18 December 2015

A way around FBAR/8938 reporting using LockSmart?

I am often asked by US residents whether precious metals are reportable under IRS and FinCEN foreign asset/account reporting obligations:
  • Form 8938, Statement of Specified Foreign Financial Assets
  • FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR)
According to the IRS comparison of these requirements, “precious metals held directly” is not reportable.  So what does “held directly” mean? The IRS’ own Q&A confirms that safe deposit boxes are not reportable but otherwise provides no explanation of the term.

Read more here.

15 December 2015

Warehouse Wars: The JPM Awakens

Last week I wrote about the gold warehouses associated with the CME’s kilo futures contract. Today I’ll have look at the Comex New York warehouses but rather than focusing on the eligible/registered debate, which has been done to death, I want to look at the fight between the warehouses for storage customers and the entrance of JP Morgan into this $30 million per annum business in early 2011 (hence my tacky topical title). Read more here.

11 December 2015

Hong Kong Gold Warehouse Movements

Back in July I pondered what happened to 110 tonnes of gold in one of the Hong Kong gold warehouses registered by CME for its kilo futures contract. The chart below updates the figures and shows that wherever the gold went, its is gone for good.

Those that get worked up about Comex “leverage” ratios should be interested in the fact that the Hong Kong warehouse report only shows eligible stocks and has never shown any registered, which probably has something to do with the fact that the delivery notice report shows no issues/stops for the kilo contract so far this year. Forget your 300:1 Comex “leverage” – that would put the OI/Registered Stocks ratio as divide by zero error, or in other words, the CME’s Hong Kong contract has infinite leverage!

Read more here.

09 December 2015

China accelerates gold reserves accumulation

In July I did a post on How much gold does China really have? which looked at the rate China was accumulating gold reserves based on their occasional announcements of how much gold they had. Extrapolating out their average monthly rate of 8 tonnes gave the chart below, which projected to 2,186 tonnes by the end of 2020. Since then China has begun to report its gold reserves every month and has accumulated 86 tonnes in five months – an average of 17.2 tonnes. That is a lot more than their previous rate and you can get a better idea of the acceleration if I update the chart above with the new reserves figures and then project that rate into the future. Read more here.

01 December 2015

Gold and silver coin sale diverge

The Perth Mint’s latest minted coin and bar sales are out, which reflect retail investor interest. In silver we posted our fifth best month in four years, although the September figure probably should be ignored because we were stocking up for months beforehand for the launch of our silver Kangaroo coin and didn’t expect to sell that all in one go. Read more here.

27 November 2015

The Beer Economy

Proponents of a Gold Standard look forward to the day when people use gold and silver coins as money but it seems that beer and spirits have a head start. This article sheds light on hundreds of secret Facebook groups in Australia where people barter goods and services for alcohol in various forms, with one group claiming 50,000 members.

Read more here.

26 November 2015

Perth Mint to collaborate with Australian Securities Exchange

Today the Perth Mint and Australian Securities Exchange (ASX), one of the world’s top-10 listed exchange groups measured by market capitalisation, announced that they would be collaborating on developing new exchange traded precious metals products.

The first product is mostly likely to be a gold futures contract deliverable in Perth. Given the focus the gold community has on futures markets, and Comex in particular, I’m sure there will be a lot of interest is this Aussie gold contract. As we are in the process of talking to the market about what features they would like, it is not possible to get into contract specifications at this time but I can make some general comments about the approach ASX and Perth Mint will be taking.

Read more here.

25 November 2015

Federal Reserve International Finance Discussion Paper #582

The idea that the US Mint has a legal obligation to mint and issue bullion coins in quantities sufficient to meet public demand is one that I have seen mentioned every time the US Mint puts its bullion coins on allocation. While originally true, it is no longer the case.

Read more here

FYI, you'll also like Sec. 5116 authorising the Secretary of the Treasury to sell gold.

22 November 2015

Five Metals

Those who frequent the precious metal forum www.silverstackers.com will know the name goldpelican, who is the forum administrator as well as one of the guys behind http://www.goldstackers.com.au/store. Well he has just started a blog called Five Metals and his first post is on a favourite topic of mine - excessive coin premiums. Worth adding to your blog reading list.

The chart below from WSJ via Zero Hedge shows a complete lack of consensus amongst banks as to gold's future direction. That may translate into a sideways market as participants compete on their view.

Thankfully there doesn't seem to be many forecasting prices below $1000.

Steven Saville made a good point about gold futures and arbitrage in this blog post, noting that:

Strangely, many gold ‘experts’ assert that gold is different due to its dominant monetary and store-of-value roles, but then insist on applying a traditional commodity-style method of supply-demand analysis.

Yep, it doesn't make sense to treat gold the same as a commodity like orange juice futures.

15 November 2015

Three ways to get paid for your words

From The Irrelevant Investor:

“Three ways to get paid for your words:
1) Lie to people who want to be lied to, and you’ll get rich.
2) Tell the truth to those who want the truth, and you’ll make a living.
3) Tell the truth to those who want to be lied to and you’ll go broke.”

The first category explains why there is so much crap out there. I think I've spent too much time in the past doing the third. I'll leave it up to you to work out which of the gold bloggers/commentators out there fit into which category.

14 November 2015

Interpreting The Perth Mint’s Financial Results

The Perth Mint recently released its 2015 Annual Report. This article discusses the Mint’s financial results with a focus on those areas where conventional financial analysis would fail due to the unique aspects of a the Mint’s business model. Read more here

09 November 2015

Indian gold monetisation schemes

While FT Alphaville’s coverage of the Indian gold monetisation schemes started off with “why gold investing in and of itself is stoopid” they did note that

“people, especially in fledgling economies, are distrustful of sharing because they’re worried about payback. That kills trust, which consequently ensures capital isn’t put to productive use … there is also a real (and dare we say warranted) distrust of government and an historically deep-rooted inflation fear to take into account”

As Jayant Bhandari observed in his Precious Metals Investment Symposium presentation, India is a negative-yielding economy, with nominal yields on property and stocks below the 10 year government bond (even cows return -6% assuming zero labour costs). In such an environment, a zero-yielding asset like gold is better than a negative yielding asset.

The Indian government’s gold monetisation schemes, however, are more about addressing the symptom rather than the disease, which is the lack of trust in “payback”. Jayant says that high levels of corruption, superstition and irrationality in India “discourages accumulation of financial and intellectual capital”. But dealing with that, I guess, is a lot harder than trying to hoodwink “its population to take a leap of faith on the trust front”.

Why do I say hoodwink? Firstly, as I discussed in this post, the lending of any physical gold deposited in the schemes will have a one-off impact on throttling Indian gold imports. Secondly, as discussed in this post, the other uses the Government of India says it will make of the gold and the way it will run its Sovereign Gold Bonds Scheme mean that the government is simply going naked short gold in Rupees, as they themselves acknowledge in this press release:

“the risk of increase in gold price that will be borne by the government” and they “will not be hedged and all risks associated with gold price and currency will be borne by GoI”.

With that sort of risky behaviour from their own government, who really is stoopid – those holding physical gold or those trusting the government schemes?

[originally posted at
http://research.perthmint.com.au/2015/11/09/indian-gold-monetisation-schemes/ ]

05 November 2015

Precious Metals Symposium, Interview with FXStreet

Last week I was in Sydney for the Precious Metals Investment Symposium. While the turnout was down on last year (surprising as the Australian gold price has been performing but I suppose people just look at the US price) the speaker turnout was excellent. For me the standouts were opening speaker John Butler, Keith Weiner and Jayant Bhandari. The presentations by Keith and Jayant were complimentary, with Keith covering his idea of yield purchasing power and how low interest rates were resulting in people eating their seed corn, and Jayant explaining why countries like India are so interested in gold (zero yield is better than negative yield), forecasting that the West is headed in the direction of negative yields/capital destruction.

On Monday night Mark from Gold Stackers roped me into helping him with the launch of the Back to the Future coins, which involved me putting on white coveralls and a wig to “act” as Doc Brown in a skit (emphasis on the double quotes around the word act). It was all good fun but thankfully I have not seen any pics of our attempt at acting circulating on the internet.

Tuesday night saw the Precious Metal Award Gala Dinner at which I was humbled to win the ‘Maggie’ Bullion Award, which is named in honour of an Australian coin dealer known for her exceptional focus on customers, who died unexpectedly last year.

Last night I recorded an interview with Dale Pinkert at FXStreet, covering a wide range of topics including:
  • bitcoin
  • personal vs third party storage
  • banning of gold in safety deposit boxes
  • manipulation
  • German repatriation
  • Chinese gold accumulation
  • price expectations for gold and silver
Towards the end I also discussed why gold has not responded to recent geopolitical and economic events, which is based on my view that everyone has a different level of trust in the politicians and central bankers to keep things under control.

[posted at http://research.perthmint.com.au/2015/11/05/precious-metals-symposium-interview-with-fxstreet%ef%bb%bf/]

19 October 2015

A Manipulation Smoking Gun?

Dave Fairtex, writing for Peak Prosperity, claims he has The Smoking Gun Proving Silver & Gold Manipulation. In identifying all of the 0.5% or greater one minute price spikes over the past 6 years I’d argue he has proven how infrequent it is.

Dave’s main result is that there were a total of 135 gold events and 869 silver events where the price moved up or down more than 0.5% within a minute, with 66% of the gold events, and 54% of the silver, being downward moves. While the data shows a bias to the downside, Dave doesn’t put any of the results into context, undermining I think what is a worthwhile analytical approach. Read More >

16 October 2015

China will save us

I have a lot of respect for Michael Kosares of bullion dealer USAGOLD but his recent commentary has a bit of the “China will save us” meme which has been around for many years and had its fullest expression in the Pan Asian Gold Exchange farce. READ MORE >

14 October 2015

The Gold Warrior

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

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

09 October 2015

Bundesbank publishes gold bar list

On Wednesday Deutsche Bundesbank published “a list detailing its holdings of gold bars in custodian storage in Frankfurt am Main, London, Paris and New York”. While I welcome this move towards transparency and accountability on what is an important (and often controversial) public asset, it was disappointing that the Bundesbank did not think it necessary to produce a bar list that conformed to the usual standards that apply in the bullion market, which is to supply refinery, bar number, gross and fine weight, purity, and year of manufacture (where available). [read more]

07 October 2015

OCC precious metal derivatives fat finger

Back in July I reported on some unusual figures in the US Office of the Comptroller of the Currency’s (OCC) quarterly report on precious metal derivatives. In the OCC’s 2015 Q1 report they had a figure of $75.62b, which was a huge increase from the 2014 Q4 figure of $22.42b. However, in the latest OCC report, the 2015 Q1 figure has been revised down to $26.94b. I have cut and pasted the two figures from the previous report (in green) and the new report (in red) below [read more]

05 October 2015

Sucking silver through a straw

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

02 October 2015

Yet another precious metal manipulation investigation

The announcement that Switzerland’s Competition Commission has opened an investigation into some bullion banks for precious metal prices fixing created a bit of excitement in the gold blogosphere. I find it hard to get excited. Consider this recent history of precious metal manipulation investigations and lawsuits [read more]

30 September 2015

Financialisation – blame the carpenter or the tool?

Chris Powell of GATA took exception to my comments about the financialisation of the gold market in my post on Friday, saying that “the more that markets are ‘financialized,’ the more advantage passes to those with the greater access to financing”. I would argue that increasing financialisation increases the advantage of the average investor. [read more]

29 September 2015

Interview on Precious Metals

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

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

Why hasn't the bullion banking system failed?

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

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

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

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

25 September 2015

Refinery view of the state of the gold market

Alex Stanczyk of the Physical Gold Fund has just posted a transcript of an interview with an executive at a Swiss refinery about the state of the market. It is well worth a read or listen to the podcast. Below are some quotes and my take on them. [read more]

23 September 2015

Fractional Reserve Bullion Banking – Part 3

In our last post we discussed the risks a bullion bank faces when operating a fractional reserve system due to the mismatch between when its assets and liabilities fall due. The main way this risk is mitigated is by borrowing gold from another bullion bank or central bank. To understand how this works in practise, we need to understand how the bullion banks interact with each other. [read more]

18 September 2015

Chill out, gold-dudes

On Wednesday Bill Holter responded to my post Who is the player and who is being played? finishing up with “comments welcome (even from Bron Suchecki)”. So I emailed him last night. Right up I apologised for the inference that he was playing people – that was a rhetorical step too far. People who have been reading me since 2008 when I started my personal blog will know when I go after something I usually go hard. Probably something to do with growing up in a working class suburb, where you learn quick to get on the front foot.
Bill was surprised to get a reply from me, which I think reflects the expectation these days that many on the internet are willing to dish it out but can’t take it. I didn’t know how Bill would respond but the way he did speaks volumes. Others I’ve butted heads with get all personal or you can see the hate flowing through their responses. Indeed there was a lot of anger in some of the comments and tweets to my post and I found myself asking, why? [read more]

16 September 2015

Fractional reserve bullion banking – Part 1

Re working some of my earlier posts on this topic on this blog, it seems to me that all the angry ranting about bullion bank failure is due to being constantly wrong yet not understanding why and thinking it is because figures are fraudulent or some such. Funny they never consider it might be because they don't understand how the system works and thus their interpretations of data and events is all wrong. One has to know thy enemy first http://research.perthmint.com.au/2015/09/16/fractional-reserve-bullion-banking-part-1/ and that means keeping a clear head.

14 September 2015

Who is the player and who is being played?

New post on corporate site with some thoughts on articles about shortages of coins and comex stocks. And yes, I have read How to Win Friends and Influence People but I don't give a F. As Alex Stanczyk says "Price will not fix. West demands of physical delivery similar to Kyle Bass will fix price" and paying massive coin premiums just reduces the amount of physical drain out of the system and thus pressure on it.

10 September 2015

Foreign currency denominated loans – what me worry?

If you only read mainstream media who just report press releases without any analysis you'll be surprised which Government is desperate or manipulative enough to do foreign currency denominated loans [read more]

09 September 2015

Buying gold is not spending

Last couple of days I was in Malaysia meeting with our distributor Quantum Metal and their clients. While it is trite to say that the East views gold differently to the West, it is still striking when sitting in a meeting with a senior executive of a bank to hear them say “buying gold is not actually spending, it is just buying another currency”. Not something I could imagine a Western bank saying. Or for a Chairman of a large Malaysian co-operative to be keen to make it easy for their members to buy gold, seeing it as a smart way to save.

For Western “sophisticates” this would be considered backward but if they lived in a country where their exchange rate had depreciated over 30% in the space of one year, like the Malaysian Ringgit has, their views may be different.

While one does not need to educate Malaysians about why to hold gold, confidence in buying gold has been damaged by businesses like Genneva Sdn Bhd. It is unfortunate that gold trading is not regulated in Malaysia as this makes it a target for Ponzi schemes to use the affinity for gold as a way of attracting customers (although high monthly returns on investments should be a warning sign).

04 September 2015

Skewness in gold and silver

Blogger John Koning recently posted on the negative skewness (or as he says: bulls walk up the stairs, bears jump out the window) of the stock market. He notes that “there are plenty of famous meltdowns in stocks, including 1914, 1929, 1987, and 2008, but almost no famous melt ups”. To demonstrate this, he produces a chart of 22,013 trading days since 1928 grouped by the daily return and showing the percentage of days that were negative.
The chart below replicates Koning’s figures but I have also included gold and silver London Fixes since 1968 for comparison, which is the longest data set I have. [read more]

03 September 2015

Outlook for Aussie gold on exchange rate weakness

Back in July I said that “an investment in AUD gold may represent a reasonable bet” given that “the general consensus on the Australian dollar is that it will continue to weaken due to a poor economic outlook with commodity prices falling”.

Today, Australian media are reporting that the AUD/USD exchange rate will reach 0.60 by end of 2016. First is Deutsche Bank chief economist Adam Boyton quoted as saying that the dollar will keep falling to US60¢ by the end of 2016 and he “wouldn’t be surprised if the Australian dollar is printed with a ‘five’ handle in the next three years”. That article also says “Suncorp senior economist Darryl Conroy is also expecting the dollar to fall towards US50¢”. The Sydney Morning Herald was quoting AMP chief economist Shane Oliver as saying “he expects the dollar to reach US68¢ by the end of the year and slide to US60¢ throughout 2016”.

If the Australian exchange rate does fall to USD 0.60, then that puts a strong floor under the Australian gold price. The following conservative USD gold prices at that exchange rate equate to:

USD 800 = AUD 1,333
USD 1,000 = AUD 1,667
USD 1,200 = AUD 2,000

The chart below puts those moves into context. [read more]

02 September 2015

Are platinum & palladium worth adding to your PM portfolio?

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

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

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

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

31 August 2015

A rally that is not meant to be sold

In this interview, Jim Sinclair says that “we are going into unprecedented deflation, and it’s the reaction of central banks around the world to the concept of deflation that brings about hyperinflation” and the resulting increase in the gold price is therefore “a rally that is not meant to be sold. What is coming up in front of us is the Great Reset where currencies wear their gold like ladies wear a necklace, and the most beautiful necklace will be the strongest currency.”
I find this advice dangerous because many people reading it will go away thinking “OK, so in the next gold bull market I shouldn’t sell”. However, how will you know if the initial bull market is just a speculative bubble that will bust or the start of a hyperinflation?

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

26 August 2015

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

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

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

Read More

25 August 2015

The ideal percentage allocation between gold & silver

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

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

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

24 August 2015

Risk Radar - 101 ways the world could possibly end

Richard Watson is a futurist and scenario planner I've been following for years. Each year he comes up with unique graphical representations of his thoughts on future trends (see here for an example) with a focus on technology. His latest takes a classic risk based approach (likelihood & consequence) and so is suited to gold which people run to when unexpected things happen. Consider this the intelligent person's doomer list. [read more]

21 August 2015

Understanding Open Interest

Techniques for analysing and trading equities, looking at price and volume, can be applied to precious metal futures markets. Futures, however, introduce another data point – open interest – that has to be considered. With equities, the quantity of shares on issue is generally fixed and rarely changes. Therefore all buying is done from sellers who hold the shares.

With futures, the amount of contracts “on issue” or “open” changes daily, as a future is a contract to trade metal in the future and an exchange will create, or open, as many new contacts as people wish to enter into. If a seller of metal and buyer of metal want to enter into a contract, then a new contract will be opened. If an existing seller of a contact (a “short”) and an existing buyer of a contact (a “long”) want to exit their contract, then the contact will be closed.

Open interest represents the number of contacts created and in existence at a point in time. The table below summarises how open interest will change, depending upon who is buying and who is selling.

[read more]

19 August 2015

Baby boomer bugs to bust bullion?

In response to a Craig Hemke comment that “the ability to convert fiat and stack physical metal at these depressed paper prices is a gift, not a disaster”, Chris Powell of GATA noted that “it would be a much more valuable gift for people in their 20s and 30s than for people in their 60s and 70s. Indeed, for the latter group it could look more like another ripoff.”

The response got me thinking about generational differences and the demographic cliff (see this Mauldin Economics article for a summary by Harry Dent about the demographic cliff). Harry’s work on demographics focuses on the generational life cycle in respect of spending patterns, which he says peaks at the age of 46. What I’m more interested in is the peak saving age, because this may give us some clues to gold demand going forward. [read more]

18 August 2015

The Precious Metal Forum List

One of the best ways to learn about precious metals is to engage with other investors on a discussion forum. There can be a lot of rubbish on them (as with the internet in general) but generally you’ll get good advice from others who have been there before. The list below has the main active PM forums (or sub forums) where precious metals are discussed from an investing point of view. I have ranked them by total membership numbers, which is not perfect as it doesn’t necessarily represent active users but it is a fair indicator of either popularity or longevity of the forum.
Each forum has its own personality and particular focus – some skew towards one metal or the other, or peer to peer trading, or prepping. I’d suggest checking them all out and reading topics/threads to get a feel and see what suits you. Alternatively, you can subscribe to my Precious Metals Forums bundle on the feed reading service Inoreader, which aggregates threads from Kitco, Silver Stackers, SilverSeek, GoldEagle, Goldtent, Gold is Money, Reddit and Gold Club Asia forums if you want to keep your finger on the pulse of global PM discussion. [read more]

17 August 2015

Demand-Price Disconnect

Last week I explained why shortages occur and how they are generally caused by production capacity shortages. Often such shortages of retail coin products are spun by commentators into a shortage of raw gold or silver or a physical-paper disconnect and thus a sure sign that metal prices will rise.

Mike Shedlock, in his very direct style, says that “any time you see articles promoting the difference between physical gold and paper gold you are most likely reading a pile of crap”, referring to the fact that “one can get physical gold near spot rather easily” and giving the example of GoldMoney or BitGold.

Mike’s comments were in response to this article that argued that because “demand for physical metal is very high … yet, the prices of bullion in the futures market have consistently fallen during this entire period. The only possible explanation is manipulation.” Market manipulation is certainly a factor but claiming it is the only possible explanation is taking a limited view of the dynamics involved. [read more]

12 August 2015

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

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

07 August 2015

A very silly thing to think about Comex

Last month I covered Comex warehouse stocks in response to “a lot of chatter about the potential or certainty of failed settlement and Comex default”, making a number of points:
  • inventory can be converted from eligible to registered relatively quickly
  • including eligible inventory give a very different picture of warehouse stocks and owners per ounce
  • the actual percentage that stand for delivery is only 2-4%
  • current registered stocks vs open interest is well within current delivery rates
For those who focused on the registered stocks only, recent Comex deliveries have caused some disbelief. The best example of this is this piece by Zero Hedge. They way they word some statements could be misconstrued by investors new to precious metal, so as an education service below are some quotes from the article and some clarifications. [read more]

06 August 2015

Will gold miners hedge, like the 1990s, into a falling price?

Reuters recently covered the latest Societe Generale/GFMS gold hedge book analysis report, which noted that “while miners overall remain wary of hedging … those who do favour the strategy are leaning more strongly towards options”. The total size of the hedge book has increased from its low of 91 tonnes in Q4 2013 to 193 tonnes at Q1 2015, but it is still massively below its peak of 3230 tonnes in 1999 (see chart below).

A timely study considering Metal Focus was reported yesterday as concluding that “on an [all-in sustaining cost] basis, the proportion of loss-making mines at $1,100 swells to 24%”. Metals Focus say that this does not mean that mines will be shut down, as “closing a mine in itself is often a very costly undertaking” and thus “mining companies will often be prepared to operate at a loss in the short term in the hope that commodity prices recover”.

For mines running at a loss it may make sense to look at hedging even at current low prices because it provides protection against further gold price falls – extending how long they can continue to operate and thus increasing the chance they will still be around when the price recovers. While this may make sense for each miner individually, it doesn’t make sense for the industry as a whole if everyone does it. Let’s just hope miners have learnt the lessons of the 1990s.

 [read more]

05 August 2015

How much gold should you have in your portfolio?

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

03 August 2015

Divergence, convergence and gold

Michael Pettis argues that a market dominated by speculators tends to be more volatile as it is sensitive to changes (in consensus) in the way news is interpreted. If gold is entirely a speculative market, as I argued in Friday’s post, then we should see high volatility. While gold is more volatile than many other assets and currencies, it is not as excessive as we would expect based on Pettis’ theory. Why is this? I think it is because it is difficult for gold speculators to converge on a consensus view. [read more]

31 July 2015

Speculators, value investors and gold

I have written before on how gold is a pure epsilon asset and driven by narratives. This article by Michael Pettis takes a similar approach to China’s recent stock market problems but he makes a number of observations that apply to markets in general. I think these observations have application to gold in general as well as the current state of the gold market. Michael notes that there are two types of players in markets – value investors and speculators. He says that markets dominated by one or the other type will generally behave differently. [read more]

30 July 2015

Forecasts, forecasts, everywhere

So the gold price drops, so the gold forecasts drop. Some recent calls in order of bearishness:
Towards the end of 2010 I started recording forecasts in a spreadsheet, as I noticed many analysts revised their forecasts frequently in response to moves in the gold price. By 2012 I had given up as it was a lot of work to make one point – that in general analysts were just following or projecting the trend.
The chart below shows the forecasts I accumulated from late 2010 to early 2012 (the clustering around July are yearly average forecasts) and I’ve added in the recent ones above. [read more]
Some may recognise the influence on the post title. I started to muck around with the original but haven't been able to get too far. Maybe those with more creativity could make some suggestions. Not sure what the Albatross should represent.
The Rime of the Ancient Goldbugee
It is an ancient Goldbugee,
And he stoppeth one of three.
'By thy long gold beard and glittering eye,
Now wherefore stopp'st thou me?
The Hedge Fund's doors are opened wide,
And I’ve told them I am in;
The punters met, the strategy set:
May'st hear the merry din.'
He holds him with his skinny hand,
'There was a newsletter,' quoth he.
'Hold off! unhand me, gold-beard loon!'
Eftsoons his hand dropt he.
He holds him with his glittering eye—
The punter he stood still,
And listens like a newbie trader:
The Goldbuggee hath his will.
The Punter he sat on a stone:
He cannot choose but hear;
And thus spake on that Goldbugee,
And mumbled in his beer.
'My account was cleared and I did cheer,
Merrily did I logon
The trend lines were so obvious,
Nothing could go wrong!
Gold came up upon the morn,
Out from the lows came he!
And he shone bright, and by the night
I had traded profitably.
Higher and higher every day,
Till at the peak in eighty-'
The Punter then he beat his breast,
I lose the whole lot matey.
The Fund hath opened its doors,
Red as a rose is she;
Nodding their heads before her goes
The merry advisory.
The Punter he beat his breast,
Yet he cannot choose but hear;
And thus spake on that ancient man,
The bright-eyed Goldbugee.
And now the BEAR-MARKET came, and he
Was tyrannous and strong:
He struck with his o'ertaking wings,
And chased us south along.
With sloping masts and dipping prow,
As who pursued with yell and blow
Still treads the shadow of his foe,
And forward bends his head,
The ship drove fast, loud roared the blast,
And southward aye we fled.
And now there came both mist and snow,
And it grew wondrous cold:
And bears, giant-high, came thundering by,
As brown as ??.
And through lines the poor chart signs
Did send a dismal sheen:
No bullish shapes did we ken—
The bear was all around.
The bear was here, the bear was there,
The bear was all around:
It cracked and growled, and roared and howled,
Like noises in a swound!

29 July 2015

Gold market liquidity and manipulation

Yesterday Chris Powell of GATA criticised an article by Clif Droke on market manipulation. One point caught my eye, where Chris identified “an ‘ipse dixit’, an assertion made without authority” that Clif made, namely that “the market for gold is immensely huge and virtually impossible for any one entity to control its price swings … Even a coterie of interests devoted to pushing gold prices lower would meet with certain failure due to the enormous size and complexity of the market.”

It is one thing for Clif to claim that one entity could not control the gold market, but it strikes me as quite bold to claim a “devoted coterie” could not do it. To assess Clif’s claim we need factual examples of gold market liquidity so that we can “assert with authority” and solve this ipse dixit problem. Being the gold nerd that I am, over the past few years I have accumulated a number of statements about actual gold market liquidity (primarily because I’ve been annoyed with trite statements about how gold is “highly liquid” without any quantification) and thankfully now I have a use for them. [read more]

27 July 2015

How much gold does the Chinese Government really have?

On Friday I posted on the messaging China may have been sending with its central bank gold reserves announcement. Today I will update this analysis from 2012 to estimate how much gold the Chinese government unofficially holds and how much the population holds. I estimate that the total amount of gold in China is approximately 10,950 tonnes, with the population holding 6,490t, commercial banks holding 2,060t and the government, officially and unofficially, holding 2,400t. [read more]

24 July 2015

The message behind the Chinese gold reserves announcement

I don’t want to pick on Societe Generale analyst Robin Bhar, as this was representative of most of the commentary around China’s gold reserves announcement, but the statement that the 1,658 tonne figure “was not unexpected. If anything, it was slightly surprising that it wasn’t more, the market was looking at a figure north of 2,000 tonnes” makes the mistake of assuming that Central Bank announcements are about communicating facts.
As Ben Hunt says, Central Bankers “are all playing the Common Knowledge Game as hard as they can … if you don’t listen to what is being said in the context of game-playing, then you are placed at a disadvantage versus those who do. You will not understand the WHY that exists behind the public statements.”

So what is the WHY driving China’s gold reserves announcement? [read more]

22 July 2015

Where to for Australian gold price

I don’t know if this is the case in other countries, but here in Australia the TV news and other media report the USD gold price, not the AUD price. The result is that often gold will only appear in the local news when the USD price does something interesting or achieves new lows or highs, when for local investors the gold price may not have changed much or moved in an opposite direction.

21 July 2015

What’s the spin on the gold smash

When the gold price has a big move the news agencies ring up traders for a comment. When I read these articles I’m looking for two things: why do traders think it happened and what do they think about gold going forward. Understanding these consensus narratives around gold is useful as they control large amounts of money and their views influence others. [read more]

20 July 2015

Dissection of a gold price smash

I was just settling in to write an article on the increase in Chian’s gold reserves when at 9:30am the gold price got smashed. Initial news reports seemed to put the blame on the Chinese market, with statements such as “bullion fell to as low as $1,088.05 an ounce … shortly after the Shanghai Gold Exchange opened trading” and “According to ANZ, the sudden collapse in gold prices earlier in Asia was due to 5 tonnes of bullion being dumped on the Chinese market” but it started on Comex. [read more]

17 July 2015

Where did 110 tonnes of CME Hong Kong gold go?

Thanks to Ronan Manly, we have found out that 110 tonnes left Hong Kong warehouses between Dec 2014 and mid-March 2015 http://research.perthmint.com.au/2015/07/17/where-did-110-tonnes-of-cme-hong-kong-gold-go/

16 July 2015

You can’t draw horizontal lines on a GLD chart

In the case of GLD (and pretty much all metal ETFs) drawing horizontal trend lines, support and resistance levels, Fibonacci levels and so on can be misleading as the gold backing each share declines over time. I've never seen any technical analyst mention this when they do draw lines on GLD's chart. http://research.perthmint.com.au/2015/07/16/you-cant-draw-horizontal-lines-on-a-gld-chart/

15 July 2015

A New Paradigm for Control

Some quotes from https://www.quantamagazine.org/20150714-explosive-percolation-networks/ - just replace "D'Souza" or "one" or "we" with "Government" and you might see why I find this article disturbing (my emphasis).

D’Souza wants to learn how to better control complex networks. Connectivity is a double-edged sword, according to her. “For normal operating systems [like the Internet, airline networks or the stock exchange], we want them to be heavily connected,” she said. “But when we think about epidemics spreading, we want to curtail the extent of the connectivity.” Even when high connectivity is desirable, it can sometimes backfire, causing a potentially catastrophic collapse of the system. “We’d like to be able to intervene in the system easily to enhance or delay its connectivity,” depending on the situation, she said.

Explosive percolation is a first step in thinking about control, according to D’Souza, because it provides a means of manipulating the onset of long-range connectivity via small-scale interactions. A series of small-scale interventions can have dramatic consequences — for good or ill.

Public relations professionals often ask how D’Souza’s work might help their products go viral. She typically responds by pointing out that her models actually suppress viral behavior, at least in the short term. “Do you want to eke out all the gains as quickly as you can, or do you want to suppress [growth] so when it does happen, more people learn about it right away?” she said.

In other systems, such as financial markets or electrical power grids, when a collapse occurs, it is likely to be catastrophic, and this patchwork approach could be used to reverse the process, breaking up the ├╝ber-connected system into a collection of disjointed clusters, or “islands,” to avoid catastrophic cascading failures. Ideally, one would hope to find a “sweet spot” for the optimal level of intervention.

The next step is to identify signs that may indicate when a system is about to go critical. Researchers understand phase transitions like the ones that happen when water turns to ice, and can identify signs of an impending change. The same cannot be said for explosive percolation. “Once we have a better understanding, we’ll be able to see how our control interventions are impacting the system,” D’Souza said. “We will have this data we can analyze in real time to see if we are seeing the signature of the early warning signals from many different classes of transitions.”

Perth Mint sales surge on back of US Mint shortage

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

14 July 2015

China to control the gold price, but with physical or paper?

Pierre Lassonde may well be right when he said that “10 years down the road, the Shanghai Gold Exchange (SGE) is likely to determine the gold price, not the COMEX” but will it be a case of “Meet the new boss, Same as the old boss”? http://research.perthmint.com.au/2015/07/14/china-to-control-the-gold-price-but-with-physical-or-paper/

07 July 2015

21 May 2015

Indian gold monetisation scheme a temporary solution

I posted on this topic late last year, here is an update. My explanation this time around about lending to the jewellery industry is probably still too confusing, needs a powerpoint animation.

14 May 2015

Anonymity - shirking or safety

Have a post up on whether writing under a pseudonym shirking from taking responsibility for your work, or just a safety measure to protect yourself from nutters?

12 May 2015

11 May 2015

08 May 2015

If you don’t know who the sucker is at the London Auction, you’re the sucker

I revisit my post from last week on the new London Auction, this time having a deeper look into the funny "I don't care what price I get" sellers.

07 May 2015

Returns Matrix for USD & AUD and Gold & Silver

What the title says, new post here. Some additional charts following on from yesterday's post.

45 year Returns Matrix for Gold

A new post up late yesterday with a colourful returns matrix for gold, I think it looks pretty cool. Will probably do one for silver today.

05 May 2015

Outlook for gold: positive and negative factors

Have a post up on the outlook for precious metals, a something that has to be done for the annual budget write up. Includes a pretty picture of the factors for those who don't like too many words.

04 May 2015

Silver investors corner the market, not JP Morgan

Have a post up on GoldCore's Friday article asking whether JP Morgan was cornering the silver bullion market, noting their Comex warehouse stocks of 55 million ounces and claims by Ted Butler that they “may be holding as much as 350 million ounces of physical silver.” My short answer: I don’t think so. Investor interest in silver in the face of falling prices is a global phenomenon, not a JP Morgan one.

01 May 2015

10 year Price vs Sentiment Map for Gold

Earlier this year Societe Generale mapped asset classes in a matrix according to popularity and profitability over the past few years. It got me thinking about applying the same idea to gold to show how its sentiment had changed over the past 10 years, which I've done and posted up on the corporate blog http://research.perthmint.com.au/2015/05/01/10-year-price-vs-sentiment-map-for-gold/. Hopefully we can move from the "Sad" to "Happy" quadrant.

Who buys or sells (to China) matters

I have a post up about an article Steven Saville of The Speculative Investor wrote in January saying that “focusing on the changes in gold location is pointless if your goal is to find clues regarding gold’s prospects.” While I get what he was trying to debunk, I think he has thrown the baby out with the bathwater in doing so.

29 April 2015

The power of gold and rebalancing in a portfolio

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

28 April 2015

Moving to new corporate blog

I have been very busy over the past few months, a few projects coinciding, and also working to set up a blog for myself at the Perth Mint - research.perthmint.com.au hence the lack of posts. I've moved the content from the Research section of the Perth Mint to the blog to seed it but the first real post on the new London fix is now up.

I will be trying to maintain a daily schedule and part of that I will go back over this blog and revisit/rewrite some content that is evergreen in nature and worth bringing to new readers' attention, after around 7 years and 450 posts otherwise useful material can get lost. I also plan to redo my most popular post on gold confiscation, incorporating a lot of material gathered since I wrote it as well as comments from those I've discussed the issue. Putting together all of my fractional reserve bullion banking posts is also probably worthwhile, so much misinformation on that topic.

The new corporate blog will be where I will put most of my serious or sensible stuff, but this blog will remain for truly personal commentary on the PM markets that the Perth Mint just can't host. This blog has been an awkward blend of personal and work which necessarily restricted overly blunt and pure opinion content (yes I have been restrained), but I hope to make the distinction clearer so that this blog has the "space" where I can rant a bit more.

I'm not sure exactly how personal I can be, given the recent case of Scott McIntyre, who was sacked for comments "calling Australia’s involvement in the World Wars an 'imperialist invasion of a foreign nation'." The excuse given for the relevance of the sacking was "It’s not tenable to remain on air if your audience doesn't respect or trust you.” Is this justified only because he had a public role, would someone without any public facing role saying the same thing which it is then discovered who he/she works for be justification for sacking. Seems a restraint on free speech to me, no matter what he said. In such cases where is the line between personal and work life, effectively there is no work/personal split and work dominates your entire life. I suppose as I have a public profile and represent the Perth Mint, I operate under the same expectation. Might just need to have a detailed read of our social media policy.

Maybe just easier to start a new anonymous blog so I can rant away.

31 January 2015

Repatriation Update

Ronan tweets that FRBNY Dec withdrawals were only 10.31t. As we were expecting 42t, Victor suggests only three options:
  1. US gov't tells lies
  2. Bundesbank tells lies
  3. US gov't loco swapped part of their gold to London so the Bundesbank could get LGD
I think a swap is the most likely and as Ronan notes such loco swaps between central banks occur often. The question is whether it was the US or Germany or Netherlands that requested the swap and who else was on the other side of the swap - I'd agree Bank of England is best candidate.
A possible rework of the repatriation schedule from my last post is below.
Month Germany NetherlandsTotal
Feb 14 10.31 10.31
Mar 14 9.58 9.58
May 14 5.16  5.16
Jun 14 5.16  5.16
Jul 14 24.31  24.31
Aug 14 15.47 15.47
Sep 14  7.377.37
Oct 14  41.9941.99
Nov 14 5.1641.9947.15
Dec 14 10.31 10.31
Total FRBNY85.4691.35176.81
Swapped 31.6531.65
The numbers can work with Germany not doing a swap and it being the Netherlands that did the swap but you can mix up the numbers any way. Koos reported that the Netherlands started in October which if true means they must have swapped something as only 99.45t came out of FRBNY over the last quarter and even if you include the 7.37t as a late Sep shipment for Netherlands, which could be consistent with a general statement about an October start, they still had to swap circa 31.65t.

On the side of Germany having done a swap is their reporting of them utilising BIS' "expertise", as the BIS is involved in facilitating transactions in the gold market.
The 10.31t figure for Dec gives both Koos and Boehringer something to question the two governments about who swapped - either way Germany or Netherlands has not fully explained that they did not physically repatriate ALL of the gold from the US. Hopefully they can get to the bottom of who misrepresented by omission.

21 January 2015

German repatriation - trainspotters only

Quite busy at the moment with a few projects deadlining at the same time, hence the lack of posts. This is a quick post which is deliberately trainspotting detail so no critiques I'm ignoring the big issues. Koos notes that:
"January till November 2014 the FRBNY was drained for 166 tonnes, if we subtract 123 tonnes The Netherlands got out that leaves 43 tonnes for Germany. The fact Germany claims to have repatriated 85 tonnes from New York in 2014 means they must have pulled 42 tonnes from the Manhattan vaults in December. By the end of this month (January 2015) the FRBNY will release the foreign deposit data of December and we’ll see if the numbers match."
So given the data from FRBNY, how can we construct 123t and 43t (or 85t for the year). I found it interesting that in Koos table 5.16t is repeated three times, that the Feb 2014 10.31t is basically double 5.16t and that the Aug 2014 15.47 is basically 3 times 5.16t. So working from this I get the following breakdown of the FRBNY withdrawals.
I cannot find any other way to get 123t and 85t. I find it very interesting that Nov 2014's 47.15t less 5.16t exactly equals the Oct 2014 41.99t and the balancing shipment for Germany for Dec 2014 has to be 41.99t. This cannot be coincidental. Issues:
  • Is it possible given the somewhat random nature of 400oz bars (assuming that is what Germany and Netherlands are getting) that every shipment exactly equals 5.16t or multiples thereof? (I note that the figures are rounded to 2 decimals, so there could be some small variance if it was shown to 3 decimals).
  • 5.16t means over 400 bars that every bar is overweight. I haven't had time to check the US Mint bar list (see here and here) to see whether their distributions shows this tendency to overweight.
  • Maybe the coin melt or whatever non standard bars Germany and Netherlands are getting are exact weight bars, hence the identical shipment weights?
  • If Germany has been doing 5t every month or so, why the rush to do 42t in December? Would it have not been easier to just do a few 10t months and spread the work out.
  • Note that in the Bundesbank release they say that "As soon as the gold was removed from the warehouse locations abroad, Bundesbank employees cross-checked the lists of bars belonging to the Bundesbank against the information on the bars removed" so that is a lot of work for December - 3360 bars to check - rather than just 400 or 800 bars per month.
  • Why would the need the expertise of the BIS?
  • Why do you need to do a "spot check" if Bundesbank employees are cross-checking every bar anyway.
  • What was the "spot check" - given point above it isn't a check of the weight and bar number on the bars to the bar list as that is already being done.
  • It can't be an assay check as they would have said that explicitly and in any case if anyone should help with that it should be someone from the refinery doing the reprocessing, not the BIS.
  • All I can think is it was weighing the bars (that weren't being reprocessed) on a scale to check the weight was correct to the bar or bar list. Do you really need the BIS to help with that?
I'll just reiterate what I said on 20 January 2014 and 21 January 2014, it is all one big central banking club and as Jim Rickards said, it is all just a "political sop to agitation in Germany's parliament" and there isn't any concern on Germany's part as to whether the US has their gold, and if there is, they can't be seen to be concerned, lest the Narrative of Central Bank Omnipotence be questioned (even more so after SNB dropped its peg).

15 January 2015

Straining at gold gnats while swallowing central bank camels

Chris Powell characterised my post on marginal miners as "straining at gnats while swallowing camels". It is an accusation of hypocrisy, that I'm being "very strict and precise in smaller matters of the law, but careless and loose in weightier matters" (see here for an explanation of Chris' use of Matthew 23:24). I'm entitled to a defend myself I guess.
Firstly, Chris said my post "argues today that gold's price is being kept down in large part". In large part? The very title of my post said "Gold price may be affected" and I said "this may crimp increases in the gold price" I think that is enough "may"s to qualify my statement and make "large part" an unfair representation of my post.
Chris goes on to say that I "overlooking central bank 'production'" and that it is "exceedingly hard to get respectable people to discuss that part of the market". In other words, that I focus on smaller matters while ignoring weightier matters. I assume that Chris is not arguing that gold commentators are only allowed to post on central bank camels and cannot post on smaller gold gnat issues. Therefore I guess he is commenting on my overall 6 plus years of commentary on this blog.
Certainly I do focus on detailed technical issues - that is where my expertise lies. It is also partly because that is an area few cover, while almost all other blogs cover GATA's central bank camels extensively enough, so I look to offer something different to those who are looking for a gnat level understanding of the gold market. But Chris' point is that "respectable people" aren't discussing it. Now I don't take it he means the majority of gold commentators are not respectable, but that the mainstream doesn't consider them respectable and will only listen to those it considers respectable.
I'm guessing that Chris' comment is that given I work for the Perth Mint that makes me respectable in the eyes of the mainstream. Unfortunately I don't think the mainstream would consider what I say on gold to be respectable and would consider me hopelessly conflicted as my employer makes money from selling gold and thus from a higher gold price.
In any case, when it comes to central bank camels I think I have looked at these weightier matters, and in a far more considered manner than many. For one, I did a 10 part series on fractional reserve banking (starting here) with this one specifically on the role of central banks and how "central bank lending of gold allows the bullion banking system to expand gold credit and this extra supply suppresses the price". I doubt that can be considered shirking from the matter. Consider also these selections from my blogging history (with select quotes):
  • Central Bank gold reserves transparency: So if it is good enough for the Reserve Bank of Australia to report this level of detail with respect of its gold reserves, I think it is fair to say it should be good enough for other central banks
  • The Bundesbank & the Narrative of Central Bank Omnipotence: central bankers use ... use public statements to play the Common Knowledge Game and drive market outcomes by proxy."
  • Central banker pop quiz on gold: that was just to scare people off investing in gold, because do you really think we don't understand gold when we employ over 300 Ph.D. economists and have written hundreds of papers on gold
  • Why gold's contango suggests central bank interference: the fact that gold has been in contango for "essentially all of the last 25 years strongly suggests central bank interference with the gold market
  • Reserve Bank of Australia Gold Sale: governments will want to be re-elected. Rather than take the tough decisions, they will turn the inflationary tap back on. For that reason, I believe that gold will again have its day.
  • Counter to Ben Bernanke's The World on a Cross of Gold: Bernanke’s words, much like Temin’s and Eichengreen’s, contradict his argument. If central banks could absorb and sterilize gold, “reflecting conscious Federal Reserve policy,” the central bank, not the gold standard, was running the show
  • To roll or not to roll, that is the central bank's question: Moves to return gold are eminently sensible, of course: what is the point of a country having its gold out of its immediate physical control if everything goes to hell. That is really the whole point of having gold reserves.
  • The death of gold: the theory of suppression of the gold price misses the point. To kill gold you don't manipulate its price, you manipulate its volatility
  • Central Bank Selling: The end result will be gold in the hands of individuals and what I call “the decades long privatisation of gold” will be complete. As per Professor Fekete, the power over the money “supply” will then be in the hands of the average person, where it should be
And finally, Australian Gold Confiscation, where I drew attention to a previously ignored mechanism by which the Reserve Bank of Australia could enact confiscation in Australia. I would argue the above is plenty of drawing attention to camels, particularly for someone who whilst speaking on this blog personally, still works for a government where politically neutrality on policy matters is expected.
Tone is very hard to get in the written word, so let me say I'm not at all fussed by Chris' comments - I can take as good as I can give - and I don't expect Chris to have read all of my 450 blog posts and understand where I'm coming from. Hopefully, Chris, you'll reconsider your J'accuse?

13 January 2015

Gold price may be affected by marginal miners not going to company heaven

Izabella has a post on FT Alphaville on the changing structure of the oil market. The point of interest for me is that the speed with which shale oil can be developed, as well as shut down and restated, means that "the clearing price of oil in a shale world needs to be much, much lower to dissuade unnecessary investment, and also needs to rise much less significantly to encourage it when it is necessary".
The take away for the gold market is that the run up to $1900 no doubt resulted in a lot of marginal gold mines being developed that probably shouldn't have been. At current prices these are not profitable on an all in basis but they are holding on as prices do cover marginal cash costs. We need a much, much lower price to really kill this potential supply but this hasn't happened - we haven't seen large numbers of bankruptcies or care & maintenance mothballing occurring. The fall in the oil price will probably give these mines some breathing space.
As the money spent on developing these mines is a sunk cost, the problem is that they will stay around and we only need the price "to rise much less significantly to encourage" them to continue producing gold on a cash costs basis. The result is that this may crimp increases in the gold price compared to the situation where a lot of the sub-standard projects would have been cleaned out and the potential for increased supply on any price increased would have been muted.
Rick Rule has been talking about how few listed junior miners are worth investing in. Unfortunately the oil price drop may mean that the others don't "go to company heaven" resulting in a sideways gold price as they keep on producing any time the price shows strength and affecting the marginal supply/demand balance.