stocks to flow, unlike commodities? If so, should we apply a commodity futures market interpretation to gold? As I say in that post "Then you see that gold hasn't went into backwardation, but that USD has went into contango."

If gold is mostly monetary with only a little commodity-like nature, it is therefore best analysed as a currency and in that respect, no one talks of currencies going into backwardation or contango, they just have different interest rates and that differential might drive a carry trade if the difference is big enough. FT Alphaville has done a whole series on this more "financialised" view of gold.

Regarding negative GOFO (which reflects the interest rate differential between USD and XAU), my current view is that it is reflecting the shift by speculators to the short side - more shorting results in more demand to lease gold, which drives up the lease rate (thus GOFO goes down). I have read that liquidation by specs out of long positions has also restricted supply of gold to lease (as the gold has been sold to those unable or unwilling to lease their gold out) and seen comments that increased physical demand has resulted in more metal being tied up in the value chain, so that results in more demand for leasing (or inventory to hedge).

So I think there is a case to say that negative GOFO as more driven by tightness in the gold leasing market. Note that shortage in the borrowing and lending market does not have to coincide with a shortage in the buying and selling market. Holders of gold may be willing to sell it (so price is low), but at the same time those continuing holding it (or the new people buying it) may not willing to lend it (so lease rate is high).

 

This is why it is logical for Dan Norcini to say that the structure of the futures market is not exhibiting "a true supply shortage" while at the same time we have negative GOFO and some futures contracts below spot.

So this development in leasing is probably what has driven GOFO negative, which, as Keith Weiner notes in this post, is then synced/transmitted to the futures markets by arbitrage (and has a very compelling combined chart of GOFO and the basis to prove his point). Therefore I think we are currently seeing is more a liquidity squeeze on the bullion banks, rather than a full blown distrust in them by holders of unallocated or shortages of physical (a price squeeze).

 

A real gold bank run will manifest itself in the wholesale markets for 400oz bars. When I see them attracting a premium and/or being difficult to source, or bullion banks desperately bidding on the Perth Mint's refining output, then we "have the real deal" as Dan says. I will let you know.

 

Alternatively, just watch Bullion Vault and Gold Money - which are backed by 400oz bars and which deal in that market every day - for reports of difficultlies in getting 400oz bars and restrictions on how much gold can be bought, and/or if they start to add on a "special" premium to their spot price.

Don't be complacent however. What I'm talking about above is the end of the line and things can unravel quickly - a liquidity squeeze can turn into a price squeeze - so keep your gold close or stored with non-banks, like the Perth Mint, who don't engage in fractional reserve and maturity transformation activities.

COMEX stock drawdown: single most important metric to watch

To understand what is going on with COMEX stocks, don't look at the stock level - it will lead you astray. You need the metric I presented at the Gold Standard Institute's 2009 seminar; one which Professor Fekete thought was the single most important metric to determine stress in the market. The second thing you need to do is put recent market action in historical context.

Firstly, lets review some historical stock levels for gold and silver for some key years - the 1980 peak, the 2001 bottom, 2012 and now. There is only one place I know that has that data going back that far, and it is www.sharelyxn.com. It is a lot easier to follow by looking at the charts of the stock levels, which are available for gold and silver if you have a subscription. If not, then just sign up for a free trial, it will be worth it just to see the charts I'm talking about.

The table below shows the average total (registered + eligible) COMEX stock in millions of ounces for each of those years.

Year	Gold	Silver
1980	3.5	80
2001	1.0	100
2012	11.0	140
Now	8.0	166

First thing to notice is that even after the big gold drop being talked about, the total gold stock is still massively up on the 2001 bottom and the 1980 bull market. Not surprisingly, given the behaviour of SLV's holdings, COMEX silver hasn't dropped.

However, the stock figure by itself doesn't tell us much, as how can we compare the 1980s with today when we have a much larger economy. The important metric is to compare stocks in relation to open interest. If stocks decline but open interest declines as well, then the stock drop is to be expected.

Thankfully Nick at Sharelynx calculates this for us - what he calls Owners per Ounce, or Stocks Cover and you can find the charts here. It is just open interest in ounces divided by stock in ounces. I like to invert it, which gives you a percentage indicating how much of the open interest is backed by stock, a sort of fractional reserves figure. The table below has those approximate figures I've eyeballed from Nick's charts.

Year	Gold	Silver
1980	13%	10%
2001	9%	28%
2012	26%	22%
Now	19%	21%

So even after that COMEX stock drop in gold, we still have a coverage ratio that is way above that which applied in the 1980 bull and which is not down much on 2012. The current coverage of around 20% also needs to be kept in context of the percentage of open interest which stands for delivery, which for gold and silver over the past five years averages between 2% to 4%. So it looks like COMEX has plenty of stock on a historical basis. It is when that percentage coverage gets a lot closer to the average standing for delivery rate that we can consider COMEX under stress and at risk of cash settlement. We aren't close, no matter how the much the pumper sites like to hype the recent stock declines.

And for those who will say what about if everyone stands for delivery, well consider that while most of the shorts don't have the metal, most of the longs don't have the cash. We know this because of all the talk about margin calls causing people to have to sell. Think about that - if they couldn't meet the margin calls, then it means they didn't have the money to stand for delivery.

Plenty of silver?

Two "insiders". First Adrian Ash of Bullion Vault on This Week in Money podcast (19:32 minute mark):

"Silver is a very interesting case at the moment, there is an awful lot of talk at the moment about silver supplies are very tight, London’s got no silver. I don’t know where this idea comes from - London liquidity in silver has never been so strong, you know there’s plenty of silver around in London right now."

Then Eric Sprott on King World News on his recent PSLV unit issue:

"It’s around nine million ounces. For the most part we will have purchased that already. I don’t know that we have all of the delivery yet because we just had the green shoe exercised on Thursday night. So that purchase has been made, but obviously we wouldn’t have delivery yet. I don’t think we’re going to have delivery problems. As you know, I’ve always hoped we can’t get that last bar (of silver) because we’ll publicize it. But so far the silver has come in."

Contrast with TF Metals Report:

"The commercial short position has grown so extreme AND the physical supply has grown so tight ... We KNOW that this silver manipulation cannot go on forever. In fact, the increasing physical supply tightness makes this eventuality a possible near-term event."

And Alasdair Macleod at GoldMoney:

"... the bullion banks which are short in the silver market are potentially in serious trouble, unless somewhere there is a pot of physical silver they can dip into. There isn’t ... There is no other identifiable source of silver, other perhaps than some producer supply, and there is anecdotal evidence that on every dip, cash silver migrates from West to East, confirmed by silver being constantly in backwardation."

Interesting difference of opinion. I'm not sure exactly how many weeks "near-term" equals, but surely no more than a few months at most? Look forward to the resolution, but while the future is uncertain, I can guarantee 100% that no one will say they were wrong.

BTW, I do not get why this claim that silver is in backwardation has been popping up recently. Backwardation is when a futures price is lower than spot (or lower than the current month). When I look at the silver futures contracts prices I see the futures prices rising from Jan 13 through to Sep 14 then sloping downwards, but only falling below Jan 13's price after the Dec 16 contract. It is an odd shaped curve, notwithstanding the illiquidity of the far months, but certainly not backwardation.

Shortage followup questions

Some good questions from a thread on my shortage interview at silverstackers.com forum, cut and paste below:

Bron

In that interview I was sort of covering the material in this discussion.

The summary text "invest large amounts of capital towards ramping up production" I think got mixed up, what I was saying was WHILE production has been expanded, it is not enough.

When push comes to shove, Depository clients will get preferential supply for collection requests as we have a legal obligation to make delivery whereas we don't have a legal obligation to sell coins to someone off the street, so to speak.

Gino

And yet, even though there were two month delivery lead times, it didn't move the price of silver at all in 2008/09. there was no price spike to reflect the demand pressures in the investment market and the apparently constrained supply. It was very interesting as an investor participating and not at all what one would expect. But then the reason was it wasn't the raw material that was in short supply, only the blanks for coins. Although I recall delays on bars as well.

So is the point here that there may be physical delays, but don't necessarily interpret that as a resource availability issue? But if the price does move, what would it mean? Does the price just come down to the paper markets and the manipulations of it by TPTB?

Bron

The thing about rationing or high premiums is that it takes pressure off the underlying wholesale market. For example if people are paying 40% premiums for silver coins when the normal is 10% premium, then $30 out of every $140 spent is going to retailers/mints as extra profits rather than buying more silver. If mints were able to keep up then of that $140, $130 would be going to buying (or bidding up the price) of silver.

Excess premiums, whether it is in coins or say PSLV, just means less ounces are being bought. That is why I don't think high premiums are anything to celebrate.

The price is driven by both the physical market and paper market, which is more dominant changes over time.

southerncross

Would you not agree tho that paper is the dominant market? Say for example just as a thought exercise that just silver alone was for some unexpected reason deemed only acceptable in it's physical form as a means of trade and that all the phantom paper Silver disappeared overnight due to some sort of black swan event.

People who have an PMDS for example cant just pick up the phone and buy X amount instantly and those sorts with unallocated accounts etc cant just use their phone to "say" they actually own it, they have to physically produce it.

Bron

Certainly paper often has the upper hand, but many desk-based commentators who aren't in the markets don't realise how much physical is also traded. Blogger FOFOA has a theory that since bullion bank unallocated accounts are fractionally backed bullion bankers are particularly concerned when the physical market starts to suck out metal, draining their reserves (which if left unchecked could take too much physical and result in a bullion bank run). His theory is they push the price UP (not down) as that means the same dollars buy LESS ounces, taking pressure off their reserves. I hope this gives one example of how complex the physical vs paper dynamics can be.

Not sure I understand your point about PMDS. If we went to a physical only market then we would only sell to a PMDS client if we could get/had physical silver.

southerncross

Now I know it's a far flung what if and an extreme example, and I am not by any means saying that the Perth Mint itself is selling more Silver on paper than what it physically holds, but there are many examples around the world of paper precious metals magically teleporting from or too certain vaults with nothing more than the push of a keyboard and a few typed lines of evidence to say that they actually exist. Literally millions of ounces that would need a convoy of armoured car's and associated security personnel to transport that don't actually happen in the real physical world.

Bron

It is a common misunderstanding that the ETF allocations involve physical movement. As most of them store their metal in London, all that is happening is that silver already in the vault (which belonged to someone else who sold it to a bullion bank) is just sold to the ETF authorised participant and they just change a computer record saying that bar in the vault now belongs to the ETF AP (who then transfers title to the ETF trust).

southerncross

Q: Would you as a personal investor in precious metals trust anyone else apart from the Perth Mint if you invested solely in paper or unallocated Precious Metals ?

Bron

It all comes down to the custodian. You either trust them or not. If you don't then not even allocated will be safe. Regarding unallocated, I don't think apart from ourselves and Kitco that there are many who explicitly state that their unallocated is 100% backed, and that is really only possible for businesses which have physical as part of their business. If you are buying unallocated from a bank, then very high chance it is being lent in some form as that is what banks do.

southerncross

Sorry Bron two questions actually, And this one go's back to the statement I quoted of yours above. Q: Do you think the paper market is manipulated by able bodied self interested parties? Again I ask this with no reflection on the Perth Mint as they are not a Bank or associated with the rise and fall of the stock market etc just on your statement on the physical and paper market.

Bron

I would not be surprised if the metals markets are manipulated, but as we are not traders in the big paper markets (eg COMEX) we don't have any evidence one way or the other. However I don't believe the metals markets are suppressed, which I distinguish from manipulation (which is short term). Suppressed means the price is kept lower over a number of years. Those who think this way don't appreciate (or is that respect) the power of the physical market, by which I mean to suppress you ultimately have to supply physical to the market and there is only so much above ground in the hands of the central bankers.

Black_Sun

Yes, all metal is NOT held physically at PM... all explained in goldchat.

Bron

To clarify, unallocated is backed by physical in our operations in Perth, but also by some physical in transit and temporarily sitting in overseas warehouses on its way to distributors, and by a bit of unallocated held with bullion banks (which is converted to physical on a regular basis). If you're not comfortable with the unallocated business model then go with allocated. 85% of Depository clients (by ounces) hold unallocated, the rest allocated.

Matthew 26:14

"Bron Suchecki, who's in charge of strategy for the famed Perth Mint, is warning all precious metals investors that the next crisis will lead to heightened precious metals demand so expect shortages and mint rationing. This is exactly what happened in 2008, and the next crisis could very well be worse." Curious statement. In 2008 the ass fell out of silver while there was a supposed physical shortage? Defies logic and economic norms.

Bron

You're confused because you're not using precise terminology. Restated: "In 2008 the ass fell out of silver due to selling by leveraged paper players needing cash to pay for other losses, while there was a physical shortage of RETAIL sized coins and bars." In fact, the leveraged paper selling, because of arbitrage, would have resulted in associated physical wholesale sized silver (ie 1000oz) bars coming into the market. This is why we didn't have any problem getting hold of 1000oz bars out of London during 2008 even while we were maxed out in the factory making coins.

Expect Precious Metals Shortages During The Next Crisis

Fear mongering is the stock in trade of most gold commentators/spin merchants it seems, so here is my modest contribution in this interview with Kerry Lutz :)

Seriously, the industry's limited (in the face of mass market demand) production capacity is just a fact, and one I've covered many times before on this blog (see the Shortage label).

I got a lot of grief in this forum discussion about why the Perth Mint wasn't massively expanding capacity for the obvious demand surge that would happen in the future. I covered that briefly in the interview - shock - minting is not that profitable compared to other investment opportunities. The result is no entrepreneurial money goes into building mints.

As an example, look at where the entrepreneurial effort has gone in precious metals - distribution, eg GoldMoney & BullionVault. These are low cost software based businesses which haven't even bothered to build and run their own vaults. That's not a criticism, it is smart business. Who wants to spend $100m+ builidng a start of the art high volume precious metal mint to earn revenue of 4.5% on a 1oz coin? Note, 4.5% is gross revenue, not profit. There ain't much left after operational costs, depreciation, tax etc.

As I say in the interview, it may only be increasing premiums which will draw investment into the industry. However, that will take time to translate into extra capacity. The end result I see is sustained high premiums, which will make pooled metal "products" like Perth Mint Depository, GoldMoney, & BullionVault and, unfortunately, ETFs, a lot more attractive to the mass market coming into precious metals for the first time.

Catch Up

Been stockpiling the following for comment:

Silver shortage vs coin shortage

I've been on this issue for a long time, now I have backup from David Morgan: In 2008 there was no shortage of all silver per se, but there was a shortage of coins, bars and other retail “investment” items. The evidence: Much higher premiums back then for small silver products on the street versus the commercial price for average 1,000 ounce commercial good delivery bars in late 2008 and early 2009, since then corrected. I also note that he says it is a myth that silver is currently in shortage.

India's love of gold

Here in the West the average person (and Buffett) has no idea of how pervasive gold is in East society. Mineweb notes loans against gold as collateral was one of the country's fastest growing businesses. Though many Indians continue to use the glittering metal to flaunt their family wealth, most working in the informal sector, have few choices to borrow money and resort to pawning their family jewels rather than taking the longer route of bank loans. and By the end of November this fiscal, total credit issued by banks grew at around 20%, while organised gold loans grew at 50%, making it an increasingly important source of liquidity. Typically, most loans are repaid within four months, since most Indians prefer to hoard their gold.

Need to watch that word "hoard", which can become a dirty word. See this The government had raised the import duty of gold and silver to curb import of precious metals which result in huge outflow of dollars outside the country. Much better you save by giving your money to bankers and if you won't then Vietnam again leads the way with plans to "mobilize" Gold Bullion held by Vietnamese citizens "in service of the national socio-economic development".

Venezuela

Gata reports WSJ as saying Venezuelan officials completed a two-month process of repatriating 160 tons of the country's gold holdings Monday, by welcoming home the final shipment of the precious metal from Europe. Where are those excited gold bulls with the thought that the withdrawal of some 150-200 tonnes of gold from the Bank of England and bullion banks will force a squeeze on traditional stockpiles of gold?

Did Bankers Deliberately Crash MF Global to Crash Gold and Silver Prices? I can't split between JS Kim and Jeff Neilson for people who have come out of nowhere to be sudden gold market experts. Short answer to JS Kim - no.

Gold Commission

When I see Newt Gingrich calling for a gold standard I start to get worried. How much different is a gold standard under the control of a central bank from fiat? When I see mainstream articles discussing the issue, I wonder if the central bank gold standard is put up to sideline the Ron Paul open currency approach?

Why are there shortages at the Mint

There has been some heavy criticism of the Perth Mint running out of retail size silver bars on the SilverStackers forum. Some good questions, some crap ones and I've tried to address them all. My first comment starts on page four of the thread and I've just posted probably my last response on page eight. Worth reading if you want to get a sense of some of the issues we face.

I'll probably rework those comments along with past posts here and here covering similar material into a more definitive post on the commercial factors the Mint has to face/consider.

Also worth reading is this series of three FT Alphaville posts on oil backwardation: I, II, and III. One would be silly to think that the same strategies aren't employed in the gold market, especially by those with the "the ability to internalise flow and keep it out of the public market (possibly within your own dark pool)".

Why Won’t Sprott Buy More Silver For PSLV and crash COMEX?

Update 25 July: I contacted Sprott Asset Management and they clarified that they could do a PSLV secondary at any time however the time lag for SEC clearance (possibly up to 45 days) of a new prospectus would allow traders to frontrun the placement. Once the one year public period has passed they would be able to do an overnight deal in which case there would be no frontrunning. Sprott Asset Management reiterated that they would not do a deal that would have a material impact on PSLV’s premium.

Update 20 July: I've been informed that Sprott can't do a shelf offering until his fund is one year old, which it won't be for many months yet and that Sprott said at the Vancouver Resource Conference that he would not do anything to hurt the resulting premium in the fund. That answers the question in my post title. I've left the rest of the post below as is. I'd still suggest that he consider structuring additional offerings in a way that would put some pressure on the market. Buying silver via forwards may not be best way to do it.

Kid Dynamite has come out all guns blazing in his latest post. His post goes into detail into a point I raised in my last post - why isn't Sprott doing secondary share issues for his silver fund?

He has a point. By not issuing more shares in the face of demand, all that happens is investors are paying $120 for $100 worth of silver. This means $20 worth of silver is NOT being bought and taken off the market, which takes pressure off the bullion banks.

The response that if he did a secondary that it would reduce the premium, hurting the existing investors, is valid. But the point is he shouldn't have allowed that situation to develop in the first place. [see update below] Now he is caught. By not wanting to hurt existing investors he is diverting silver demand AWAY from taking physical off the market INTO just bidding up the premium.

In any case, I would counter the "reduce premium" argument by suggesting that Sprott could do the secondary in a way as to probably cause no loss to existing holders. Consider that PSLV has 22.3 million ounces. A 20% premium suggests there is at least demand for 4.46 million ounces (20% of 22.3moz). I think most would agree, however, that he could do a secondary for double that given the profile and trustworthyness of his fund.

COMEX has registered stocks of 26.8moz. Consider if Sprott slowly bought 8.92moz of silver futures and then stood for delivery. That is ONE THIRD of the entire COMEX stock. What do you think that would do to the price of silver when Sprott and others assert that the physical market is currently so tight? Those that believe this would have to expect that you'd get a price increase that would easily cover any decrease in PSLV's premium.

And the argument that Sprott shouldn't do it because COMEX would cash settle does not hold water. Even if the cash settlement price is below the current "real" physical price, it would still probably be above his purchase price (as silver is in a bull market). In any case, if his actions were able to cause such a significant and high profile failure to deliver, then the resulting price move really would be "explosive", producing a profit on his existing silver holdings that would cover any loss (if any) on the cash settlement of his futures contracts, and benefitting existing PSLV holders to boot.

It is a win win: if COMEX delivers they take a huge hit to their stocks, if they don't, the price gets a huge hit to the upside. Personally I don't think it would play out this way. Bullion banks would source silver to deliver into the Sprott contract and thus maintain COMEX stocks. But that is just a theory. Until someone with the capability to make such a move does it, it is all talk, both on my side and theirs.

PMs and the LME Warehouse Scam

Gata and ZeroHedge have picked up on this Wall Street Journal article on bankster owned warehouses restricting deliveries out to the minimum amount allowed by the LME. The scam is summarised by the Financial Times: buyers "must keep on paying rent on the metal even after you have asked for it to be delivered, giving warehouse companies a guaranteed income stream".

But with no restrictions on how quickly metal can come in (and the bankster warehouses have been bidding for metal to be delivered into their warehouses from producers) it "has had the effect of driving the cost of metal in the physical market in the US to the highest level in more than a decade relative to LME prices". The FT notes however that this creates the risk that "the LME contract risks becoming entirely detached from the physical market."

Apart from the storage fee scam, an increasing price is good for the banksters because it makes it easier to sell commodities as an alternative investment class to institutional investors (see FT on Goldman Sachs).

Problem is, with lots of metal coming in but restrictions on it going out and you end up with increasing stockpiles. That doesn't help the story that commodity prices will rise. Solution: take the metal "off warrant" which, as FT Alphaville points out, just transfers it into a "non-LME storage facilities or simply being classified private non-LME registered stock in the very same warehouses. Kept out of sight, so to speak."

The scam here is that (FT Alphaville again) "the industry still reads cancelled warrants as an indicator of physical demand" which is positive for prices, however "many of the 'cancelled' warrants are ... not transforming into real deliveries, they’re just being stacked elsewhere in the same warehouse. In which case the demand they insinuate is potentially not real at all."

Precious metals are not subject to the warehouse outward restrictions scam and the spot market is much bigger than futures anyway, from a physical point of view. However, the "off warrant" scam can be played, particularly on fools like ZeroHedge who get all excited about COMEX eligible and registered trends while ignoring (ignorant of?) the "stock" sitting in ETFs and, more importantly, the dark pool that is bullion bank vaults. And don't fall for the "its fractional" false flag. Yeah unallocated is fractional, but what is missed is that if the amount of fractional is giga-enormous, then even at 10:1 or even AIGish 40:1, the amount of physical metal being held in the system is still enormous.

Which is why I am very interested in this ETF bar list project and am doing what I can to help, as this I believe holds the potential to reveal just how big that dark pool of stock really is.

Coin shortages coming

I have been going on about the coming shortage of coins due to limited minting capacity in the industry for a while now. This interview with refiner Argor-Heraeus by Mineweb confirms this, see quote below.

Geoff Candy: Are we likely to see a shortage of supply of these sorts of denominations.

Bernhard Schnellmann: A shortage yes, but that's not because of the metal, it's just because of the minting capacity. You have to same situations of the four coins - if the bullion coin - if we are sold out it's not because there is not enough gold around but also because there are not enough minting presses around.

If you believe there will be increased mass market demand for gold going forward and like your minted coins or bars, then stock up now because you will face premium increases and/or rationing. Once that happens small cast bars will be the other economical option and I think it would be a while before industry capacity is maxed out for them.

I would also draw attention to Bernhard's comment that being sold out does not indicate that "there is not enough gold around". The "selling out" of retail size coins and bars is an indicator of mass market demand and is bullish, but it is not an indicator of no gold. If you see any commentator claiming this, then the only thing it is indicating is that the commentator has no precious metals industry experience on the physical side and in my view any basic commercial sense, in which case you should consider carefully any of their other claims. It is a very good indicator of a hype merchant rather than someone trying to give you good advice.

Silver premiums and fake spots

Interesting resurrection of a Kitco post from October 2008 about silver premiums. There was a lot of heated words and a bit of sillyness. In October 1000 oz bars were quoted @ 69 cents and 1 oz Eagles @ $6.99. Now it is 19 cents and $1.99.

For those who would only trust physical, the smart play was 1000oz bars @ 69c. I'm not sure what the buyback discount is in the US, lets say 1% under the so-called "fake" spot. So sell the 1000oz bar and lose 15c and then buy Eagles at $1.99. Total cost = 69c + 15c + 1.99 = $2.83, still way cheaper than $6.99.

Also, reading back over those posts there seemed to be a view that there was a difference between "industrial" silver (1000oz bars) and "investor" silver (1oz coins). In the Perth Mint's Depository by far the most popular physical form held in allocated storage by individual investors is the 1000oz bar, not coins, simply because it is the cheapest. From my point of view a 1000oz bar IS and investor product.

As to the view that COMEX is some sort of "paper" price "disconnected" from the "real" physical price. Arbitrage in the professional market keeps COMEX price in line with spot price for physical. The fact is that huge quantities of 1000oz physical silver bars change hands at this "fake" spot price.

It is interesting that commentators who were making a huge deal about the big premiums on coins and using this as proof of the fakeness of COMEX and that it meant the end of the world and silver was going to the moon etc etc are now very quiet about the reduction in premiums. If the low premiums are mentioned, it is as an aside and no conclusions are drawn. They really shouldn't have been making a case for investment in silver based on premiums (as that just reflects manufacturing capacity shortages) but on the spot price (which reflects real shortages of the underlying physical).

Why are there not enough coins?

I was recently asked the following question: There was always enough coin production capacity under the gold standard when a gold coins were struck on private account free of seigniorage charges and in unlimited quantity. With all the technological improvements of the past 100 years, why is there any question about "enough capacity"?

While I work at a mint, I am not a manufacturing person so have only picked up a cursory knowledge of coin production. I sought out additional information from the Perth Mint’s CEO, Ed Harbuz, who ran the South African Mint before coming to Perth and is an engineer by trade and a manufacturing guy, so he knows not only the general issues but also the state of the operations of most of the other mints. This has helped inform my comments below.

Firstly, under the gold standard mints were geared up to do nothing but gold and silver coins. Now they are geared up to do base metal coins with gold and silver a niche or side part of the operations, from a volume point of view. The Perth Mint is different in this respect because it is focused on precious metals, whereas other mints are primarily circulating coin operations.

Secondly, lets distinguish between blank manufacturing and minting, they two key steps in making a coin. Blank manufacturing is process manufacturing where inventory is measured in weights and losses and scrap are involved. Minting is unit manufacturing where inventory is measured in units (i.e. number of coins) and is much simpler.

Most mints have many presses, and probably too many for their circulating coin needs. However, the technological improvements made for these have been focused on circulating coin production. They are high speed presses (12 coins a second) for small sizes with low relief designs – all optimised for high volume/low quality production. Certainly most of these presses can be converted to strike precious metal coins, but it is not just a case of putting a new die in and feeding in gold blanks – physical changes and reprogramming is required. In addition, some of the presses are specialised for small coins and would not be able to take the usual 1oz gold coin size. So while it is possible to utilise circulating coin presses to do gold coins, there would still be some work and capital investment required.

However, minting is not really where the problem is. It is blank manufacturing where the bottleneck is. Blank manufacturing, in the trade parlance, involves melting, casting, rolling, cutting out of the blanks (blanking), annealing and various surface treatment processes. It is a far more involved and “messy” process than minting. It is Ed’s view that while there may be enough presses (once converted) in the world to stamp out gold coins there is simply not enough gold blank manufacturing capacity in the world to meet the current demand levels. So can we not convert existing base metal blank manufacturing to gold?

Here is where the technological improvements made are of no use. Mass base metal blank manufacturing deals in metals that are significantly less value that the face value of the coin. As a result, the process is optimised for speed, not quality or security: if a blank is no good, throw it away; weight control tolerances are lax (do you care if your copper coin has slightly more or less copper in it?); metal evaporating when it is melted is not recovered and so on. You cannot allow any of these things with gold, due to its high cost. To convert base metal blank manufacturing you would have to install weight control machines, scrubbers to collect evaporated gold, lock down the building and install physical security, etc. These are major changes and without them the cost of production of a gold coin would be very high.

The result is that circulating coin mints are not optimised/designed for precious metal coining and can only be done so with difficultly. Certainly, if we moved to a gold standard then conversion of base metal circulating coin equipment or addition of dedicated precious metal coin production lines would be made and we would have enough coins.

In the interim, mints will only invest capital in precious metal production facilities if they believe that the current demand for gold coins will continue for a number of years, otherwise they will not recover their investment. The hesitancy of mints to gear up is because the cost of a modern full precious metal coin production line is high.

What sort of investment is required? One Grabener coin press (the most commonly used one) is circa $1 million. That is just for the press, for blank manufacture you need melting furnaces, breakdown mills, pickling plants, weighing machines, scrubbers, vacuum furnances etc etc. If you look at the last Perth Mint annual report (which is almost exclusively a precious metals mint), you will see that on page 24 the cost of plant and equipment (pre depreciation) is AUD 22 million. That equipment supported only 8.1 million blanks and an 8% share of the world gold bullion coin market. And we haven’t even begun to consider working capital requirements cover cash costs and work-in-progress inventory.

One can see that to meet mass market demand for real (gold) money many times the Perth Mint’s capacity would be required across the minting industry (public and/or private). Thus a substantial amount of dollar investment is required.

This discussion of investment then leads us to ponder Professor Fekete’s comments in The Mechanism of Capital Destruction: “A falling interest-rate structure is lethal. It is an insidious destroyer of capital.”

Now most government mints are not affected by interest rates or commercial factors. But even so I think, as a general statement, that we cannot expect Government mints to make the sort of decisive and entrepreneurial decision required to invest to meet future demand; to take the gamble that retail coin demand will continue. This sort of high risk/high return is not in their bureaucratic nature. For those of a conspiracy bent, this is an academic question anyway as the mints have been told by their masters, those that set the interest rates, to make as few gold coins as (plausibly) possible.

This then leaves us relying on private mints to meet the demand. But then is the capital destruction nature of a falling/rising/oscillating interest rate causing private mints to be unwilling to invest in the equipment to meet the demand for coins? And in these markets where will they get the funding from anyway?

The conclusion is that we will continue to have coin shortages (and high premiums) while retail demand for gold continues. In some sense this is necessary, as it is an economic signal to minters to encourage them to invest to make these extraordinary profits. But will this signal work in the current environment? We have a catch-22 type situation (or insidious conspiracy, if you prefer): the interest rate policy of Government destroys the capital of private mints, making them unable/unwilling to spend on equipment to make enough coins to meet demand, but neither are Government mints commercial enough to invest (or told not to). Either way, shall we ever have enough coin production capacity?

There is an alternative view. For all other manufacturers, a zero or near zero interest rate does not cause them to say “money is free, lets borrow heaps and build additional car manufacturing lines”. This is because the sort of dire economic environment that drives the interest rate to zero is the same one that drives consumer demand down. People are not concerned about making money, they are concerned about conserving money (or more accurately, wealth).

However, is it not this demand to conserve wealth that also results in driving demand for gold up? If so, unlike other manufacturers who see falling prices and sales, minters would see that they have increasing demand and increasing prices (premiums). Would this not make taking on zero cost debt a low risk decision? As mentioned earlier, the key is belief by minters in sustainable demand (see this blog for a discussion on the types of issues involved).

While you may consider the unprecedented demand that has occurred as a clear signal, the minters obviously do not as they are rationing supply instead of increasing it. How long before they act? Hard even for me to say, and I work inside one.