Physical redemptions from Sprott precious metal funds

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

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

We know these are redemptions because the prospectus says that redemption notices will be processed on the last day of the month (as long as received before the 15th of a month) and thus show up on the first day of the next month.

 

The question is why are people redeeming. If you look at the historical premium/discount to NAV for PHYS, PSLV or SPPP you will see that PHYS and SPPP have been trading at a discount to NAV of up to 1% and 1.5%, respectively. So if you are a largish holder who can take 400oz bars, why sell your shares at a discount when you can get the physical for 100% of NAV with fees of $5 a bar and $5 per ounce delivery (if you can't arrange your own, which you'd want to because $5 an ounce is nuts for any decent amount) or zero delivery cost if you have an account with the Canadian Mint. Note that PSLV has had very little time trading at a discount to NAV so we don't see any redemptions for it as you can sell on market at a fair price.

 

My guess is these are most likely physical redemptions as cash redemptions are done at a 5% discount to NAV (or a volume-weighted average price) so it makes no sense to redeem for cash and lose 5% when you can sell on market and only lose 1%.

 

So the Sprott funds are presenting a nice little arbitrage where you can buy gold at a discount. It is a bit hard to say if it is arbitrage or just a holder(s) from long ago getting out. As long as it continues to trade at a discount we should continue to see these redemptions. The discount is persisting I think because to-date only 2.4% of PHYS has been redeemed, which is probably not enough to move the price.

 

With all these claims that the bullion banks are out of physical reserves and about to blow up, it is unusual why we aren't seeing much more redemptions out of PHYS, especially since the bullion banks could do it at a discount, effectively getting paid to take PHYS' physical.

 

Maybe they don't believe PHYS has the metal - that is a joke by the way, which will only make sense to those who remember all the spin about how the PHYS and PSLV premium was an indication that people trusted the Sprott funds more because they were backed by real metal, as in logically then, those people should believe the fact the funds are trading at a discount means people must now not trust the Sprott funds. Lesson: don't ever pay a premium for a closed end fund, no matter how good the story.

 

Maybe the other reason is that the bullion banks aren't actually that desperate. There is nothing stopping them from coatchecking (comment dated Nov 6 7:00PM)out of PHYS, although I'm not sure what the borrow situation on PHYS has been like. And if  the bullion banks have "hit the bid" to loosen up metal from GLD, well the same effect happens to PHYS, so why would a bullion bank not step in and buy up PHYS shares being sold by weak hands to get hold of its physical?

 

Anyway, just some opinions/thoughts at this time (not facts) and something to watch.

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

FOFOA - more on LBMA survey and Coatcheck

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Confusion in Beijing's gold shops on price manipulation

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

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

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

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

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

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

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

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

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

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

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

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

More Deception About the COMEX

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Tax Office investigates $65m GST fraud in bullion market

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

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

Gold and the Permanent Portfolio in Australia

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

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

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

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

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

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

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

Why gold's contango suggests central bank interference

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

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

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

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

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

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

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

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

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

Who Is Andrew Maguire?

Andrew Thomas Maguire, formerly Andrew Gerhard Maguire

Born 4 June 1951 in Germany British citizen

1980s: Sundry jobs in England

  Car salesman at Henleys, a car dealership, London

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

  ICS, start-up insurance courier company

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

Late 1990s: Day traded his own account.

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

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

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

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

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

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

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

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

Trip to Sydney & Melbourne

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

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

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

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

11.40am Stacking Precious Metals - Gold Stackers and Silver Stackers

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

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

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

China Surreptitiously Acquiring Gold Via The Perth Mint?

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

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

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

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