27 December 2011

Is PAGE dead on PBOC ban on non-Shanghai gold exchanges?

Mineweb (ex-Reuters) is reporting that "Gold exchanges in China outside of two in Shanghai are to be banned, authorities said in a statement released on Tuesday."

Looks like the much hyped Pan Asia Gold Exchange is dead. Not sure where this leaves those who claimed that it "will ultimately destroy the remaining short positions in both gold and silver".

I will come back to this story but for the moment I want to see how the pumpers and hype merchants spin it, or unspin what they said before.

I also find it interesting that this story breaks at the same time as China Daily reports that "China should further diversify its foreign-exchange portfolio and make more gold purchases when the metal's price dips but is still at a relatively high level, a senior central bank official said on Monday."

What is China's game re gold? How can we weave these two stories into a coherent explanation?

23 December 2011

Safety cookies

What are safety cookies? Gold coins. Very amusing charaterisation in this article from Terry Coxon of Casey Research

Terry sees safety cookies (or coins in your pocket) as the first rung on the ladder of internationalisation. In light of the recent IRS reporting requirements, which require US persons to report "all worldwide assets subject to exceptions and applicable threshold amounts", you could also call coins privacy cookies.

22 December 2011

Unsegregated Allocated

Following on from this post from 2009 where I identified five types of storage (Segregated Allocated, Unsegregated Allocated, Unsegregated Physical Backed, Unallocated Fully Hedged, Unallocated Unhedged), we now have confirmation that "Allocated" metal at a bullion bank is unsegregated from this interview with Kyle Bass (42 minute mark) where he talks about bars being all over the place when they did an audit.

The unsegregated nature of bullion bank allocated is why Bob Pisani picked up the wrong bar in his visit to the GLD vault as part of a HSBC promo.

This unsegregated storage is not necessarily a problem and would not make a difference in any bankrupty of a custodian as the key "segregation" is the specific bar numbers and weights in the client name. Whether bars belonging to two different clients sit together on the same pallet or are on separate pallets separated by air, I cannot see making a difference.

GoldMoney is no longer Gold Money

Digital Gold Currency Magazine is reporting that GoldMoney is suspending the ability to make and receive payments in precious metals to or from other GoldMoney customers due to the "global increase of compliance requirements for payment service providers."

This capability was the key differentiator of GoldMoney to other online precious metal storage businesses. It is an unfortunate development for gold standard advocates.

The decision was not entirely driven by increased regulations as GoldMoney also indicate that "our customers’ use of the metal payments and currency exchange services is not significant." Looks like a case of disporportionate compliance effort for GoldMoney on something that didn't drive business.

Interesting then that customers have voted and said they aren't really interested in gold as money. Possibly this may change if those customers are faced with high inflation or banking system instability, but it will be hard for GoldMoney to restart the functionality and catch up with any regulatory requirements in place at the time (assuming there is any regulatory tolerance for alternative payment systems at that time).

Freegold anyone?

20 December 2011

Has Gold's Uptrend Been Broken?

I have a post up on the corporate blog featuring a Sharelynx log chart of the gold price.

There is also a very good video of why gold was (is?) favoured as money over other elements/metals in this post The Science Of Gold

And in response to this cheeky question from JR re that post "Is the Perth Mint claiming that gold is money due to its unaltering quality!?", the answer is No. The "What others are thinking" category on the corporate blog is for non official views and maybe the wording "gold is all but unrivalled as the outstanding candidate for money" could have been a bit more qualified in retrospect. :)

17 December 2011

My thoughts on Freegold

A reader, LS, asked for my thoughts on the following topics:

1) freegold
2) the gold for oil trade
3) the current price is not a real physical price of gold because of happenings in COMEX/LBMA
4) do you believe the current world affairs will resolve itself towards freegold or something similar?

Firstly, I haven't had the time to read FOFOA in depth given the amount of material and thus give it justice. My comments here are therefore tentative thoughts.

Freegold is very interesting and I can see the logic of the idea of leaving fiat to perform the medium of exchange role and gold the wealth store role. I have a feeling free banking (see also) and a restriction on maturity transformation would need to be involved for it to work. There is a hell of a lot of discussion condensed in that sentence, more than I have time for at the moment.

I would also argue that Freegold needs to allow gold leasing but not gold lending. By "leasing" I mean as in leasing a car, ie physical asset rented (not borrowed and sold). Manufacturers of gold products like the Perth Mint could not operate without leasing because with Freegold's ban on lending of gold and other financialisations it would be difficult (impossible?) to hedge against gold price movements.

This leads to my next point, which is that the gold price under Freegold would not be stable and still exhibit some volatility. This is because under Freegold people can save excess wealth either in gold or by investing in productive enterprises (ie true investment). Human nature being what it is we will still have overestimation of the success of productive enterprises, thus failures, thus business cycles, ths varying preferences to store wealth in gold versus investments.

On the Oil/Gold idea, I don't have an option as this is not an area of FOFOA I've looked at much.

The current price is a real physical price as physical buyers and sellers of size (giants) are willing to exchange at that price. When aversion to counterparty risk really hits market players (MF Global you'd think should have been enough), then we will see a divergence between paper and physical.

As to the fourth question, well this is bound to my answer in the paragraph above, which is a necessary condition, but not sufficient, for Freegold to emerge. You would also need consensus that a gold standard is not the answer, and there are strong forces working towards that end. Possibly the biggest problem is getting people to understand the reason why financialisation of gold needs to be banned. How it will end is impossible to predict.

Either way it is going to be exciting to see how it plays out.

15 December 2011

FOFOA, New Vaults and physical/paper price

A couple of weeks ago FOFOA made the following statement:

Do you remember the stories about HSBC clearing out space in their vaults, or JP Morgan building new vaults? What could be the explanation for this if the aggregate gold stock is so stable? Then it occurred to me that unallocated storage is much more space-efficient because the gold sits stacked on pallets. Allocated gold often gets put into cubby holes to assist in recordkeeping. That takes up much more space. So the process of allocation after many decades of non-allocation requires an expansion of vault space. This is how I now interpret these stories.

I left a comment suggesting other reasons for new vaults:

1. Investment's share of demand vs jewellery/industry is much higher now compared to past, thus more going into vaults rather than around necks.

2. ETFs and others (eg Goldmoney) share of investment demand vs coin/bar is greater compared to past, thus more going into vaults rather than backyards.

3. Industry consolidation during gold bear market meant vault closures and thus increase in utilisation of remaining vaults, leaving less spare capacity to absorb above factors before new vaults were needed.


Just to clarify that last point, say there were 10 vaults with capacity of 100oz but each was only holding 60oz. Total spare capacity is 400oz. Then you have 3 vaults close during gold's bear market and metal is moved into the remaining 7 vaults. You now have 600oz in 7 vaults, leaving only spare capacity of 100oz.

Another point is that allocated metal is not "often gets put into cubby holes". Allocated does not rely on physical segregation by client. For example, you can have a pallet of 32 x 400oz bars with 32 owners of each specific bar number on that pallet. My guess is that except for all but the most paranoid client (mostly likely central banks), most allocated at bullion banks is held this way, rather than piles segregated by client.

I also forgot to mention that my guess is that the amount of physical supporting unallocated metal accounts with bullion banks has increased, that is the fractionalisation has declined. This puts further pressure on vault capacity.

Evidence for this is that whereas unallocated accounts were free a number of years ago, there is now a small fee on unallocated. My guess is that the physical turnover/redemptions have increased in line with a more busy gold market and thus bullion banks have needed to hold more physical to back their unallocated to deal with day to day fluctuations.

Of course it could just be the banks going for a fee grab if they felt their clients would just accept it.

And while I'm doing posts on my comments on FOFOA's blog, here is another for those who don't follow the FOFOA blog comments closely - and I can understand that considering some posts get 400+ comments (link here):

Re 1) [major refiners would start posting their own price for physical gold, having their own auctions, making the trading volume public], that is what the Perth Mint already does. The 5 tonne or so per week we refine is currently auctioned. Settlement can be full cash, but mostly is done in London paper gold plus a cash premium. I just watch this premium, it will tell me when paper gold has really disconnected.

BTW, miners sell their metal to us either for cash or swap for paper gold (which they then on trade).

The system will break when miners find few willing to take their paper gold or the price offered is much lower than what we will pay. And in that situation we will always be after to better the offers they get because we are getting better prices for the real physical at the other end.

Because the Perth Mint stands as intermediary between physical buyer and physical seller, the miner is always informed as to the real price of gold.

We are not reliant on the London market to tell us the price, we make a Perth price every day. However currently London is a convenient settlement mechanism for us the miners and the buyers, but it is just to help the flow.

14 December 2011

Negative Gold Lease Rates (again)

If Tom from Metal Augmentor keeps on putting out great stuff like this post on negative lease rates, then I'll be out of a (blogging) job.

It is heavy going but a comprehensive discussion of the issue with a dramatic speculation that "The selective collateral nature of the tri-party format may force bullion banks to eventually declare their unallocated LBMA gold accounts as backed by 100% physical bullion." Other key points if you don't have the time to read the 8500 word article:

"leasing is probably done directly by the bullion banks on behalf of commercial banks for a fee. Instead of pledging the assets acquired with the sale proceeds of gold leased pursuant to a carry trade, the borrower of gold now pledges existing collateral that it could not otherwise sell without incurring a loss. The central bank accommodates the gold leasing by accepting a wide range of collateral that would be otherwise prohibited in conventional funding schemes"

"An outright sale of gold could always be hedged by acquiring a gold forward contract. Therefore, even if gold leasing has not experienced a recent resurgence, the increase in the gold forward rate indicates that owners selling gold to generate liquidity still want their gold back once the funding need has abated. The combination of a falling gold price and rising forward rate is quite a bullish feature of the gold market that is lost in the reporting on negative gold lease rates."

"the persistence of negative lease rates could be accompanied by the emergence of something entirely new: The result could be negative gold “lease rates” as gold price expectations may create an entirely new phenomenon: cash borrowed to buy gold for future delivery (what I call “gold bonds”). In effect, this is the equivalent of gold owners forward selling their gold at higher and higher prices, and receiving cash up front to be used for current liquidity needs. The above scenario may appear a lot like the current futures market because it involves leverage but the difference is that “gold bond” transactions are 100% backed by metal."


A few of comments:

Tom: "From the perspective of the borrower (typically a bullion bank or its customer, a hedge fund), gold was historically leased as a way to fund a gold carry trade under which excess returns could be earned by using the sales proceeds from leased gold to purchase highly-rated securities meeting the central bank’s collateral requirements."

Bron: This is by far the major use of leased gold, but gold can also be leased by users/manufacturers of gold products to provide physical funding of their work in progress inventories, which does not involve any sale of the leased gold.

Tom: "As just mentioned, the gold (or silver) lease rate does not represent the actual rate at which lease transactions are being done in the market. The published lease rate is simply an indicated value derived from two related variables, the gold forward rate and LIBOR."

Bron: In support I would say that the Perth Mint has always paid positive lease rates when borrowing gold, although it does so for inventory funding rather than carry trade etc reasons. Note Perth Mint borrows without posting ANY collateral because of the West Australian Government's AAA rating.

Tom: "a customer may execute a gold swap with a bullion bank pursuant to which the customer’s physical gold is initially stored in an unallocated account and used as the collateral for dollars loaned to the customer. The bullion bank then sells the gold from the unallocated account to replenish its funds and concurrently enters into a gold forward contract with a gold refinery. The forward contract is then used to back the gold liability to the customer."

Bron: My emphasis on "physical" in that. This sequence of transactions is what fractional bullion banking is. In this case the customer's metal is "lent" to the refiner.

Tom: "sane market participants will naturally demand that gold as a financial instrument retain its utility as the ultimate collateral for non-recourse funding. Under these circumstances, the appearance of 100% physical backed LBMA unallocated bullion accounts seems like a very good possibility"

Bron: I note that some years ago balances in LBMA unallocated accounts attracted no fee, whereas now there is a very small account fee as % of value. Indication perhaps that bullion banks have had to increase the percentage of physical backing unallocated (and thus need to recover that cost) due to an increase in physical redemption/turnover on those accounts.

12 December 2011

MF Global and HSBC case

As usual, Zero Hedge and others hype a story way beyond the reality (see here for the Bloomberg story), such as:

ZH: "is whether or not MF Global was rehypothecating (there is that word again), or lending, or repoing, or whatever you want to call it, that one physical asset that it should not have been transferring ownership rights to under any circumstances."
TF: "A lawsuit such as this one could easily bring about the total destruction of the Comex/LBMA-based, fractional bullion banking system"

Here is a suggestion, read the actual Interpleader Complaint for the facts:

1. Mr. Fane and MFGI entered into five COMEX gold contracts and three COMEX silver contracts relating to the Property. HSBC is the depository for the Property pursuant to a certain Gold Delivery Point Agreement and a certain Silver Delivery Point Agreement entered into between HSBC and the New York Mercantile Exchange, Inc.
2. By e-mail dated October 25, 2011, MFGI notified HSBC that "MF Global’s customer Mr. Fane would like to take possession of [the Property] and move [the Property] to his account at Brinks (sic). I have already canceled for load out. Customer will advise of date and time.”
3. Mr. Fane did not contact HSBC to request that the Property be transferred to his account at Brink’s prior to the Commencement Date.
4. By letter dated November 18, 2011, HSBC, through its undersigned counsel, notified the Trustee that it had possession of the Property. HSBC also notified the Trustee, in light of HSBC having received instructions from MFGI prior to the Commencement Date to transfer the property to Mr. Fane upon his request, that HSBC would act in accordance with MFGI’s prior instructions barring an injunction or contrary instructions from the Trustee.
5. By letter dated November 21, 2011, Mr. Fane requested that HSBC transfer the Property to his account at Brink’s.
6. By letter dated November 22, 2011, the Trustee, through his counsel, asserted to HSBC that the Property constitutes customer property under Part 190 Regulations of the Commodity Futures Trading Commission and that the treatment of the Property must be administered by the Trustee. The Trustee further instructed HSBC not to release the Property to Mr. Fane.
7. By letter dated November 22, 2011, HSBC notified Mr. Fane that the Trustee had instructed HSBC not to release the Property to him and that the Trustee asserted an interest in and claim to the Property.

Not being a lawyer, I read this as "before you went bankrupt, you said I could have my metal", "yeah, well, you didn't take it before I went bankrupt, so it is now part of the bankruptcy proceedings".

So no rehypothecation or loaning, no "suing" by HSBC, no stealing or counterfeiting of the bars and certainly not the total destruction of bullion banking. Just another lesson in counterparty exposure and possession is nine tenths of the law.

23 November 2011

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.

01 November 2011

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).

31 October 2011

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].

30 October 2011

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.

27 October 2011

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.

23 October 2011

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)".

20 October 2011

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.

13 October 2011

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.

10 October 2011

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.

09 October 2011

Classification matrix for PM blogs

Perth Mint is doing some strategic planning sessions at the moment and I was looking for a way to discuss what is going on in the precious metal blogosphere. Nothing like a matrix to oversimplify things (since when does just two dimensions fully describe anything), here is my attempt.


My two dimensions are to what extent does the blog deal in facts or lies including misunderstanding of how things work (the x-axis or What?) and to what extent does the blog attempt to explain and get to the bottom of what is going on compared to just accepting things as they are (the y-axis or Why?).

The resulting categories are:


  • Truth Seekers: these commit to using facts and try and explain, they might not get it right, but the intention is there.
  • Technical Analysis: just focuses on the facts (price) but doesn't care about the fundamentals or why the price is moving as it does.
  • Tabloid Entertainers: doesn't let the facts get in the way of a good story or clicks and doesn't get too deep as that may over tax the brains of its readers.
  • Propaganda Merchants: conscious misinformation and false explanations to push an agenda and/or clicks.


Let me know what you think. Are there some better dimensions I can use? And if you can come up with a word beginning with "T" for Propaganda Merchants box then that would be great as I can call it the Four Ts Matrix, which would be cool.

The fun part is working out where to place all the precious metal bloggers. But lets get the dimensions and categories set first.

02 October 2011

Futures furphies

Wikipedia: A furphy, also commonly spelled furfie, is Australian slang for a rumour, or an erroneous or improbable story.

In Gold Stocks: Ready, Set, Eric Sprott and David Baker say that "While the futures market is comfortably forecasting a continuation of today’s levels, the majority of sell-side analysts refuse to update their gold price estimates to reflect its recent strength."

It is futures 101 that futures prices are not a forecast by the market, they are just a mathematic derivation from the spot price, interest rates, freight and storage costs, with gold interest rates and dollar interest rates being key components. Backwardation is when gold interest rates are higher than cash rates. Contango is the reverse. Either way, the futures price isn't forecasting anything. See this blog post for more on backwardation.

In that same article, Sprott raised the "excessive turnover" meme which Eric seems to be running recently - he must think he is on a winner with this. I dealt with it in this post and to that I'd like to add another counterpoint. First, the quote:

"In the LBMA market, for example, market participants traded an average 19.6 million ounces of gold PER DAY in July 2011. Keep in mind that the total gold mine production in 2010, globally, was approximately 86.5 million ounces. ... so the LBMA is essentially trading a year’s worth of production in less than a week"

I think it is misleading to relate turnover only to new mine production. This assumes that there is no sales by any of the investors who hold above ground gold. Eric should at least be including privately held gold stocks of 30,000t, or 965 million ounces. Adding that to the 86.5moz then the 19.6 moz represents the "LBMA" turning over the stock once every 54 days, or 7 times a year. Not as dramatic, is it. If we included the 30,000t or so of central bank holdings then it is even less so. But don't fear Eric, help is at hand.

The funny thing about the "large turnover is bad" idea is that in most markets this is seen as a good thing, as it indicates the particular market is liquid. On this line of thought, note that the recent Loco London Liquidity Survey was undertaken by the LBMA at the request of the World Gold Council "in order to strengthen its argument that the gold market is sufficiently deep and liquid to justify gold’s characterisation as both high quality and liquid" with the objective of getting gold included in the Basel liquidity buffers for banks.

What did their survey show? "The average daily trading volume in the London market in this period was 173,713,000 ounces or $240.8 billion." I can see Eric getting his calculator out now and dividing 86.5 by 173.7 and getting really excited. When you hear that the "paper" markets turn over annual mine production every 12 hours, remember you heard it here first.

The other thing I find interesting is the different way Sprott pitches this meme. For the gold/silver bugs we get:

"... I think all the paper markets are a joke. As you are probably aware, we trade a billion ounces of silver a day. A billion ounces. The world produces 900 million a year." (link)

But in the Markets at a Glance article with Sprott branding on it for a more wider market it is less breathless and a bit more sophisticated:

"When price discovery is dictated by levered paper contracts with no physical backing, it’s extremely easy and relatively inexpensive to jostle the spot price around."

Interestingly, the LBMA survey revealed that 90% of trading was spot, not forwards (sort of the over the counter markets version of futures), which equals 156moz. COMEX average daily trading during August was 278,000 contracts, or 27.8moz. 156 versus 27.8 - who do you thinks jostles who?

Continuing on with futures, we get this from Patrick A. Heller: "Increases in margin requirements make sense as prices are rising, as that helps keep the market in order, but it does not make sense when prices are falling."

Now this is a very common misunderstanding. Margin increases (or decreases) are to do with volatility of the price, not the direction of the price. Dan Norcini explains it well:

When you get a market like silver that drops 15% in ONE DAY, you are going to get margin hikes. The reason - the very integrity of the Clearinghouse comes into play.

Silver closed down $6.48 today. In a single session, one long contract in this market cost the buyer a paper loss of $32,400! That is enormous. If you consider the fact that the previous old margin was $21,600, that was wiped out and then some.

During the clearing or settlement process, the winners get paid (have their accounts credited) by debiting the loser's accounts. If the losers do not have sufficient funds in their accounts, the whole process breaks down.


Zero Hedge has really went downhill in the past few years and this post by them I found very funny and symptomatic of the sort of readers they are now attracting:

We are only putting this up because we have been flooded with emails about an event which for some reason readers believe is relevant. The event in question is that according to its website, the London Gold Exchange ("LGE" or the "Joke") has closed. The one thing we would like to say about this is that the LGE is nether an exchange, nor does it trade gold.

You have only yourself to blame Tyler. While he didn't meant he post to be ironic, I read it that way. Yes, Tyler, your readers can't tell between real gold news and rubbish, but guess what, neither can you, IMHO.

To close, I'll quote myself from Ed Steer's Gold & Silver Daily on the recent sell off in precious metals:

Here's an interesting comment that I got from my friend Bron Suchecki over at The Perth Mint yesterday. I'd sent him an e-mail on the weekend asking him how sales were both on Friday...and their Monday, which started Sunday night here in North America. This was the reply that I got...

"The Perth Mint has been very busy this Monday morning with a lot of buying [but also some selling], however buying is outweighing selling by a fair margin [pun intended]...and the decrease in the AUD/USD has taken some sting out of the drop for Aussie investors.

I see this sell-off driven by leveraged “weak hand” money. In contrast, average investors [the real smart money] are looking at this as an opportunity to buy in or top up at cheaper prices. These buyers are “strong hands” and have been the ones who have been driving the trend all these years."

20 September 2011

Catch up

Record prices spawn new wave of China gold bugs: "More investors are moving into paper gold because of the lower capital costs. The prospect of making big and quick bucks by betting on gold's ascent is beginning to look like a fairly easy way to make money." Keep this in mind to temper they hype the next time you hear how China is going to be a huge physical market. One could argue that the gambling like nature of Leverage would have more appeal in the East than the West.

More than 2.8m tonnes of hidden copper stocks: "...how much copper is being stored ‘off market’ in private inventories..." Guess what, there is a lot of off market (in that we don't know who and where) gold and silver. At least we know the overall stock figure is circa 160,000t. When you have that much overhang relative to new mine flow, "...sudden and violent liquidation could pose a major threat to market fundamentals..." Of course a sudden and violent flow of dollars into gold could cause the same problem.

Another Lawsuit Filed Against JP Morgan For Silver Price Manipulation: I nearly fell off my chair reading this from Zero Hedge - "a lot of the content in the filing is regurgitated filler" and "at time reads like a diary of a conspiracy nutjob, and unfortunately that is how the conflicted legal system will see it". What happened to their usual goldbug ra ra ra? BTW, not much in the 100+ page filing and it wasn't very convincing for me.

Dutch Socialist Party puts gold questions to treasury secretary: Note that the Reserve Bank of Australia, in contrast to most central banks, answers these two questions in its past annual reports -

"2) Why are gold and gold loans stated as one line item in the annual report 2010 instead of mentioned as two separate items?
3) Can you give an overview of the yearly yields of the gold loans during the past years?"


If the RBA can disclose this information, why not the other central banks? Interestingly, the RBA has wound back all of its gold leasing. Would you take counterparty exposure to a bullion bank for 10 or 20 basis points return?

08 September 2011

A Fofoarain take on the swiss move

The Swiss National Bank press release: "The current massive overvaluation of the Swiss franc poses an acute threat to the Swiss economy and carries the risk of a deflationary development."

The Fofoarian rephrase: "Too many people are trying to store value in our currency, which is distorting it's role as a medium of exchange. We'd rather you save your wealth in something whose price increase won't impact the economy because it has minimal industrial/productive use but which many people still think is valuable anyway. Hey, I know, how about gold?"

Don't know what I'm talking about? Have a look at this picture and then read this.


05 September 2011

Eric, Catherine and Kid

I forgot to mention I'd left some comments/speculation to this excellent article that looks at the Sprott three months to get my silver story, which includes some graphics of what 600t of silver looks like.

I also liked this blog post by Catherine Austin Fitts, keeping things in perspective:

"Gold is a metal.

If everyone takes all their money out of operating enterprises and puts it in gold and pays people to watch their gold or dig up the earth to get more gold, the economy will stop.

The top guys bubbled real estate and used the money to buy up gold and silver cheap while imploding the emerging markets and forcing their way into big real estate and equity positions there. Now they will allow gold and silver to rise and shift their money back into real estate and land. The emerging markets will continue to rise. And of course there will be interim pumps and dumps along with the way. And technology, including of weaponry, is the wildcard. Our current economy is operating on 50-100 year old technology.

Of course, without law, that which can be stolen and protected rises in value. Operating enterprises require the rule of law or expensive private armies to retain value when times are lawless.

Hence, there is no one answer, no magic bullet. If there is a core, it is certainly not a metal. It is, rather, intelligence both human and divine.

“Happy is the man that findeth wisdom, and the man that getteth understanding. For the merchandise of it is better than the merchandise of silver, and the gain thereof than fine gold.”

Great economies are raised one healthy child at a time. Sound currency certainly helps."


Kid Dynamite's post on the Gallup finding that "Thirty-four percent of Americans say gold is the best long-term investment" is also worth a read along with Adrian Ash's take on it, where he notes "that the gold bubble comes far more in media coverage than in actual investment decisions to date".

04 September 2011

Physical v Paper & PAGE discussion on FOFOA

Below is a cut and paste of some of my comments on this issue at FOFOA's latest post. Also see here for some comments on the GBI system which was the focus of the FOFOA post, in particular the "fully insured" claim, which many operators imply they have.

mortymer: “You will maybe find this one interesting

I had seen the SNA papers and tend to agree with Paul I's "egghead" analysis - in the end there is no forced requirement to split out physical gold from unallocated from leased out, so they can continue to play their games.

Kid Dynamite: “How do you have true allocated storage of any bullion less than a full bar? Ie, yes: bars have numbers that you can put on the statement. Coins do not.”

I've posted on this issue here. In my view "true" allocated can only be for full bars and coins. Bar numbers help in trusting the custodian, but can still achieve the same with unnumbered bars and coins by marking them (eg texta). One way to really test if allocated is being offered is to ask if you can view your metal and if there will be any problem if you mark your coins and bars.

Blondie: “The interview with Ned Naylor-Leyland describing PAGE is a must watch IMO, as I agree that this has the potential to be a real game-changer.”

I'm underwhelemed by PAGE. So there may be a "fully allocated spot gold contract". Guess what, we sell the 300t of physical gold we refine each year at spot in the OTC market - the buyers can be totally private. I don't think we will see much trading moving to PAGE beyond what bullion banks will feed it to meet local demand as other buyers aren't going to want their activities out in the public and visible to the benevolent Chinese Govt.

The Giants are going to continue to deal with the bullion banks in the OTC market where they can wade about without anyone knowing.

Blondie: "The significance I see in PAGE is as a physical gold price discovery market. If it is fully allocated contracts that create the spot fix, then I see an arb developing between the existing (paper-based) exchanges and PAGE where the contracts are backed by physical."

Just to be clear, in the wholesale markets the price of paper unallocated gold with a bullion bank in London and physical gold are the same. Tonnes and tonnes of physical deals (as well as paper) are priced off the London Fixes. The Giants don't need PAGE as a "physical gold price discovery market" - it already exists in the OTC market. There already are arbitragers between paper futures exchange and "contracts backed by physical" ie allocated and spot physical deals.

This is not to say it will always be like this, but right now paper price = physical price. Through all the ups and downs of the past five years and all the rumors of imminent market failure I have not seen paper and physical diverge.

As to PAGE being a way to get renminbi exposure, well that will be interesting to watch but note what Victor said "long the allocated contract at the PAGE and short gold in US$" - the end result is no impact on the gold price because the long cancels the short.

Paul I: “Right now, the gold spot market is like a big, stupid, compliant Labrador, Perth Mint included. It doesn't mind having it's tale wagged by the paper market. PAGE will turn out to be a snarling Rottveiler.”

I'd say that is debatable. Everyone assumes paper is in charge, when the only data we have is COMEX and other visible exchanges but nothing on what goes on in the OTC market, save for some opaque “transfer” numbers from LBMA.

Paul I: “Quite frankly, as an Australian, it makes me sick to see our national gold wealth sold off for pennies on the dollar. I may be naive, but I have to ask why an organization like the Perth mint hasn't long ago tried to maximize value for Australia and Australian gold mines by proposing something along the lines of PAGE.”

I don't think you are getting what I'm saying. Perth Mint doesn't need to start an Australian PAGE – every week we offer 5t or so of physical gold to the OTC market and the bullion banks and other bid for it. You may consider the current gold price undervalued, but that does not mean that we aren't maximising Australia's gold – if the demand is there then those banks bid for it. If anything changing the current private OTC approach to a public PAGE would likely hamper the process.

Paul I: “Instead, we see them pushing massively over-priced "collectable coins" to Grandmas in Post Offices, more demand divertion, very little education.”

Our marketing guys push those fancy coins because they are our highest margin product – that makes business sense, we aren't going to waste prime “shopfront” pushing low margin kilo bars. But that stuff is small by volume compared to kilo bars where ultimately the big dollars are.

mortymer: “To separate physical gold in unallocated from leased would be at this stage too much, they got so far to clear definitions and on what is allocated what is not and that is a progress.”

Agreed. What that document does is make it clear what unallocated is. No professional player is unaware of that, they just believe in the system and thus believe in the “value” of their unallocated, because they are of the system. I do not believe there is any big move from unallocated to allocated at the moment, nothwithstanding the antics of Chavez. If that was the case we would be seeing a lot more bidding for our weekly 5t.

costata: “According to Bron the Perth Mint relies on mine supply of silver for its refinery as very little scrap silver finds its way to them. I see your point about the price of copper and silver. I would be interested to hear Bron's thoughts on this. Is it merely a question of price?”

Those comments about “silver scrap is mainly sold and refined locally because it is not high enough in value to justify shipping it around the world” were primarily focused on Australia, which is more geographically remote, and does not have much silver refining capacity. In other markets silver may be far more mobile.

whiteelefant: “Concerning PAGE: my impression is that any offer which is closer to physical than what the LBMA & Co offers might be taken up and will push the price of Au up. But, I am only a small shrimp and not into finance”

Again, this is an assumption that the LBMA banks are all paper and ignores the huge physical market that exists side by side with paper.

costata: “Recently I came to the opinion that leverage on the currency side was irrelevant. The key point is that the gold itself is not fractionalized. If PAGE said no margin that doesn't prevent someone from borrowing outside the exchange and trading a 100% cash account with PAGE.”

Ha, now we are peeling the onion, or should I say seeing more of the spider's web.

costata: “We should also not underestimate how much the Chinese love to gamble. The paper gold market appears to be going gangbusters right alongside the development of the physical gold market according to this article.”

Very good point, I noted that comment as well. We should not blindly think that Asia is a physical only market and cannot be tempted by the leverage paper offers.

10 August 2011

Vietnam speculators cause "unstable psychology"

The Vietnam Government saga against its people's preference for gold continues. Commodity Online reports that after the gold price "skyrocketed" the State Bank of Vietnam allowed private companies to import "5 tons of gold to help stabilise domestic markets and supplement local supply. ... 'Taking advantage of the situation, speculators in the domestic market had speculated, and manipulated, causing unstable psychology among people even though the amount of Gold in the market is still high' [State Bank of Vietnam] said. The State Bank of Vietnam also said its consistent policy is to stabilize the dong’s value, and it is risky for people to buy and hold gold at the moment..."

I'd say its risky to buy and hold the dong whereas holding gold would indicate a very stable "psychology"!

09 August 2011

The Mint is humming

Nigel Moffatt, Treasurer of the Perth Mint, breaks from his leash with some really bullish statements in an interview with The Australian newspaper:

He said he could see no end to the gold boom.

"If you're in the US or Europe, what on earth are you going to put your money into?" he said. "You wouldn't touch the equity market at this stage. Interest rates are low, and frankly precious metals are a hell of a good way to go. I can't see anything around to stop it. Bit it won't go northwards in a straight line because people will always be taking profits."


And then this morning an interview with the ABC:

The head of the Perth Mint says the price of gold will continue to rise, even after hitting another record of $US1,720 an ounce.

Nigel Moffat says the mint is fielding calls from all over the world from investors wanting to jump aboard the gold juggernaut.


If this continues I'm worried he is going to become a media tart. If he gets a stint on TV then I think I'll call a temporary bubble top.

08 August 2011

Weekly wrap

Some blogs that caught my eye last week. First is The Burning Platform with Edward Gibbon's five marks of Rome's decaying culture from his book The Decline and Fall of the Roman Empire:

1. Concern with displaying affluence instead of building wealth.
2. Obsession with sex and perversions of sex.
3. Art becomes freakish and sensationalistic instead of creative and original.
4. Widening disparity between very rich and very poor.
5. Increased demand to live off the state


I think it would be fair to say we are close to ticking all of them. Second is Steve Keen on the RBA's setting of the cash rate:

The graph shows an almost 100% correlation between the cash rate and the 90-day bank bill rates. However the data also shows that in almost every instance the RBA cash rate FOLLOWS the 90-day bank bill rate, rather than leads it. ... This analysis raises a number of interesting questions:

1. Why do we have the RBA as an interest-rate setting body at all when all they do is follow the market?
2. Why does the RBA shroud itself in such mysticism when their actions are so transparent to all?
3. What is the quality of our economists, politicians and financial commentators that we have to go through the “Will They or Won’t They” pantomime each month?
4. How could any economist get their forecasts wrong, particularly on the up-side?


Very much Wizard of Oz man behind the curtain. Third is Mark Tier at economics.org.au with two takeways on small/no government, which speak for themselves:

"... when the income tax was introduced in 1913 no one in his right mind would have suggested a top rate of 90 percent. In fact, there was considerable support for capping the income tax at 4 percent. This was shot down by those who argued that specifying such a maximum rate would mean the income tax would rapidly rise to that (then) horrific level. Can you imagine living in a world where an income tax of 4 percent is unthinkable!?"

"On January 24, 1848, the California gold rush began. But it took eighteen years for the U.S. Congress to enact a mining law to regulate such discoveries. Meanwhile, gold production in California boomed. How could that have happened without a governmental framework to recognize mining claims, register titles, and regulate disputes?

The miners created their own. They established districts, registries, procedures for establishing and registering a claim and buying and selling claim titles, and a system for resolving disputes. Officers were usually elected, including the recorder of claims."


Finally, we have a report by Mineweb that I think few PM commentators will pick up, but which I think is a good signal that gold is on the move into the mainstream. Mineweb reported on Thomson Reuters buying GFMS which "will enable Thomson Reuters to offer clients analysis of metals markets alongside its news and prices". This is a sign to me that smart money is moving into gold, as they are the only ones who can afford a Reuters feed. The mass market (dumb?) money follows much later, which is when we'll see a real bubble.

07 August 2011

A cartoon that should concern all PM investors

The cartoon below (h/t Nathan's Economic Edge) is a warning to gold and silver investors.


Instead of focusing on how and why there are no productive investment opportunities, the cartoonist demonises the cash "hoarder". Yes, you must spend your cash to help pull the debtors out of their problem. If you won't, then next they will charge you to hold cash - see BNY Mellon's negative interest rates. By the way, if that did come to pass it would be amusing because one of the (mis)criticisms of gold is that it costs to hold it and it doesn't pay a return - well if more banks copy the BNY Mellon action then neither will cash.

Demonisation is what PM investors can expect as metal prices increases - you will be classed as rich hoarders. Hopefully it stays at that, rather than degenerating into a "super PM profits tax" or confiscation. However, one shouldn't underestimate the politics of envy and thus keeping an eye on which category the majority of voters sit would be prudent (FOFOA's The Debtors and the Savers worth a read in this respect).

06 August 2011

Turning $400k into $1.2m

Late yesterday the bullion desk manager let me know that one of "my clients" had sold up. By "my clients" she meant clients I knew from when I worked on the desk, which was a long time ago.

This client bought $400,000 of gold about 15 years ago and sold it yesterday for $1.2 million. He and his wife are now in their seventies and are now drawing down on their nest egg.

Sometimes I've asked myself whether working at the Mint is of any benefit to society, whether it is a productive job - we don't make anything useful like cars or food - we just melt and stamp and store metal.

It is days like yesterday however that give me a boost and make me feel like I am doing something useful.

02 August 2011

The coming goldbug civil war and your PM exit strategy

I recently received a question from a client regarding my three point staged approach to choosing a storage method, as per the Perth Mint website:

“1. While the world environment is benign, they hold unallocated. They do not incur ongoing storage costs and fabrication charges.
2. When the environment becomes uncertain and risky, they convert to allocated.
3. When the world is at a crisis point, they take delivery of their physical metal.”


By the way, I wrote that webpage text many years ago, well before the gold bull market and when the world environment was benign.

His question was “At a crisis point why would investors opt to take delivery of their metal, rather than sell it? Isn't that the whole idea of holding precious metal?”

I found it a very interesting question, because it indicated that the investor saw only one scenario developing, what I would call “Repeat of 1980”. This scenario sees the 1970s repeating with a bubble in metal prices driven by high inflation, recession and a “mild” financial crisis.

This exit strategy assumes that just like the 1970s, the current economic environment is just a cyclical phase and we will return to “normal” at some point, in which case you can deploy your increased wealth into other (hopefully) cheap productive assets. Selling your metal for cash certainly could be profitable in such a scenario.

However, my third point was addressing another scenario, one I call “End of the Debt Bubble”. This scenario in simple terms (and probably do the complex issues involved a disservice), is that we are at an “end of cycles” as the debt levels most Governments and individuals have accumulated will not be able to be paid back. The only acceptable political solution, it is argued, will be for Governments to inflate debts away, which given the scale of the problem, will lead to hyperinflation as people lose confidence in fiat currency’s ability to hold its value. Some consider this scenario will also involve confiscation. In the case of Australia I personally think this is unlikely and have covered it in detail in this post.

This is a completely different sort of crisis, possibly also involving societal breakdown, in which case investors would be looking to take delivery (in coin form) with the purpose of using their gold and silver as money to buy goods and services or simply because they feel more secure having the physical metal in their possession in such a situation. Selling your metal for cash in such a scenario could be disastrous unless you quickly convert that cash into some other wealth preserving asset.

This is the single most important issue precious metal investors must have a view on, because if you get it wrong it will potentially do significant damage to your wealth. You do not want to have held on to your metal if we will experience a “Repeat of 1980” as you will end up selling at a much reduced post-peak price. Alternatively you do not want to have sold your metal if we experience the “End of the Debt Bubble” as you will be left with worthless cash.

Whichever scenario you favour, I suggest you read this post of mine on Deflation or Inflation .

For those who believe in “Repeat of 1980”, this post summarises the key arguments why the US won’t be able to paper over its debt problems. For those believing in the “End of the Debt Bubble”, keep in mind that the text of the post was written 20 years ago. At the time the writer was sure that it was “the End” – how sure are you that it really is different this time?

It is not something you have to work out right now as you can wait for more "data" as economic events unfold, but unlike my questioner, at least be aware that there are alternative "futures".

As the gold price increases, you will also start to see a "civil war" developing in the gold internet community on this issue. All gold commentators you read have a view on this issue. It may seem that everyone is in the “End of the Debt Bubble” but a careful reading of many commentators tells me many hold a “Repeat of 1980” view. At the moment all gold advocates are united against conventional economists and investments advisers as they have been proven right with a 10 year bull market.

But once the gold price starts to get really high, you will see commentators who believe in the “Repeat of 1980” scenario start to recommend selling your gold. This is likely to result in “End of the Debt Bubble” commentators calling them "traitors" or "incompetent" for recommending holding soon-to-be worthless cash. The passion of the current debates in our little gold internet community will be nothing compared to this.

The key will be to keep your emotion out of it, weigh up the claims, and hopefully make the right decision.

19 July 2011

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.

17 July 2011

Turnover and Fractional Memes

I recently listened to an interview between Eric Sprott and Chris Martenson. Eric has a very good line in spin playing to the themes beloved by the 'bugs. Deconstructing them requires more time than I have at the moment, but this comment I can't leave:

"... I think all the paper markets are a joke. As you are probably aware, we trade a billion ounces of silver a day. A billion ounces. The world produces 900 million a year."

There are many falsehoods in the precious metal commentary "market" but I'm surprised Eric is supporting the idea that large turnover figures are suspicious, which I debunked in this post. He should be careful supporting this meme as it can just as easily apply to his own funds, particularly his silver fund as he seems not interested in doing any secondaries (in contrast to his gold fund).

The suspicious turnover meme is often confused with fractional bullion banking, an example being this comment by The Burning Platform:

“Several competent analysts have worked the numbers (including Bill Murphy and Chris Powell of GATA), and have come to the conclusion that for every ounce of silver in known inventories there are approximately 100 paper contracts trading (a fractional bullion system, if you will) on various exchanges across the globe.”

My response below:

1) My understanding is that the 100:1 figure did not come from “analysis” but from a statement made by CPM Group’s Mr Christian. See here. I would be very interested in independent analysis coming to the 100:1 figure that did not rely on Mr Christian’s comment, please provide links.

2) Mr Christian’s comments were confused by many as a statement about the ratio of fractional bullion banking instead of paper to physical trading ratio, which are two completely different things. GATA’s Adrian Douglas did an analysis that concluded the fractional ratio was 4:1. That analysis had serious flaws in my opinion (see here but in the end it was too conservative, with Mr Christian confirming it is generally 10:1 (40:1 in the case of AIG).

13 July 2011

Pan Asian Gold Exchange Hype

The new Pan Asian Gold Exchange (PAGE) has got Andrew Maguire into hyper mode claiming that it "will ultimately destroy the remaining short positions in both gold and silver" and "in very short order affect current precious metals price discovery dynamics." This all based on his wishful thinking that "if just 1% of their [Agricultural Bank of China] customers bought a single 10 ounce contract, that would equate to 1,000 tons of physical gold being drawn down."

As Kid Dynamite comments in a FT Alphaville article on Maguire "a 10 ounce contract is worth well more than the average annual income in China, right? There was a stat recently that 40% of Americans couldn't come up with $2k if they needed it for emergency bills... I wonder what % of Chinese can afford to buy 10 ounces worth of gold?" I tend to agree. While it is always positive to have more ways people can buy gold, if you think that "this new gold and silver exchange has flown under the radar" of the big short players like Andrew does, then you are severely underestimating them, at your cost.

It reminds me of the hype that circulated some time back about the new vault in Hong Kong (by the way, what happened to all that metal was that clients were supposedly going to pull out of London and move to Asia, bringing down the LBMA?) Anyway, the impression (meme?) given by that story and the spin on PAGE is that there are few exchanges/markets around the world apart from the "fake" COMEX and London. Certainly, the story is that there are few places where "real" prices for physical metal can be found. In respect of that, you may find this list of gold markets from Sharelynx a useful reality check:

US- New York Open Outcry; Electronic Trading CME
UK- London LBMA
China - Shanghai SGE; SHFE
Hong Kong CGSE; HKEX; HKMEX
India - Mumbai NCDEX; MCX; NMCE
Indonesia - Jakarta JFX; ICDX
Japan - Tokyo TOCOM
Pakistan - Islamabad NCEL
Turkey - Istanbul IGE
United Arab Emirates - Dubai DGCX
Europe EUREX
Nepal - Kathmandu MEX
Russia - Moscow RTS
Singapore SICOM
South Africa - Johannesburg JSE
Taiwan - Taipei TAIFEX
Thailand - Bangkok TFEX
Brazil BMF

Between these, the 25+ ETFs that Sharelynx also tracks daily, and retail bullion dealers, I'd say it isn't too difficult for investors to buy gold these days. China certainly hasn't had access to these methods of buying gold to-date, but by the amount of physical metal we've seen being shipped into China over the past few years, I don't think Chinese investors (savers, more like) have had any problems getting all the gold they need.

29 June 2011

Government v Industry

The two charts below from Andy Smith's (Bache Commodities) latest piece are a humorous use of US house prices to illustrate the problem of Big Government. The first shows the real boom is in Government jobs and lobbying. The second how gold buyers aren't fooled by America's shift from productive to unproductive jobs.

18 June 2011

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.