The Squirrel and the Grasshopper

The text below was forwarded to me a few years ago and I rediscovered it today. I've edited it to take out Australian specific references. The Squirrel and the Grasshopper story really resonated with me when I first heard it as a kid. I thought the squirrel was prudent. I’m sure other kids felt sad for the Grasshopper. I propose everyone can be divided into two groups – those who side with the squirrel and those who side with the grasshopper.

ORIGINAL VERSION

The squirrel works hard in the withering heat all summer long, building and improving his house and laying up supplies for the winter.

The grasshopper thinks he's a fool, and laughs and dances and plays the summer away.

Come winter, the squirrel is warm and well fed. The shivering grasshopper has no food or shelter, so he dies out in the cold.

MODERN VERSION

The squirrel works hard in the withering heat all summer long, building his house and laying up supplies for the winter.

The grasshopper thinks he's a fool, and laughs and dances and plays the summer away.

Come winter, the squirrel is warm and well fed.

A social worker finds the shivering grasshopper, calls a press conference and demands to know why the squirrel should be allowed to be warm and well fed while others less fortunate, like the grasshopper, are cold and starving.

The media shows up to provide live coverage of the shivering grasshopper; with cuts to a video of the squirrel in his comfortable warm home with a table laden with food and informs people that they should be ashamed that in a country of such wealth, this poor grasshopper is allowed to suffer so while others have plenty.

Do gooders demonstrate in front of the squirrel's house. A Lefty Politician rants in an interview that the squirrel got rich off the backs of grasshoppers, and calls for an immediate tax hike on the squirrel to make him pay his 'fair share'.

In response to pressure from the media, the Government drafts the Economic Equity and Grasshopper Anti Discrimination Act, retroactive to the beginning of the summer, and creates The Grasshopper Housing Department. The squirrel's taxes are reassessed. He is taken to court and fined for failing to hire grasshoppers as builders, for the work he was doing on his home, and an additional fine for contempt when he told the court the grasshopper did not want to work.

The grasshopper is provided with a Grasshopper Housing Department house, financial aid to furnish it and an account with a local taxi firm to ensure he can be socially mobile. The squirrel's food is seized and re-distributed to the more needy members of society - in this case the grasshopper.

Without enough money to buy more food, to pay the fine and his newly imposed retroactive taxes, the squirrel has to downsize his home.

A 60 Minutes special shows the grasshopper finishing up the last of the squirrel's food, though spring is still months away, while the Grasshopper Housing Department house he is in, crumbles around him because he hasn't bothered to maintain it. He is shown to be taking drugs.

Inadequate government funding is blamed for the grasshopper's drug 'Illness'.

The grasshopper gets arrested for stabbing an old dog during a burglary to get money for his drugs habit. He is imprisoned but released immediately because he has been in custody for a few weeks. He is placed in the care of the probation service to monitor and supervise him.

Within a few weeks he has killed a guinea pig in a botched robbery.

A commission of enquiry, that will eventually cost $10 million and state the obvious, is set up.

Additional money is put into funding a drug rehabilitation scheme for grasshoppers.

The grasshopper dies of a drug overdose.

The usual sections of the press blame it on the obvious failure of government to address the root causes of despair arising from social inequity and his traumatic experience of prison.

The squirrel’s taxes are increased to pay for law and order, and they are told that they will have to work beyond 65 because of a shortfall in government funds.

Why Gold Mining Shares Are Lagging The Gold Price

I've got a post on the corporate blog referencing two articles on the divergence of mining shares to the gold price - and the conclusion is it isn't all the ETF's fault.

Negative Lease Rates

Very good two page analysis of negative lease rates by Pollitt & Co’s John Paul Koning, including central bank activity in this market. Quote:

What sort of “non-banks” might be supplying leased gold to the market-making banks at these extremely negative rates? As we already pointed out, central banks seem willing to lend only at positive rates, which leaves only one other source: the investing public. ...

The public effectively lends gold to banks when they deposit their physical gold in unallocated form at a bank. ... The negative interest rate received by the borrowing bank is probably in the form of client fees or bid-ask spreads. ...

By serving as the cheapest source of lent gold, the investing public has effectively priced central banks out of the gold lending market.


The Perth Mint does a bit of leasing and certainly no one is paying us to borrow metal. However, unallocated accounts at bullion banks do attract an account keeping fee, as Koning notes, and this is effectively paying the bank to use your metal.

Another factor as to why investors may be prepared to pay people to borrow their metal is that it can be cheaper than the costs of storing it (ie Allocated). I do also think the derived negative rates are a theoretical interbank no counterparty risk rate. Once you add in a premium for the counterparty risk the actual rate is positive.

Finally, there is a mathematical relationship/arbitrage between the futures markets and GOFO (and thus lease rates) and this could also have an impact (not something I've been following too closely).

Silver news you won't get anywhere else

Shall we count how many bloggers pick up on this news item Chinese silver imports decline 39% y/y; exports tumble 44% y/y:

Silver imports in China fell by 39% y/y and 16% m/m to 264.7 tonnes, the lowest level since February, while silver exports declined by 44% y/y to 83.5 tonnes, keeping China a net importer of the metal for two consecutive years on a monthly basis.

On a product basis, silver powder, unwrought silver, semi-manufactured silver, and silver jewellery all declined y/y in September with the latter two products suffering the steepest decline and silver powder only falling by 4% y/y. Indeed, silver powder is the only product that has grown for the year-to-date.

And from the "Chinese love paper more than physical" department, see China's gold frenzy gives birth to small bourses:

The emerging exchanges offer a lot size as small as one ounce, which lowers the capital needed to begin trading, even though the margin requirements can be as high as 30 percent. With lot size set at 10 ounces and margins at 20 percent, the initial capital requirement to start trading is about half the amount required by the SGE.

Emerging exchanges claim to trade physical gold, but most investors are not interested in taking physical delivery. Some exchanges make it difficult and expensive to take delivery. ...

"Who would want to take physical gold? People just want to speculate on price moves and make a profit," said a customer service representative at the exchange who gave her last name as Chen.

Analysts compared the gold investment spree to the wave of retail stock market investors in the last decade, who rushed to a bull market with little know-how, only to suffer huge losses during later market turbulence. ...

Although China's central government has vowed to open up the market, and has made progress by allowing more foreign banks access to the two Shanghai exchanges, an open market for retail investors is yet to take shape. ...

But it was unlikely to happen as long as the country's foreign currency exchange remains tightly controlled. Until foreign exchange controls are lifted, Chinese gold bugs would continue to need tables to put down their bets. "The Chinese love gambling," said Hou.

Doesn't sound like China's exchanges are any different from COMEX. If the Chinese Government wanted its people to buy physical gold you'd think all this paper gold would be shut down. I suppose we will have to wait until the much hyped PAGE is up and running [sarcasm].

What the 1 tonne coin tells us about the gold bubble (not)

All weekend I've been getting heaps of google alerts about the 1 tonne coin, over 90 at last count. Interestingly they have all been mainstream media outlets picking up on the few source Australian media reports about it but next to nothing from the gold bloggers. You'd think such a story would get more coverage within the gold community than mainstream. The fact that it hasn't is starting to cement a view I've had for a while that the gold bloggers treat the Perth Mint like the mainstream media treats Ron Paul - don't give em any publicity, unless it is negative.

Anyway, ignoring that paranoid diversion, I've been particularly interested in the comments left to the mainstream media outlet articles on the 1 tonne coin. Lots of funny ones like "where can I order it", a few calling it obscene waste of money (to be fair, you can't expect average person to understand the concept of pooled physical backing unallocated) but most importantly the "gold, what a stupid thing to buy" comments outweigh the pro-gold. Secondly, there aren't many of those anti/pro comments anyway. More proof that we are no where near a gold bubble, if we were then I'd expect it to generate more comments about gold as an investment.

I also love this opportunistic website http://1millioncoin.com/ which was up in a couple of days. Whatever you do don't click on any of its ads, we don't want to encourage these people.

One Tonne Coin

It has been killing me having to keep this under wraps www.1tonnegoldcoin.com

The idea was conceived by Acumen Design as part of their pitch to win the contract to renovate our shop and exhibition. I ran that project until recently and I loved the idea but it was considered impossible (maybe because I wanted it to be 3 tonnes, which would have given it about 1.5m or 5ft diameter). It was our CEO, Ed Harbuz who really got behind it and challenged our guys to work out how to do it, saying that if the Egyptians could make Tutankhamun's gold coffin then surely we could do the same with modern technology.

A few trial runs were made in smaller sizes to get the right mold material and to solve problems dealing with that much molten metal, eg thermal shock. My favorite part of the making video is using a router to cut in the milled edge serrations - if you ever want to "work" pure gold apparently normal wood router bits work just fine.

A silly indulgence to out do the Canadian Mint? Probably, but it will generate some nice publicity and draw tourists to our exhibition and shop so we'll recover the cost of fabrication in time.

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)".

Gold Symposium

A bit remiss of me not to mention that I will be attending the Gold Symposium in Sydney, November 14 and 15. If you are in Sydney it is really a must go to event considering the speakers: Ben Davies, Dan Denning, David Evans, Egon von Greyerz, Eric Sprott and John Embry, Kris Sayce, and Louis Boulanger.

Remiss because Friday is the last day to get tickets at $199, after which they go up to $299. There is a draw for a natural nugget worth $2000 from Focus Minerals and the Mint is also throwing in a 25th Anniversary 1oz Proof coin as well. This isn't going to have thousands of attendees so good odds on winning.

Let me know if you are going, would look forward to catching up with you at the end of each day for drinks.

US manipulating the gold price up

Very funny to read this from Reuters where Iran claims that its enemies were deliberately causing the price of gold and foreign exchange to rise in a bid to undermine the Islamic Republic's economy. "The enemies and ill-wishers want to make a fuss and present wrong information to provoke and deviate the market," Ahmadinejad told a crowd in a town in the western province of Hamadan, where he was on one of his frequent provincial visits. "In order to disturb the market they buy a lot of gold coins with their huge amount of money ...

Seriously, this should be read in context of Vietnam's issues with its citizens buying gold as an inflation hedge/savings, which I've blogged about in the past. We are seeing how politicians respond to high inflation. In Vietnam's case, try to ban/restrict gold or in Iran's case, blame outsiders. In neither case take responsibility. Don't expect it to be any different in Western countries.

I also note DGC Magazine's pick up of expansion of reporting (in USA) of export/import of physical money to prepaid access/stored value card products. Of course all about preventing the "transfer of money obtained through illicit activity". I wonder how long before the movement of money between states within a country has to be reported. They may as well get it over and done with and tell us fuck your privacy and just ban all forms of physical money/value and tell us we have to have one government issued credit/debit card we have to use for any transaction.

Finally, I recommend reading Unqualified Reservations blog post on maturity transformation, on which he has written about before. His argument is that borrowing short and lending long is at the heart of our banking problems and cause of the business cycle. Quote:

The genius of Professor Krugman is that he goes so near the truth that he makes it obvious even to his commenters - who typically are both idiots and fools, but several of whom spontaneously exhibit the same insight themselves: Why can't we regulate or even ban the maturity mismatch? Savers would have to make the maturity choice themselves and it would be transparent. Currently, the savers don't understand the huge run risks that the banks have by funding with demand deposits and lending long. It's hiding the risk.

Fekete on Sprott and Silver

I missed this piece dated 6 September 140 Year of Silver Volatility where Fekete picks up on Bob Moriarty's Facts on Silver from 25 April with this cutting comment: "Beware of the fund manager, crying from his rooftop that the paper silver market is a joke, while down there under the roof he is selling paper silver at a 25% mark-up."

Also worth reading Bob's article with these five facts on silver:

1. When charts go parabolic, it ends badly.
2. The actual ratio of silver to gold in the earth's crust is not 16 to 1.
3. There is no shortage of silver. There never has been a shortage of silver. Until the laws of supply and demand are repealed, there never will be a shortage of silver.
4. The most illogical thinking and worst use of "facts" is common among the silver uberbulls and the parrots that follow them.
5. There cannot be a run on Comex. The rules do not allow the chance for a run.

By the way, Bob is certainly in the "Repeat of 1980" category with comments like "You can't profit if you don't sell and all the permabulls are screaming "Buy, buy, buy." As they will at every top."

PS I missed the Schoon and Morairty posts because those sites don't run RSS feeds, which I think are essential. I've got around 100 feeds giving approx 250 posts a day to get through, just not possible to include manual site visits in that.