Podcast

Harvey Organ: Get Physical Gold & Silver!

Gold & silver prices suppressed with prejudice
Friday, April 20, 2012, 6:10 PM
,

Harvey Organ has been analyzing the bullion markets closely for decades. The quality and accuracy of his work is respected enough to have earned him an invitation to testify before the CFTC on position limits for precious metals back in 2010.

And he minces no words: Gold and silver prices are suppressed. With extreme prejudice.

In this detailed interview, Harvey explains to Chris the mechanics of how he sees this manipulation occurring, why he predicts this fraudulent pricing scheme will collapse soon, and why it's critical to be holding physical (vs. paper) bullion when it does.

The real suppression of the metals started in 1988. That’s when the leasing game started and was invented by J.P. Morgan.

These guys would go around to the mining companies and say, Listen, I’m going to pay you for your gold in the ground and I will sell it. You just pay me as you bring it out. So that was cheap financing to the miners. Barrick, the biggest mining company of them all, went in on this and it financed a lot of Nevada projects.

Once the leasing game came, the actual selling, the extra selling, suppressed the price. In the first five years, it started at maybe three hundred to four hundred tons. It didn’t start to get really bad until probably ’97-’98 with the Long Term Capital affair. And that’s when the leasing started to become around maybe 1,000 tons of gold. And it hasn’t stopped.

And silver is the same.

And that’s why you've had a long-term, 20 years of suppression of the metals. The problem now is that the physical is now gone. Where is going? It’s gone from West to East. 

A lot of people don’t know that China used to refine close to 80% of the world’s supplies of silver, because it’s very toxic. Up until probably 1985, the Chinese handled 80% of the world’s refining of silver. Now they're down to 40%, but that’s still a major part of China’s industry. They are keeping every single silver ounce they refine, and gold. They are keeping it for themselves; their reserves are rising (though they don’t tell exactly). Two years ago they went up to 1,054 tons and I can assure you it’s probably triple that now. These guys are not stopping. Just like they are not stopping in oil. They know what the game is, and they are slowly taking all their U.S. dollars that are on their shelf and converting them to gold, oil, copper – anything that’s real.

And the game ends when the last ounce of gold has left London – not COMEX, because in a nanosecond it will come back to here. 

The big problem in London is that their derivatives on gold are about 50 to 100-to-1. That’s the amount of derivatives. So if I take out that 1 ounce, the balloon around it – the derivative – is getting bigger and bigger and bigger until it’s ready to totally implode.

And that’s what you are seeing now. So right now, people are going to say: How high can it go? And I’m going to tell you: You are going to go to sleep on Thursday night and gold may be $1,670. And then you wake up the next day and it’s going to be a banking holiday. And gold will be $3,000 bid, no offer. No offer – and it will be a banking holiday. Because there will be a failure to deliver.

You’ve got to have physical coins or bars. If all you have is a piece of paper – that’s all it is!  It will just blow up in smoke.

So just go buy your physical and be thankful that you are getting it at a cheaper price today.     

Click the play button below to listen to Part I of Chris' interview with Harvey Organ (runtime 32m:36s). 

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To listen to Part 2 - Click Here.


Harvey received his Bachelor of Science degree in 1970 and an MBA in 1972 at McMaster University, majoring in finance. It was during this time period where Harvey got exposed to the derivative market that was just starting on Wall Street.  Harvey has been trying to expose the fraudulent manipulation of the gold market ever since  the "Long Term Capital" downfall in 1998.  It has been Harvey's duty to share what he knows and expose the fraud and educate the intricacies of of the gold and silver paper and physical markets, which he does through his website Harvey Organ's Daily Gold and Silver Report.


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372 Comments

Erik T.'s picture
Erik T.
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Posts: 1232
What a contrast!

My hat is off to Adam and Chris for bringing us such an outstanding contrast of guests. The most important skill for investors to develop is their ability to both listen with an open mind, while at the same time being skeptical and critical. Learning to differentiate between concrete, logical, fact-based arguments and emotionally charged bullsh*t - and correctly identifying each - is a learned skill, and it takes a lot of work to perfect.

Regulars on this site have, in just 7 short days, been treated to both the well-reasoned arguments of a truly accomplished and well-spoken precious metals expert with well researched views supported by facts and evidence (Paul Tustain, featured last week), and have now also been exposed to a completely transparent charlatan, who asserts emotionally charged but factually hollow arguments that categorically lack credibility (Harvey Organ, in this interview).

I suggest readers listen to both podcasts again before reading further. The expose that follows debunking Mr. Organ for the charlatan he truly is will have less value if you just read it. You'll learn a lot more by first listening to both podcasts and keeping score yourself. Listen for assertions of apparent fact, and see which of the claimed "experts" supports his arguments with logic and reason, versus nonsense and emotional innuendo. Develop your own skill at differentiating well reasoned analysis from utter nonsense, then compare your own notes to mine to see whether you picked up on the same things I did.

This interview was particularly compelling because Mr. Organ never once - so far as I was able to tell - ever supported a single thing he said with shred of evidence or objective data. His arguments were persuasive to be sure, but they were emotional statements that lacked the support of evidence. For those who have studied precious metals markets, they were also just plain inaccurate in many cases. I was only willing to listen once, and thought I would note any factual inaccuracies to myself on a Post-It sticky note. By the end of the first half of the interview, I had no less than 7 sticky notes full of notes on the most absurd things Mr. Organ said. I couldn't keep up with all the BS because it was coming faster than I could write, but I'll outline just a few highlights below.

Please forgive the fact that the quote mechanism inserts the word "wrote" after the attributed author. Where you see "Harvey wrote:" below, please read it as "Harvey said:". Please also excuse the fact that I was scribbling notes as fast as I could, and cannot reproduce exact word-for-word quotations. But you'll get the gist of it.

Harvey wrote:
The Banking Cartel raids [the precious metals markets] to contain the price

...

They Raid and Fleece the longs out of the COMEX

Ok, those are some pretty strong allegations, and they certainly ignite the imagination of anyone whose general disposition is to distrust government. But where's the supporting arguments? Why would the banking cartel want to suppress the price, and how do they achieve that? Contrast to Paul Tustain, who made very clear statements about how the AM/PM London fixes can be and are manipulated by bankers who seek to profit from the general trend of metals movement from west to east.

I think the key here is to understand that charlatans like Mr. Organ and GATA strive to appeal to investors' emotions, rather than positing logical arguments and/or citing verifiable facts. But why do they do this? What comes to my mind is a very impressive and pertinent book, The True Believer, written in 1951 by Eric Hoffer. I cannot recommend this book strongly enough to investors who wish to hone their ability to separate cogent logical argument from irrational appeals to our emotions, which is what people like GATA and Mr. Organ are all about. Here's a summary of Hoffer's perspective from Wikipedia:

Wikipedia wrote:

Hoffer believed that self-esteem was of central importance to psychological well-being. He focused on what he viewed as the consequences of a lack of self-esteem. Concerned about the rise of totalitarian governments, especially those of Adolf Hitler and Joseph Stalin, he tried to find the roots of these "madhouses" in human psychology. He postulated that fanaticism and self-righteousness are rooted in self-hatred, self-doubt, and insecurity. In The True Believer he claimed that a passionate obsession with the outside world or the private lives of others was an attempt to compensate for a lack of meaning in one's own life. The book discusses religious and political mass movements, and extensive discussions of Islam and Christianity. A core principle in the book is Hoffer's assertion that mass movements are interchangeable: fanatical Nazis became fanatical Communists, fanatical Communists became fanatical anti-Communists, and Saul, persecutor of Christians, became Paul, a fanatical Christian. For the "true believer", substance is less important than being part of a movement.

My contention is that Hoffer's thesis is exactly what this is all about. GATA, Harvey Organ, Ted Butler, and other charlatans appeal to what Hoffer described as the True Believer. People who are dismayed by the world around them, and who correctly perceive great injustice to exist around them. Their frustration with that bona-fide injustice generates an emotional need for something to believe in - to feel they are part of the in-the-know crowd who is up on the scam, whether it exists or not. Organizations like GATA provide service that emotional need, with a complete and total lack of logical or factual support.

But enough on Hoffer. Let's get back to Mr. Organ's fantasies.

Harvey wrote:

Open Interest is basically defined as longs who are standing for delivery.

Umm, hello? Open interest refers to the number of outstanding contracts - for each open contract there is exactly one long and one short (it takes two to tango), and by definition, there are always an equal number of longs and shorts. The number of longs standing for delivery is determined only after the contract's deadline for cash settlement. Mr. Organ's statment is so completely far out of touch with reality that one must question what motivated it. Talking about longs standing for delivery triggers unconscious beliefs and fears about whether the system can deliver against those who stand for delivery. And that plays perfectly into Hoffer's theory that this is all about playing to the self-esteem and insecurities of the audience. It has nothing to do with the reality of how precious metals markets function! The definition of "Open Interest" is well known, Commodities 101 level stuff. This kind of statement reveals an agenda to mislead the listener into emotional territory.

Harvey wrote:
The [bullion banks] manipulate and actually influence the price collusively!

...

And it kinda hurts guys.... And you can't beat these guys...

Ok, so we have an allegation that bullion banks manipulate the price of the metals. We further have an emphatic allegation that this manipulation is collusive. Is there a single shred of evidence to support these allegations? No. Is there any discussion of the mechanism or technique of manipulation? No. Is there any logical argument whatsoever even explaining what their motive might be? No. But we can't leave it there. We have to add "You can't beat these guys", which appeals to the emotional need of Hoffer's True Believer to feel in-the-know about what the evil banking cartel is up to. Sans evidence or even logical explanation.

Harvey wrote:
[referring to the Feb 29 selloff] These are sellers who have absolutely no interest in profit!

... then just a few minutes later...

These guys make a lot of money!

Ok, which is it? Are they truly sellers who have no interest in profit, and if so, why is that? And if that is the case, why are they making so much money on these non-profit-motivated trades? Again, we have commentary that is categorically lacking in logic, reason, and common sense. But boy does it feel good to the True Believer to feel they have the inside scoop on the evil cartel's operations!

Harvey wrote:
Then they just let the HFTs take [the market] down!"

Wait a minute here. HFTs mostly exploit liquidity inefficiencies, and profit from scalping bid-ask spreads. So how does an HFT algo "take down" a market to do the bidding of an evil bullion bank? If there is a rationale for how this would actually work, why didn't Mr. Organ state that rationale in the interview? Or could it be that this is really about the fact that HFTs have been widely publicized as a major mechanism by which Wall Street rips off retail investors (that part is true by the way), and that appeals to the emotional needs of the True Believer? 

Harvey wrote:
[Paraphrased - I couldn't write fast enough] Feb. 29 was a raid. I knew it when I saw it because of the price action

Harvey, ever heard of fundamentals? The whole reason Gold has performed so well over the last few years is central bank money printing. Feb. 29th was a day when FOMC minutes were released revealing that much-anticipated QE3 wasn't going to happen when everyone thought. The big sell-off makes perfect sense, and is supported by fundamentals. But a logical, rational, and coherent explanation based on reality doesn't appeal to the emotional needs of Hoffer's True Believer. Harvey's comments do.

Harvey wrote:
The COMEX is supposed to be about price discovery, not the price!"

This is a long-standing Ted Butler argument, and so far as I can tell, it derives from a basic lack of understanding of economic terminology. I believe what Mr. Organ means here is that he believes (as does Mr. Butler) that the futures market is not supposed to set the price of precious metals, and that by law it is prohibited from doing so. Rather (according to Butler), the futures market is only supposed to discover the price. This sounds good to a person who is unfamilliar with the phrase price discovery, and it definitely appeals to Hoffer's True Believer, who wants to feel he knows the inside scoop on some sort of dastardly injustice.

But returning to reality, the price of gold and silver is in fact set by trading in the futures market. The way the price is determined is through a free-market bid and ask system, where a stack of bids are matched by computers against a stack of offers, and trades clear immediately when buyers and sellers have compatible prices. The market "clears" when the outstanding bids are all lower than the outstanding offers. The result is that a price is determined - the bid is the price a seller can get immediately, and the ask is the price a buyer can get immediately. In Economics, this function of setting the price by clearing bids and offers is known as price discovery. Here's the Wikipedia entry:

Wikipedia wrote:

The price discovery process (also called price discovery mechanism) is the process of determining the price of an asset in the marketplace through the interactions of buyers and sellers [1].

Price discovery is different from valuation. Price discovery process involves buyers and sellers arriving at a transaction price for a specific item at a given time. It involves the following: [2]

  • Buyers and seller (number, size, location, and valuation perceptions)
  • Market mechanism (bidding and settlement process, liquidity)
  • Available information (amount, timeliness, significance and reliability) including
    • futures and other related markets
  • Risk management choices.

In a dynamic market, the price discovery takes place continuously. The price will sometimes fall below the duration average and sometimes exceed the average as a result of the noise due to uncertainties.

Usually, price discovery helps find the exact price for a commodity or a share of a company. The price discovery is used in speculative markets which affects traders, manufacturers, exporters, farmers, oil well owners, refineries, governments, consumers, and speculators.

So what's going on here? Both Butler and Organ are going way out of their way to make a big deal about the travesty of justice (in their eyes) that the futures market is never (according to them) supposed to set the price - it's only supposed to discover the price. Butler went so far as to claim in a CM.com podcast that this was "illegal, according to commodity law". Of course he didn't cite a reference to the law he was referring to. Yet the definition of "price discovery" that is well known and accepted in economics is that price discovery is the process by which a price is set!

Are Butler and Organ intentionally and maliciously trying to appeal to the True Believer by trying to make a distinction that makes absolutely no sense? I suppose that's possible, but I don't think so. My guess is that these two men are just so profoundly ignorant as not to comprehend the meaning of the terminology they use so frequently and so authoritatively. But that's only a guess. In any case, the argument is specious and without merit.

Harvey wrote:
Trust me when I tell you... Gold and SIlver are manipulated 100% of the time!"

This says a lot to me. At this point we're well in to the interview, and Mr. Organ has yet to back a single argument with a single fact or logical or ratioal argument. Now he wants us to trust him. Why would we trust him? Answer: Because he's a master when it comes to appealing to the emotional needs of theTrue Believer. Should we trust him? Of course not - he's a complete charlatan.

Harvery wrote:
All the gold in Ft. Knox is gone!"

Now that's a hell of an allegation! You'd think someone making it would at least have a rationale to assert - even if a bogus one. But no, there was no discussion of reason, cause, or evidence. Just a statement that implied that the government is evil and up to no good. Calling all True Believers...

Harvey wrote:
The big problem in London, as per Jeff Christian, is that there is 50 or 100 to one, and if I take just 1 oz out of London, the bubble around the derivatives grows

I probably got the exact wording wrong - I had literally run out of Post-it notes! But this is a recycled argument that was originally put forth by Andrew Maguire, another precious metals charlatan. They are trying to imply (or say directly in Maguire's case) that the physical metal in London is somehow serving as collateral to back the cash-settled forwards market, which is pure and unadulterated nonsense. When an ounce of gold leaves London for the East, there are good reasons to be concerned - the East is getting all the real wealth! But the business about this de-collateralizing cash-settled forwards markets is plain nonsense, and everyone who understands how these markets function (that rules out GATA and Butler immediately) knows that.

Summary:

Ok, that's as far as I got before exhausting my Post-It pad. The bottom line here is that there was not one shred of credible, knowledgable commentary on precious metals in this interview. Not one bit. This was nothing more than yet another charlatan appealing to the emotional sensitivities of Hoffer's True Believer.

I'm certain I'll be flamed relentlessly for this post by the many true believers on this site. That's ok. I hope to offer those few who are here to actually learn about how markets truly function some insight, and I hope this post has helped at least a few people differentiate between the cogent and well-reasoned arguments of Mr. Tustain and the nonsensical ramblings of Mr. Organ. That's what investing is all about - learning that both the real players and the charlatans can talk a good story, and learning to tell the difference.

All the best,

Erik

p.s. To Adam and Chris, I openly challenge Mr. Organ, Mr. Butler, or both to a debate on these topics in a future podcast on this site.

[Moderator's note: All readers please be sure to read Erik's post here, clarifying his use of the word "charlatan."  Left by itself, that word implies intentional deception for personal profit, and we have no reason to think that Mr. Organ is anything but honest in his intentions.]

GregGGH's picture
GregGGH
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 Erik What a LONG reply ...

Erik

What a LONG reply ... you put a lot  of effort into this  ... just to be noticed ... BTW -- do you offer a daily blog like Harvey where you have to get the page out for the eager readers ....every day ?  And is your blog free?

Perhaps before you can openly challenge and get the media attention for that '5 minutes' you need to show us your stuff ...  I for one cut Harvey more slack as someone who is passionate onthe subject like Harvey will slip up on a phrase here and there - it is the overal intent that counts for me.   The effort that Harvey & Ed Steers ( another free blog posted daily ) put into this effort is amazing, IMHO

Greg

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Arthur Robey
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Fatal Models.

Whooee! Them thars fighting words, Partner.

I think that your Believers book would be a precurser to Iain McGilchrist's "The Master and his Emmisary." It is a Left brain Thing. The silly thing makes up a model of how the world works and then holds onto it as though it's existance depends on the model being true. With fatal results in Hitler's case.

I am going to take a chance on Brillouin Energy. I shall convert my silver into shares. Huge Risk, Huge reward.

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 One more point, if I may

One more point, if I may .... when someone is so eagar to 'debate' ....

http://www.youtube.com/watch?feature=player_embedded&v=7hnIqE1_ZGU

the above link is Jeffery Christian ( no side ) to Bill Murphy of GATA ( yes side ) to the 'debate' ...  I would like to pick my team --- say John Embrey or Rick Rule ( both from Sprott ) ... bring on the sleeze balls for the NO side  ... you can tell Bill is so passionate that it gets in the way for a 'debate' ... 

History will not be kind to Blythe and the trolls

Greg

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Denny Johnson
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Jim Rickards

I haven't listened yet, but always find Jim Rickards worth the time:

http://jessescrossroadscafe.blogspot.com/2012/04/jim-rickards-is-intervi...

Part 1 is focused on Gold manipulation and why gold plays such an important role in the world, even if conventional wisdom doesn't believe so, gold is not only being watched by central bankers, as Mr. Rickards put, "the gold price is being managed."

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Denny Johnson
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GregGGH wrote

GregGGH wrote:

What a LONG reply ... you put a lot  of effort into this  ... just to be noticed ... BTW -- do you offer a daily blog like Harvey where you have to get the page out for the eager readers ....every day ?  And is your blog free?

Perhaps before you can openly challenge and get the media attention for that '5 minutes' you need to show us your stuff ...  I for one cut Harvey more slack as someone who is passionate onthe subject like Harvey will slip up on a phrase here and there - it is the overal intent that counts for me.   The effort that Harvey & Ed Steers ( another free blog posted daily ) put into this effort is amazing, IMHO

Greg

I don't have a dog in this fight and am happy to not feel a need to have an opinion on manipulation...........but for the sake of objectivity..............having a free blog, passion, and putting a lot of effort into something have little to do with seeing things clearly. There are many deluded free blogs, many deluded passions, and much deluded effort in this world.

I doubt you know any of these folks well enuf to know what their intentions are.

bring on the sleeze balls for the NO side

Emotionally charged words like this don't do much for your argument either.

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JAG
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More Gold Manipulation?

Another podcast/post about gold manipulation, and to think that gold is just in consolidation period. I can't imagine the whining and rationalizations when there is a significant decline in gold.

Am I the only one who recognizes the hypocrisy in all this? A person buys physical gold to get out of the manipulated markets, but then they spend all their energy complaining about gold being manipulated. 

This psychological pattern is guaranteed to end with empty pockets....

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Erik T.
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GregGGH wrote: the above

GregGGH wrote:

the above link is Jeffery Christian ( no side ) to Bill Murphy of GATA ( yes side ) to the 'debate' ...  I would like to pick my team --- say John Embrey or Rick Rule ( both from Sprott ) ... bring on the sleeze balls for the NO side  ... you can tell Bill is so passionate that it gets in the way for a 'debate' ... 

The one part of this I agree with is that Chris M. should interview Jeff Christian in a future podcast. He would do a better job than I can of debunking all this nonsense, and that would be of great value to the minority here who are interested in reality.

As for all the "passion" stuff, we all have our own passions. The Organs, GATA, and Ted Butler's passion is to fill retail investors heads full of lies and propaganda. My passionate hobby is debunking this BS. Diff'rent strokes...

Best,

Erik

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Currency Wars

Erik,

   Tell me, have you read Jim Rickards' book,  "Currency Wars"? If so, what are your thoughts about what he says? If not, you might want to consider it.

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Erik T.
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shudock wrote: Erik,    

shudock wrote:

Erik,

   Tell me, have you read Jim Rickards' book,  "Currency Wars"? If so, what are your thoughts about what he says? If not, you might want to consider it.

Hi shudock,

I haven't read it, but expect it's quite good. I've heard Rickards interviewed several times about it, and it sounds like he's basically making an argument I very much agree with, but am already well versed in. He's a smart guy and I'm sure I'd learn something, but I'm also sure most of it would be old news, so I haven't made time to read it. Not saying I won't - just haven't yet.

Best,

Erik

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Critical thinking

Erik,

  I have amended my point of view on the topic you wrote about many, many  times over the years, as more pieces of the puzzle come my way. I am still amending it, almost every day. Certitude makes for a compelling argument in a debate, and will win many uncritical people over while barely trying, but I prefer being open to new possibilities, even when I think I've got the picture already, and even when it appears to others that I don't have any answers. I prefer a bit more agnosticism demonstrated in folks who are trying to persuade me of something. (Incidentally, my book recommendation was not made as an illustration of "what I believe" - simply another perspective on the topic. )

  To me, if a person wants to go about "debunking" concepts and philosophies on the Internet, and also cares whether people take their arguments seriously, it might be better to for them to check their approach to doing so, to truly investigate all corners, even if they think they already know what will be said. I am neither agreeing nor disagreeing with your arguments right now, because I can easily decide for myself what I think about those. Nor am I trying to convince you of anyone's particular stance on the topic. But your easy dismissal of something that you haven't read is telling. It makes me think that you have simply arrived at a point where you think you have it "all" figured out, stopped there, and dug in. What troubles me, and casts a shadow over your words for me, is your attitude toward others out there who are seeing the situation differently than you. While you may "know" that you are right, a loud, accusing condemnation of people who are clearly on the same path of discovery that you are on, makes it difficult for an observer to hear your argument. Half of your argument appears to be: "these people are crazy/greedy/nefarious and just want to fool you guys out there." But attacking messengers won't help the fact that some people will think critically, and others will not, no matter who is speaking.

  Peace, and thanks.

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Gold Manipulation ?

Erik,

Thanks for you detailed and thoughtful reply. I would certainly enjoy listening to you debate. There are far too many people who do not realize just how close to impossible it is to pull off a manipulation of the futures market for any extended length of time. I certainly am a gold investor and I am still adding to my physical inventory. However I also believe CEF, SGOL, and GTU actually have the physical metal to back their claims and I have seen no credible evidence to the contrary.  Gold is not the only physical asset that will soar if and or when the paper money systems crack. Perversely the current market rally may be discounting that situation right now and quality stocks with pricing power may be the biggest winners.

Erik T.'s picture
Erik T.
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shudock wrote:But your easy

shudock wrote:
But your easy dismissal of something that you haven't read is telling.

Wow. I just can't seem to win today.

So let me see if I got this straight... You asked me what I thought of Rickards' book, and I took the time to reply telling you that I hadn't found time to read it yet because many of the arguments he makes in interviews are familliar territory, but that expected it would be a good read because I think Rickards is a smart guy.

Based on that, you perceive me as "dismissing" Rickards work? Maybe this Organ guy is contagious or something!

I wish you all the best, Sir.

Erik

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Erik, thanks for your comments.

Erik, I certainly appreciate that you have taken the time to share your knowledge.

Frankly, I am a bit confused about where I stand.

While even I could see that open interest statement you quoted is patently false even to someone with as little knowledge as me, and I don't agree with all of the arguments of GATA and others, I have to say that there are certain arguments that I am at least sympathetic to, or certain fishy events that make me suspicious that there might be "massaging" of the gold price.

For example, I read about the plunge in the gold price moments before the Swiss announced they were going to devalue their currency and not let it cross a certain line in relation to the Euro. The reports of gold in great tonnage being sold in very short time frames, rather than looking for best price over several trades, also makes me suspicous.

And I don't want you to roll your eyes, but assuming JP Morgan is simply acting on behalf of clients in the silver market, and everything is hedged by forward contracts in the OTC market, why the need for such massive turnover of contracts on the COMEX? I'm not being sarcastic by any stretch, this is genuine question I have and I haven't had a satisfactory explanation to it...

I do think there is a valid argument that the futures market is not acting well in its function as a price discovery mechanism when the "market value" of a commodity can drop by 15%, or whatever it was, in a matter of minutes on a Sunday evening, when most of the "market" is not even present.

Having said that, these anecdotal events and evidences don't convince me by any means that price is "manipulated 100% of the time" as you quote some of these guys allege. I think that's absurd. These events just seem fishy to me, but I am confused and frustrated because I feel like we don't have enough information to answer all the questions that need answering...

PS Erik, I am trying to understand better how where the LBMA stands in all this in contrast to the COMEX. I have read about how the fix is generated on the LBMA and how deals occur privately on the LBMA directly between two participants. How then does price discovery take place on the LBMA? I am fully satisfied that price discovery can occur on a futures exchange but the LBMA is not really an exchange, and certain people emphasize that the COMEX is just a kiddies playground compared to the LBMA because so much physical precious metal is traded on the LBMA compared to COMEX. If you could perhaps kindly give me a quick run down about the LBMA influences COMEX and vice versa and the significance of the LBMA versus COMEX when it comes to price determination and which one matters more for pricing I'd really appreciate it very much. I have tried reading around the LBMA website and elsewhere and I don't understand how a market which acts as a trade association, apparently, and doesn't have a real-time auction process (deals are done privately between participants) can set price. I am quite confused about it and about how it interacts with the futures market.

PS I enjoyed your peak oil videos, I hope you produce more some time and release video notes of all the countries you are visiting.

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Erik T.
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@CPTWaffle

CPTWaffle,

I'll try to address your most salient points. I'll summarize much of what you said as "But hey, isn't there still good reason to be concerned about monkey business in markets, even if some of what Harvey said is BS?" The answer is a resounding yes. But unfortunately, the people who have self-appointed themselves "expert pundits" on these markets like Harvey, Ted, GATA, etc. haven't the foggiest clue what they are talking about. That doesn't mean there isn't any market manipulation. It just means the amateurs "reporting" on it don't know what they are talking about.

On LBMA vs. COMEX, I will take a stab at your question, but frankly the best possible way to address it would be if Chris were inspired to interview someone like Jeff Christian. As much as he's been vilified by the PM conspiracy crowd, he's actually one of the smartest guys I know, and his knowledge of the metals market is remarkable.

LBMA is for the big boys. It's where the physical metal gets traded (worldwide center for that), and also where the biggest forwards market exists. I am pretty sure LBMA forwards are much larger on an annual clearing basis than COMEX, but I could be wrong - I don't deal directly with the big players who operate in LBMA, so I have no first-hand knowledge. Only research I've done for articles debunking the GATA types. Again, Jeff would know the exact numbers off the top of his head.

Briefly, LBMA is about moving the metal. Technically, these are OTC contracts which means any two parties could set any terms and conditions they want. But most contracts are boilerplate, and roughly approximate the terms of a COMEX futures contract - the contract can be cash-settled up until a specified date, and if not closed by then the parties must deliver (or accept) physical. Even that is not always true - a "delivery fail" is - from what I understand - not really treated like a contract breach where people sue each other. Rather, the contract specifies delivery fail penalties, which are steep. I have the impression that traders view the option to fail and pay the price as a routine matter of business, but it's a big enough penalty that the incentive to avoid it is very strong.

My understanding is that there is no particular price discovery mechanism on LBMA. The price is determined by the almost-24 hr worldwide futures market - COMEX, GLOBEX, etc. Then there is the London AM/PM fix which Paul Tustain discussed. My understanding is the parties can agree to any price they want, but that the AM or PM fix on a specified date is most often chosen. Again, I am on the edge of my knowledge here, and could be wrong.

The point of LBMA is that the whole "good delivery" system, bonded warehouse network, etc. is behind it. LBMA is not about setting or negotiating the price so much as it's about making the deal to deliver once the price is agreed. Once two parties have agreed on a price, time of delivery, etc, LBMA provides the whole infrastructure to deliver the metal from one bonded warehouse to the next, etc.

My image of how this works is that trader A calls trader B on the phone, and says "Ok, Gold is at 1652 on the front month contract. Let's do a deal for XXX ounces at $YYYY, you game?" The other guy agrees, and they ink an OTC contract that gets settled through the LBMA infrastructure.

I'm not comfortable saying any more because frankly the details of physical transactions on the London market are beyond my knowledge and experience. I'm going to reach out to Jeff Christian and see if he's willing to comment in this thread. I doubt he will - he's a busy guy and gets fed up with conspiracy theory nonsense easily. But I'll give it a shot. He could tell you in excruciating detail how it all works.

All the best,

Erik

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CPTWaffle
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Thanks Eric

I listened to Jeff Christian's talk on Financial Sense recently and I wish he would do more interviews.

If you could get him to comment that would be great.

If Chris could get him to participate in a podcast interview that would be fantastic!

Thank you for your response, it does actually help my understanding a bit. I think I suspected much of what you say (price is discovered in the futures market but big deliveries are made OTC) but I have been reading some people, and some of them make themselves sound very sophisticated and knowledgeable, who maintain that the LBMA has more price discovery influence than the futures market. So thank you for clearing that up for me; I appreciate taking the time to respond.

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Erik T.
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@CPTWaffle

I've exchanged e-mails with Jeff. He said he'd try to find time to reply here, but could make no promises. He's a very busy guy, so we'll see.

A little background - Jeff is actually one of the most generous people I've ever met in terms of being willing to give his time to help educate anyone who is interested in learning about PM markets. But he's also been vilified by the GATA crowd so badly that as soon as his name is mentioned, some people (who generally have no idea what they're talking about) come out of the woodwork hurling personal insults and baseless allegations. So if you put yourself in his shoes, it's easy to see why participating in open Internet forums is not always fun for him.

Given the very strict moderation policies on this site dealing with civility toward others, my hope is to persuade Jeff that this is a place where he can share information without being personally attacked by the people who have been brainwashed by GATA. I hope others here will help make him feel welcome if I can persude him to take some time to post a contribution to this thread.

Jeff also said he would be happy to do an extensive interview with Chris on a future podcast. Just to keep everyone's expectations set, however, I happen to also know that Adam has the podcast schedule booked for months. So don't expect a podcast interview overnight... Also, it's up to Chris and Adam to decide what fits their editorial agenda, so it's really up to them to decide whether to invite Jeff to do an interview.

All the best,

Erik

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idoctor
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Erik great post & thanks for

Erik great post & thanks for taking the time to do it. IMHO we need more post like this to try to make the best decisions we can about the future that seems so uncertain. I like some of the interviews Eric King does but his style of sounding like a guy at a circus shouting about the greatest snake oil on earth show is a turn off. He never that I am aware of ever interviews someone that has a negative view on gold & silver.....it is always PMs to infinity & beyond LOL.

Thx again....enjoy your posts & the balance you offer.

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Erik T. wrote:it sounds like

Erik T. wrote:
it sounds like he's basically making an argument I very much agree with, but am already well versed in. He's a smart guy and I'm sure I'd learn something, but I'm also sure most of it would be old news, so I haven't made time to read it. 

*shrug* That sure looks dismissive to me, and I was surprised by your answer, as it appears you have already made up your mind about something you haven't read. I think it was a fair point to make.

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Metals realities

Greetings. I usually don't spend time here, but was told about the metals commentaries and that my name was being brought up in both good and bad ways.

First, I have to say two things about myself, that relate to the interview with Organ. First, I have been a public critic of the enabliing CFTC legislation since it was written in the mid-1970s, while I was still in college, through now. There is a long, well documented history of me calling for better regulation of commodities markets, and OTC derivatives markets, going back to the mid-1980s, as well as of certain banking practices. For goodness sake: I quit Goldman Sachs to start my own research boutique in 1986. I know banking, and its warts, far better than the outsiders who did not even study basic money and banking, it is clear from their comments. BTW, Andrew Maguire is, in fact, a total fraud, having never worked in the bullion banking industry.

Second, in college I studied journalism and political economics. One of the things I learned in journalism school was to check facts. In fact, most legitimate journalism outlets have fact checkers that will call you and check your quotes and statements before they print it. I bring this up because whoever interviewed Organ clearly is not a journalist, or a professional one. Organ said totally ludicrous stuff like China refines 80% - 85% of the world's silver, and the interviewer neither called him on it nor stopped to think that someone so totally ignorant of the silver market maybe should not be given a public forum to air what clearly are totally ill informed comments.

Now, to the point. Below is an article we wrote, excerpted from our Gold Yearbook released in late March, about the fallacy of the am/pm london gold trade. I am afraid the super-cool distribution chart will not appear here, but the text and table tell the story. It's one example of what real statistics will tell you that [Admin: redacted per our policy regarding ad hominem comments] Organ will not. I hope you enjoy it, and that it helps you.

In The Long Run We Are All Dead: Trading London Gold Price Fixes

Articles have cropped up on the internet and elsewhere over the past few years discussing the perceived phenomenon that the London gold morning fix is higher than the afternoon fix, and that enormous profits could easily be made by buying on the afternoon fix and selling at the morning fix. A new round of such discussions reappeared in late 2011 and early 2012.

The gist of these comments is that the London afternoon fix on average is below the morning fix, so that one could make a fortune by always buying on the afternoon fix and selling the next morning at the morning fix. Others have tried to paint this as evidence suggesting a conspiracy among gold bullion dealers to game the market. Neither set of conclusions are accurate. All of the articles confused the average with the range of daily results that comprise that average.

It is true that on average the afternoon fix tends to be lower than the morning fix. However, that average masks an enormous range of results.

Before analyzing the data, one must realize that there are two ways to make these calculations: The difference between a given day’s morning fix and its afternoon fix, and the difference between a given day’s afternoon fix and the following day’s morning fix. Which of these formulas you use to calculate the differential yields different results.

The average differential between a given day’s morning fix and afternoon fix was 16 cents per ounce between 1968 and 2012. That average masked an enormous spread, ranging from a morning fix $80.00 higher than the afternoon fix and a morning fix $45.00 below the afternoon fix on the same day. The morning fix was higher than the afternoon fix only 49.2% of the time. Another 45.6% of the time the afternoon fix actually was higher than the morning fix. The remaining 5.2% of the time the fixes were the same in a given day. Nearly half the time this trade would have resulted in losses, up to $45 per ounce.

Looking at it only on a more recent time period, from 2000 to 2012, as some of the articles do, the average spread was 35 cents: On average the afternoon fix was 35 cents higher than the morning spread, although the range was between $80.00 and -$42.00.

These data drive home how deceptive averages can be. The accompanying table and chart show that on average the afternoon fix has been 30 cents higher than the next day’s morning fix since 1968 and 79 cents higher since 2000. These averages mask wide ranges, from $81.00 higher than the morning fix to $87.50 lower since 1968.

The table shows that the morning fix has been higher than the afternoon fix only 49.2% of the time since 1968 and 53.6% of the time since 2000. The afternoon fix has been higher 45.6% of the time since 1968, and 44.7% of the time since 2000. The rest of the time the fixes have been the same.

This highlights the large risk to this strategy.  On average, one theoretically could make a fortune on this trade. However, fortunes can be lost just as easily, and nearly half of the time someone trying to make this trade will lose money. Anyone committed to this must have incredible staying power. If he or she is part of an organization, using other people’s money, or reporting to a manager, the institution supporting them must be willing to sustain consistent heavy losses in the expectation that in the long run the average difference between the morning and afternoon fixes will yield handsome profits.

Some institutional investors and others with deep pockets may try this strategy, but it clearly is not the easy money machine that people looking only at the averages suggest it is.

The distribution chart graphically portrays the risks involved in confusing long-term averages with the individual trading days of our lives.

Another misconception is that the relationship between the morning and afternoon fixes means that the price is lower all day long after the morning fix. The articles mistook the differentials between two specific points in time — those of the morning and afternoon fixes — with all of the time in between.

Calculations comparing prices at two specific times of the day in no way provide any insights into how the price changes during the reminder of time between those two points. Prices move up and down continually. That is how markets tend to work when they are free, unimpeded, and relatively efficient.  

Why

There are certain reasons why the morning fix tends to be slightly higher than the afternoon fix. The morning fix is a much less liquid, and a much less traded fix. It occurs when Asia and North America are closed. The afternoon fix occurs after the North American markets are open. It is a much more liquid fix. Much more gold trades at the afternoon fix, and, importantly, based on the afternoon fix, than at or based upon the morning fix.

Much of the gold that trades at the afternoon fix is producer selling. Producers  and refiners tend to sell on the afternoon fix, in part because it occurs during their business hours in North America, because it is a more liquid price, and out of market tradition. The afternoon fix is used in contracts covering the vast majority of gold mine production and refined output. All of that selling tends to lead to the afternoon fix being lower than the morning fix on average over time. It is that simple.

One could say that if it is so simple and obvious, why do not more producers shift their selling practices to the morning fix, or some other time or price mechanism. That is a very good question for shareholders to ask management at mining companies.

There are inefficiencies in the bullion market like those in many other markets, which may be large and simple to fix and still remain in the market.

This article is excerpted from CPM Group’s Gold Yearbook 2012, released 27 March 2012. www.cpmgroup.com. 

 

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Erik T.
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Thanks for participating, Jeff!

Jeff, not sure if you're reading further replies here, but I just wanted to say thanks for taking the time to post and share some of the content of your Gold Yearbook with us.

Best,

Erik

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LBMA...

There seems to be a meme running through the PM blogosphere tonight as Turd also posted on this topic;

http://www.tfmetalsreport.com/blog/3701/sunday-night-discussion

From the piece, which is not Turd himself, but a commenter on the site;

"A key takeaway is that the LBMA cleared $20bn per day in 2009 alone (for sure more than that now) which is because of the massive number of forwards, swaps and general paper crapola that pass for Precious Metals trades and absolutely affect the price discovery mechanism - this is also why the likes of Jeff Christian think its fine to be 100 or 300:1 paper to silver within the price discovery mechanism - I append his own damning 'Bullion Banking Explained' piece.  It is also an issue of market depth, big players always want the deepest pond (or Dark Pool!!) to swim about in.  The COMEX futures market is really a speculative market dominated by different forces than the LBMA 'spot' market and generally is a bit more 'whippy' in the way it behaves due to the different kind of investor.  'Spot' is where you go for delivery of large amounts (albeit 300:1 leverage inbuilt there), you buy at spot and then have a 'wholesaler' within that system make delivery for you, which is why COMEX contracts are so rarely delivered: they just need to be ABLE to be delivered in order for that market to retain a sheen of credibility.  Be clear neither the LBMA nor COMEX have credibility, hence why the upcoming Deliverable and FULLY allocated 'spot' silver receipt exchange in China could be so interesting.  Given the choice between the unregulated joke that is COMEX and the 0.3% backing offered by the LBMA any trader or big physical buyer of Silver would be likely to want to get involved in a new and more transparent entity versus either of the 2 other options.  This could lead to bifurcation in the price discovery mechanism as the new exchange starts to 'make the price' as it could grow exponentially in size by attracting real longs while also forcing the existing shorts elsewhere (ie London and COMEX) to unwind their paper positions."

My take is that bankers will be bankers.. they have grabbed hold of the precious metals markets and fractionally reserved them, as they are wont to do.  What the hell do you think "unallocated" is other than a fancy word to mean that a pool of metal has multiple claims against it?  The whole ponzi is held together by the fact that, as pointed out above, "Comex contracts are so rarely delivered".  

This is where our friend Harvey Organ comes in... he may not have the credentials of a Jeffrey Christian, or even of Erik... but he is an everyman investor who has watched the Comex trading like a hawk for years and I would submit to you that he has a strong intuitive grasp of what goes on there.. what the vault movements are telling us.  It is Harvey that writes everyday to tell us about the deliveries, and how often the lack of real Silver and Gold availability leads to probable cash settlements... even though only a tiny fraction of contracts ever go to settlement.  Since when do credentials = truth?  Bernanke has a PhD you know.. so he must be right?   

From Saturday's report, "  The total comex open interest rose by 339 contracts from 399,314 to 399,653.  Gold gained marginally on Thursday, so we gained a few longs. The front delivery month of April saw its OI fall from 501 to 329 for a loss of 172 contracts.  We had 142 delivery notices on Thursday so we probably lost another 30 contracts to cash settlements.  Nobody in their right frame of mind would put up 100% of the cash, hold that position for almost the entire month and then roll without any compensation."

http://harveyorgan.blogspot.com/2012/04/french-elections-tomorrowspanish...

Finally, you can forget all of this and just keep your eye on the money printing.  The Gold and Silver markets are relatively small and will be easily overwhelmed (along with any lingering manipulation) by rabid demand once more of the investing world starts to understand what is really going on.   Watch this presentation by Santiago Capital  - this chart comes from the presentation;

http://play.goldmail.com/rjsk8p9o2cr2

sorry.. I can't get the chart to post.. watch the presentation and see the long term correlation between the Gold price and the USD monetary base... really worth 1000 words as they say...   

 

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A question for you Erik

I have not yet had time to listen to either podcast yet, so forgive me if the question is misguided.

In your first post is your contention solely to debate the fact that Mr. Organ is making claims purely based on emotional opinion while offering no facts to back anything? Or are you against the entire notion of the precious metals market being manipulated.

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Erik T.
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Thanks for cross-posting

Thanks for cross-posting this quote, Jim. By searching out and finding some of the most ignorant commentary on the Internet, you provide the basis for further discussion and debunking of common myths.

Personally, I have a hard time understanding why any investor would even take seriously a self-appointed pundit who hides behind a pseudonym (Turd Furguson) borrowed from a B Movie script. But since so many of you guys seem so-inclined, let's dig into the commentary and see if we can make sense from nonsense. Yes, I understand this was not "Turd", but rather some other blogger commenting in TurdSpace. You didn't mention his name (or pseudonym), so I'll just call him T2 below.

T2 wrote:
"A key takeaway is that the LBMA cleared $20bn per day in 2009 alone (for sure more than that now) which is because of the massive number of forwards, swaps and general paper crapola that pass for Precious Metals trades and absolutely affect the price discovery mechanism - this is also why the likes of Jeff Christian think its fine to be 100 or 300:1 paper to silver within the price discovery mechanism

Ok, so we have some pretty highly emotionally charged innuendo here from T2. His reference to "forwards, swaps and general paper crapola that pass for Precious Metals trades" implies that cash-settled a/k/a "Paper" trades are somehow bad or inherently wrong. If I understand the innuendo correctly, he is implying that the price discovery mechanism is being corrupted by the presence of cash-settled trades in addition to trades settled by bullion delivery. But he conveniently fails to offer the slightest bit of rationale, explanation, or substatiation. If he really intends to make this point, would it not make sense to explain why he believes cash-settled transactions are corrupting efficient price discovery? Or could it be that he really doesn't know himself, and is just another wanker in the blogosphere mouthing off with soundbites he's heard elsewhere but never quite understood? I have no idea which it is, but I will concede that an intelligent and level-headed conversation about the impact of cash-settled transactions in commodity price discovery might be worthwhile. Since T2 clearly isn't offering the slightest bit of substantiation or discussion of this common fallacy, let's have our own discussion here.

A hypothesis that has been suggested by some is that having both cash-settled "paper" and bullion-settled "physical" transactions co-existing in the same price discovery mechanism prevents the price from rising to its true natural level. The fallacious rationale for this argument is that if there were only physical transactions, then there is only so much physical bullion, and all the demand would have to be matched against the amount of metal that really exists. But if there is much greater liquidity of "paper sellers", the buyers can buy a lot more gold without pushing the price up very much. Assuming this was the argument T2 was alluding to, he might have done his readers a better service by explaining it as I have here, rather than making an unsubstantiated allegation by inference, and moving on as he did to his next specious argument (to be debunked below). But I suppose you get what you pay for on a free blog.

Let's now examine why this popular fallacy is just that - a fallacy. First of all, there is nothing unique to precious metals here. The entire commodity complex trades this way - far more cash-settled paper bets than actual deliveries. It has worked for years, and if the presence of the paper transactions really undermined efficient price discovery, the practice would have been stopped decades ago. Crude oil, grains, etc. form a cornerstone of the global economy. If their pricing mechanism were being corrupted by the presence of paper transactions, we'd know about it by now.

But at first glance, it does appear that the paper transactions increase the size of the pool, so further explanation is warranted. The fallacy lies in the idea that the paper transactions are diluting the buying influence of buyers of physical bullion. It doesn't work that way. Everyone who wants to buy and take delivery of physical bullion has to buy it from someone who had physical bullion to deliver. And the pricing mechanism reflects this. The fact that traders on both sides of the contract have the option of standing for or accepting assignment for delivery ensures that the paper prices are kept in line with the physical price. For every paper-only buyer, there is a paper-only seller. The increased liquidity argument washes out, because there are paper traders on both sides of the trade.

T2 wrote:
It is also an issue of market depth, big players always want the deepest pond (or Dark Pool!!) to swim about in.  The COMEX futures market is really a speculative market dominated by different forces than the LBMA 'spot' market and generally is a bit more 'whippy' in the way it behaves due to the different kind of investor.

Huh? Bluntly, none of this makes any sense. Of course big buyers want as much liquidity as possible so that their trades don't "move the needle" any more than necessary. But what does that have to do with dark pools, which are privately settled trading systems for equities that allow large transactions to occur without public disclosure? The two concepts are completely different, and I see no direct connection. It appears to me that T2 is just throwing about a phrase, dark pool, that he probably doesn't comprehend, because it sounds good and helps sell the story. Here again, if he believed that dark pools were in play, why doesn't he elaborate and explain what role he thinks they play?

T2 wrote:
'Spot' is where you go for delivery of large amounts (albeit 300:1 leverage inbuilt there)

Ok, now it's clear this guy is just plain clueless. Spot is the physical bullion market. There is quite obviously ZERO leverage there, because if you want to take the metal, you have to pay for it. Sounds to me like T2 has been suckered by Andrew Maguire, who has cleverly (and I am convinced intentionally) encouraged investors to confuse the ratio of cash- to physical-settled transactions as having something (anything) to do with leverage. Leverage is a very precise and well understood term. Speficially, it refers to assets over collateral. If there is 300:1 leverage built into the spot market, that means I can buy $300,000 worth of gold for only $1000 (300:1 leverage), then just take the metal, and (I guess) just owe the seller for the rest? This is absolutely ludicrous, and clearly reveals that T2 doesn't have the foggiest notion what he's talking about.

T2 wrote:
Be clear neither the LBMA nor COMEX have credibility, hence why the upcoming Deliverable and FULLY allocated 'spot' silver receipt exchange in China could be so interesting.  Given the choice between the unregulated joke that is COMEX and the 0.3% backing offered by the LBMA any trader or big physical buyer of Silver would be likely to want to get involved in a new and more transparent entity versus either of the 2 other options.

Well, I do have to credit T2 for efficiency. He packs an amazing amount of nonsense into only a couple of sentences. First he states that neither COMEX or LBMA have credibility. He offers exactly zero explanation or substantiation for these ludicrous statements. He refers to COMEX as un "unregulated joke", an absurdity considering the fact that CFTC's greatest challenge is the criticism that U.S. markets are MORE regulated than others in International jurisdictions. Then we get the 0.3% backing nonsense, confirming that this guy - whoever he is - has clearly been snowed by Andrew Maguire's efforts to mislead investors, and now he's regurgetating and argument he obviously never understood himself. For the record, folks, the 0.3% backing nonsense would be true if the ratio of cash- to bullion-settled transactions on LBMA had something to do with leverage. It doesn't. The bullion in LBMA vaults does not serve as collateral for cash-settled transactions, and has nothing to do with leverage.

T2 wrote:
This could lead to bifurcation in the price discovery mechanism as the new exchange starts to 'make the price' as it could grow exponentially in size by attracting real longs while also forcing the existing shorts elsewhere (ie London and COMEX) to unwind their paper positions."

Huh? This guy is just spewing sound bites that I doubt he understands the first thing about. What are "real longs", and how would this force shorts to unwind their positions? More to the point, why would anyone take seriously an author who makes one assertion after another, without ever backing a single one of them up with a logical argument or evidence to support his contentions?

Jim, moving on to your own comments now...

Jim H wrote:
My take is that bankers will be bankers.. they have grabbed hold of the precious metals markets and fractionally reserved them, as they are wont to do.  What the hell do you think "unallocated" is other than a fancy word to mean that a pool of metal has multiple claims against it?

You're mistaken, Jim. Ironically, the shortcomings of unallocated accounts are actually worse than you imply, but your statement clearly evidences to me that you've accepted the nonsensical ramblings of GATA and company as fact, without questioning them. An unallocated account is a credit relationship. It's not backed by ANY bullion. So there is no legitimate issue of "multiple claims against the same bullion". Unallocated account holders don't have any claim against any bullion. They have an unsecured credit receivable only. The multiple claims stuff is just GATA rhetoric that imparts fear and perception of conspiratorial wrongdoing in the minds of investors. It is not part of reality.

Jim H wrote:
The whole ponzi is held together by the fact that, as pointed out above, "Comex contracts are so rarely delivered".

Now you're following T2's lead, and making significant allegations without a single word of substantiation or logical support. Why do you believe that deliverability of COMEX contracts affects anything, and what "Ponzi" are you referring to? The word Ponzi is universally accepted in finance to refer to a specific characteristic of a fraud committed by Chalres Ponzi many years ago. Specifically, the phrase is now used to refer to a scheme where an investment vehicle does not really own its advertised assets, and incoming investments from new investors are used to pay exiting investors, creating the illusion that investments can and are being redeemed, when in reality insufficient assets exist if all investors were to redeem simultaneously. The reason COMEX contracts are so rarely delivered is that they are principally used by hedgers and speculators who don't need or desire physical settlement. Everybody who wants physical settlement gets physical settlement. The "what-if" scenario often cited by GATA and the like where all the longs stand for delivery at the same time and the system breaks is utter hogwash, and its fallacies lie in the fact that the longs don't have sufficient equity to stand for delivery, plus the fact that the price discovery mechanism would automatically elevate the price to a market-clearing level if such a run on physical delivery ever began. Jim, you're allowing GATA's ignorance of how commodity markets function to come into your mind as if it were reality. It isn't. It's pure, unadulterated nonsense, and I sincerely wish I could get through to you on this.

Jim H wrote:
This is where our friend Harvey Organ comes in... he may not have the credentials of a Jeffrey Christian, or even of Erik... but he is an everyman investor who has watched the Comex trading like a hawk for years and I would submit to you that he has a strong intuitive grasp of what goes on there..

First, I never represented myself to have any formal credentials. But I do think rationally and objectively, and I fact-check things that I read and hear. Jim, if you did the same I think you'd quickly realize that people like Harvey are charlatans who don't have the foggiest clue what they are talking and writing about. Please ask yourself why you feel inclined to think Harvey has "an intuitive grasp" of the market or anything else. His style is very clearly revealed in this interview - he's a guy who make a LOT of really BIG allegations, frequently cites the existence of corruption and conspiracy, but never backs his allegations and innuendo with verifiable, factual arguments. Ever. Jim, I really mean this - please stop and take a moment to ask yourself why you take this guy seriously. He certainly talks a very alluring story - corrupt markets, evil conspirators, and poor innocent investors like you are made out to be the victims. But he could just as easily be writing about how millions of humans have been livingin colonies on Mars for 20 years! That sounds exciting too, and if you have an audience that never expects you to back anything you say with fact or even logical rationale, why not!

Jim H wrote:
It is Harvey that writes everyday to tell us about the deliveries, and how often the lack of real Silver and Gold availability leads to probable cash settlements... even though only a tiny fraction of contracts ever go to settlement.

The  only verifiable fact here is that Harvey writes every day. The rest is innuendo that lacks factual support, and reveals to me that Harvey's understanding of how commodities markets funtion is possibly even less complete than the other charlatans at GATA. Jim, you have credited Harvey for writing every day, and I do not question his work ethic. But you've yet to explain to us - or more importantly, to yourself - why you believe one word of the nonsense he writes.

Jim H wrote:
Since when do credentials = truth?  Bernanke has a PhD you know.. so he must be right? 

Nobody here has said or implied that credentials=truth, and FWIW I'm a strong believer in the idea that formal credentials have almost nothing to do with truth. That's why I never take them seriously.

Jim H apparently quoting Harvey again wrote:
From Saturday's report, "  The total comex open interest rose by 339 contracts from 399,314 to 399,653.  Gold gained marginally on Thursday, so we gained a few longs. The front delivery month of April saw its OI fall from 501 to 329 for a loss of 172 contracts.  We had 142 delivery notices on Thursday so we probably lost another 30 contracts to cash settlements.  Nobody in their right frame of mind would put up 100% of the cash, hold that position for almost the entire month and then roll without any compensation."

These statements don't make any sense, and further reveal to me that Harvey is lost in outer space. First, most futures transactions are cash-settled. He's not making any sense here. He seems to be saying that the decline in OI should be matched by delivery notices, but it isn't because there are 30 less delivery notices than the decline in OI. That makes no sense, and I have no idea what point he's even attempting to make here, so it's hard to refute it. This further reveals to me that Harvey, despite probably meaning well, is completely clueless as to how futures markets function, and is performing an amateur analysis on data he doesn't understand.

As to the innuendo that "nobody in their right mind" would put up 100% then roll anyway, the answer to that one is that daring traders on the short side sometimes hold their positions beyond the cash settlement deadline, knowing that they are risking assignment for delivery, but also knowing they stand a good chance of not being noticed, allowing them a staying power advantage over the corresponding long traders. It's a daring game of chicken to play if you don't have the metal to deliver, but some do and that easily explains why some traders could be short beyond the cash settlement date and still roll the contract, after risking having to pay the delivery fail penalty if they got assigned. Even so, Harvey's description of the interplay between OI and cash settlement just plain doesn't make sense.

Jim, you seem like such a nice guy. It really pains me to see you falling for all this crap. I sincerely wish you well, and hope you'll eventually recognize that you are falling for the work of charlatans.

All the best,

Erik

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Thank you Erik..

For the very detailed reply... I will reread and digest.  My point about Harvey is that, when you spend so much time analyzing vault movements, COT reports, delivery reports, etc... you get an intuitive feel for that which you are observiing.  A simple example is the fact that Harvey knows that Good delivery bars have exact weights... that are not fixed.. they vary... so when he sees a transfer of 6500 oz (just to make up an example)... then he observes that is probably some kind of paper transfer.. vs. real bars moving. 

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Thanks !!!

Dear Erik T,

thanks - I agree with most of what you wrote. I think one of the causes of the misunderstanding by Ted Butler and others is that gold and silver are traded over the counter (OTC) between the banks and bullion traders. This is commonly referred to as the 'London gold market', and many of these institutions are members of the London Bullion Market Association (LBMA). What is traded is actually not physical gold and physical silver, but rather two currencies. Each has cash (=allocated gold), credit money (=unallocated gold), swaps and forwards. The OTC market is many times bigger than COMEX, and so price discovery mainly happens in the OTC market, and the price is transmitted to the COMEX by arbitrage.

People whose background is commodities futures trading see the funny behaviour of the gold and silver COMEX and cry manpulation. What they complain about, however, is not manipulation but rather the arbitrage that transmits the OTC price to the COMEX. Note that gold and silver are the only underlyings of COMEX/NYMEX/CME futures that are traded as currencies OTC, and so, of course, corn or soybeans don't behave like that.

I am also a bit frustrated by the abundance of misinformation in the goldbug internet and ofen comment about it.  See the comments on

http://screwtapefiles.blogspot.com/2012/04/hard-rains-gonna-fall.html

and

http://www.tfmetalsreport.com/comment/156655#comment-156655

Sincerely,

Victor

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Jim Rickards

Further, on the book by Rickards. I give him a lot of credit for getting the role of gold in the monetary system across to a huge audience and for pointing out the achilles heel of the dollar. I also have some criticism about his idea to return to a gold standard (i.e. an institutionalized undervaluation of gold). This won't work, and it is the Europeans who have made sure the U.S. cannot do this. Perhaps you are interested in the argument:

http://victorthecleaner.wordpress.com/2012/02/22/currency-wars-why-the-u...

Sincerey,

Victor

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Thanks, Victor!

Hi Victor,

Thanks for the support. It's immediately obvious that you're a professional in this space, and know more than I do about these markets.

I was aware of the role of LBMA, and the fact that its nickname "The Physical Market" is a misnomer because far more cash-settled forwards are traded there than actual bullion deliveries. I was also aware that LBMA is much bigger in volume than COMEX, and so therefore it is logically implied that LBMA should set the price, which as you describe is then transmitted via the arbs to the COMEX.

But I was not aware of the existence of a real-time electronic quotation system for LBMA's OTC market. I therefore came to the inferred conclusion that LBMA traders used the global futures market (which is really not just COMEX but also GLOBEX when you think about it) as their price discovery mechanism. As noted in an earlier reply, my guess was that LBMA traders were using the futures market to set the basis for their quotes, negotiating OTC contracts priced at some margin to the futures front month. In a sense, the LBMA traders, being the big players, are still transmitting price into the futures via arbitrage, but they are doing so thru their reliance on the futures price as their pricing mechanism, and presumably gaming the futures market to their perception of fair value.

But your post implies that LBMA has its own price discovery mechanism, and that it is the LBMA price that is transmitted to COMEX thru the arbs. That actually makes more sense, but I was unaware that LBMA had a real-time electronic price discovery mechanism. Sounds like you are saying they do. I'd love to learn more. Is this mechanism electronic? Is it quoted on Bloomberg (I don't have one, sadly)? Is it 24/7, or only London trading hours? Do you have to be an LBMA clearing member to participate, or can non-member banks and dealers bid in this LBMA price discovery mechanism? Enquiring minds want to know...

To Jim H and others following this thread: Did you notice how I was able to instantly recognize Victor as being legit, while I was equally instantly able to recognize Harvey as a charlatan? That's the skill you need to hone if you want to be successful investing. That probably sounds arrogant as hell, but it's the best investment advice you'll ever get from anyone.

Best,
Erik

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Yes

Erik T,

yes, that sounds arrogant as hell indeed. As for electronic trading, this FT Alphaville article

http://ftalphaville.ft.com/blog/2011/08/10/649746/theres-a-new-gofo-tabl...

has a screenshot of how GOFO (the gold forward offered rate) looks on a Reuters screen. I guess when you want to trade with them OTC, your company should be a member of the ISDA. I remember some individual investors wanted to short mortgage bonds in 2006-2008, and this usually failed because they didn't have enough capital and not the lawyers to get all the paperwork done. But as far as I remember, there was a real estate guy in California who managed to trade OTC as a private investor. But then, at that time, Wall Street didn't care about counterparties at all.

Sincerely,

Victor

PS: Not a professional.

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Thanks Victor, that's very

Thanks Victor, that's very helpful. I wasn't aware of the GOFO quote, which makes perfect sense. I can't trade it anyway.

I actually looked into trading CDS directly on the OTC market myself as a private investor back in 2008. I was able to find desks in NYC willing to deal with me, but it was instantly clear that they smelled blood. I don't think it's possible for a private investor (unless you're retired from serious wall street experience) to deal with those guys directly without being taken to the cleaners. I opted not to proceed, and instead invested in a hedge fund that was long CDS against subprime CDOs - the 2&20 was cheaper than what I could tell the sharks on the OTC desks had in mind for me.

On the non-professional thing, you had me fooled. You clearly know what you are talking about, and that led me to an errant assumption.

victorthecleaner wrote:
yes, that sounds arrogant as hell indeed.

Indeed it does. Not to mention pompous. But it's still the best investment advice these guys will ever receive. Do you concur? :-)

Erik

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CPTWaffle, You wonder how a

CPTWaffle,

You wonder how a market which doesn't have a real-time auction process or exchange can set prices. Let me answer by saying it is the same way the price of cheese or second-hand car prices are "set". The funny thing is, with all this talk of manipulation, the operation of the over-the-counter (OTC) spot physical market is one which is very much free market and unregulated and thus close to the capitalistic ideal.

Note I prefer to use OTC rather than LBMA, which are often used interchangabily. References to LBMA are better understood as "OTC trades which will be settled in London via http://www.lpmcl.com/". OTC is wider and refers generally to trades negotiated and settled counterparty to counterparty instead of on an exchange. The majority OTC gold trades are settled in London but OTC trading can occur outside the LBMA/LPMCL system.

The best way I can explain it is by discussing how we "trade" gold at the Perth Mint, as that's what I have first hand experience with. Before I start, I'd just like to clarify that the Perth Mint has never traded on any futures market, nor GLOBEX or any other exchange. We refine around 10% of the world's new mine and scrap supply. That is about 7 tonnes, or $370 million, a week of physical we sell/supply. So this is not a theoretical exposition below.

Because there is no LBMA real-time electronic quotation system/trading platform for spot unallocated or spot physical prices, professional bullion market counterparties need an indicator of where the market is. We use Reuters, others Bloomberg. However the price displayed on these information services is just an indicator. It is updated by the bullion desks of the big banks and is in effect, a bulletin board or forum where banks can publish their prices in the hope other dealers will call them up to do a trade. Sort of like an advertisement. Unlike a stock market, it is not a commitment to deal at those prices, but most times you can. However there are many times, especially when the market is moving quickly, when the dealers don’t have time to update their quotes on Reuters and so when you ring them up, they say "Sorry, Reuters off the market, my current price is $5 below the screen".

Many trades are done over the phone, but some bullion banks also have trading platforms for use by their clients which provide price quotes - often used for small trades (a few thousand ounces or less).

How does a bullion bank set their prices on Reuters or their trading platform? Well consider a bank's bullion desk as a little stock exchange except they are the only ones quoting a bid and ask price. They get a constant stream of calls from buyers (eg jewellers) or sellers (eg mines). If they are lucky, the buying and selling will match but this is unlikely, so if they find they are selling more than they are buying from their clients, they will have to go and find another counterparty to buy from. This other counterparty is often another bullion bank, but could also be another market like COMEX.

So a bullion desk keeps an eye on what prices are being quoted on Reuters, on COMEX etc and what sort of deal flow they are getting (how many ounces and whether it is net buying or selling) and, since Reuters is just an indicator, what actual prices previous deals have been executed at in the past to set their price and bid/ask spread.

So while none of these bullion banks or their systems are interlinked computer wise to a central exchange, they are interlinked informationally. Consider the case of the Mint where we call a bullion bank and ask for a price. We'll compare it to say the price on Deutsche's Autoban trading platform and Retures before deciding if we'll take it. Say the Autoban price was better and the bullion bank's dealer wasn't willing to match it. Well they have just got information on where the "real" physical spot market is from our refusal to deal with them. If they are consistently over quoting compared to their competitors they won't get business.

It is this interaction between bullion banks and bullion banks and their clients that is the spot price. Dealers are in constant contact with each other, doing deals, talking and exchanging information on what they are seeing in the market, watching the Reuter’s and COMEX price movements. They use all this information to set their prices.

The OTC market is therefore best thought of like a network of free agents. But as described, because of no central exchange, you can't put your finger on exactly what the spot price was at any point in time.

But then you can't put your finger on exactly what the price of cheese is either at any point in time because supermarkets and independent grocers and farmers markets all quote different cheese prices and do physical cheese deals at these various prices and don't report them on any central exchange nor settle them through centralised clearing houses.

Yet you don't see anyone worrying about the lack of a reference spot cheese price and what the premium of physical cheese is to the cheese spot. It is a case of the shopkeeper saying "you don't like my cheese price, then buy from someone else". Somehow this system works. I think it is called a free market (which doesn't imply it isn't manipulated, BTW). Precious metals works the same in the OTC market.

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bronsuchecki wrote: Yet you

bronsuchecki wrote:

Yet you don't see anyone worrying about the lack of a reference spot cheese price and what the premium of physical cheese is to the cheese spot. It is a case of the shopkeeper saying "you don't like my cheese price, then buy from someone else". Somehow this system works. I think it is called a free market (which doesn't imply it isn't manipulated, BTW). Precious metals works the same in the OTC market.

Cute metaphor, but physical cheese won't be called upon to perform its hedging role in extremis. Unallocated gold holders may understand physical price discovery when cash settlement in hyperinflating dollars isn't a palatable option.

It's fine to demolish a fraudulent argument, but not at the expense of the bigger picture. Even though unallocated holders have no claim on physical, do fiduciaries believe their holding hedges them against a government money crisis? If they do, then fractionally-reserved bullion banking is effectively diluting real physical demand, and GATA's argument rings true.

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Arrogance

Erik T. wrote:

victorthecleaner wrote:
yes, that sounds arrogant as hell indeed.

Indeed it does. Not to mention pompous. But it's still the best investment advice these guys will ever receive. Do you concur? :-)

Erik

Erik,

I somehow have doubts that your overbearing words will be the "best investment advice I will ever receive." You need to understand, the problem I have with your words has nothing to do with your argument, and has everything to do with your delivery. You claim to desire an "intelligent and level-headed conversation" and yet you are the only person I see calling names: "self-appointed pundit" (aren't you, too?),"wanker...mouthing off," "charlatans," etc., and generally ascribing various nefarious motivations to others. Makes it difficult to hear your argument Erik, when you spend so much time denigrating those you disagree with. We little peons here at CM may be "falling for crap" as you say, but your tone doesn't help anyone understand the facts as you present them. And generally slamming people for ignorance doesn't encourage anyone listening to you, to learn.

An obsession with being "right" isn't always the best way to teach.

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Just a BTW....

Jim Sinclair knows a thing or two about Gold.. and he kinda runs a Gold exploration company (TRX) (see his name here:  http://finance.yahoo.com/q/pr?s=TRX+Profile) ... and he does not think Harvey is full of it;

http://www.jsmineset.com/2012/04/22/in-the-news-today-1170/

Am I to discount Jim Sinclair's opinion of Harvey?  Is Jim a charlatan?  Or is he just another really dumb rich guy like Eric Sprott?  Or a misguided ( but well meaning) semi-solvent guy like Jim H?    

Jim Sinclair’s Commentary

This is a scenario that you need to know about because it cannot be wholly discounted as a possibility.

Harvey Organ: Get Physical Gold & Silver!
Friday, April 20, 2012, 6:10 pm, by Adam Taggart

Harvey Organ has been analyzing the bullion markets closely for decades. The quality and accuracy of his work is respected enough to have earned him an invitation to testify before the CFTC on position limits for precious metals back in 2010.

And he minces no words: Gold and silver prices are suppressed. With extreme prejudice............

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Questions for Erik T.

Erik,

I have read your commentary and agree with you in some respects and respectfully disagree in others.  I have some questions/observations that I am hopeful that you can address for me.

  1. Bart Chilton - Commissioner with the CFTC says that the silver market is manipulated frequently (paraphrased) and that the perpetrators (unnamed) should be prosecuted under existing commodity laws. The assumption I draw is that he is in a position to know.
  2. One of Ted Butler's core themes is the level of concentration in the silver shorts - i.e. that a small group of entities holds a very high percentage of the overall shorts in silver.  He posits that it is inherently manipulative for this to occur and that in its absence that the price of silver would be far higher (of course it would be impossible to provide a specific $$ amount of how much higher).
  3. You have Blythe Masters recently appearing on CNBC essentially stating that JPM doesnt have any naked shorts - they are all "hedges" put on for their "clients".  Considering the size of those "hedges" it stands to reason that their "clients" could easily hedge their own positions (they dont need JPM to be the intermediary) and secondly - if their clients are hedging their own positions - JPM doesnt have any risk anyways since they are simply acting as the agent.  Finally - if the client has physical positions (stored by JPM) and are hedging (courtesy of JPM) and if JPM wanted to hedge that - wouldnt JPM be long as a hedge against the short instituted on behalf of their "cleints"?
  4. There have been numerous statements by various central banking folks over the years about how gold can and will be leased (in increasing quantities - if needed) in order to control the price of gold.  Volcker admitted that their failure to do so during the 70's was a mistake.
  5. You had the Gordon Brown sell 1/2 of Englands gold reserves - he even announced this intention in advance which practically guarantees the price will be less - something that anyone trying to sell for "best value" would be an complete moron to do - unless the motive was something other than "best value".
  6. There are frequently MASSIVE sales of gold/silver in very, very short timeframes (dumping of contracts - hitting all bids) which is something that someone selling for profit would be stupid for doing.
  7. You have the cap on gold typicall at 1% but RARELY (if at all) in excess of 2% in a day.  No other commodity has this upside limitation in price movement.  This has been consistent over the entire duration of this gold bull market.

Now - I am not providing references or a bibliography with this post so I am hopeful that you wont put me in the same category as Harvey Organ, Andrew MacGuire, GATA, et al... I trust that you are sufficiently cognizent of the "goings on" in this market that what I am referencing is factual and without hyperbole.

I would be interested in your analysis/conclusions based on the above data points and any speculation/theories you have that fit the facts as described above.

Very Respectfully,

Steve

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your questions for Erik T

Dear Steve,

I know you asked Erik T., but perhaps I may jump the line. Many of your questions are commented on or even answered in the comments section to

http://screwtapefiles.blogspot.ca/2012/04/hard-rains-gonna-fall.html

Sincerely,

Victor

 
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@Strawboss

Excellent questions, Steve. I'll take a stab at them below.

Strawboss wrote:
Bart Chilton - Commissioner with the CFTC says that the silver market is manipulated frequently (paraphrased) and that the perpetrators (unnamed) should be prosecuted under existing commodity laws. The assumption I draw is that he is in a position to know.

I have to confess to a bit of dismay on this one myself. To be frank, Chilton strikes me as a bit of a quack in the interviews I've heard. He has clearly bought into the GATA argument. I concur that he's in a senior position where he should know better, but he doesn't seem to. I don't know anything more than that.

Strawboss wrote:
One of Ted Butler's core themes is the level of concentration in the silver shorts - i.e. that a small group of entities holds a very high percentage of the overall shorts in silver.  He posits that it is inherently manipulative for this to occur and that in its absence that the price of silver would be far higher (of course it would be impossible to provide a specific $$ amount of how much higher).

This is always Ted's central argument, but he NEVER offers any explanation as to WHY he thinks the PRESENCE of a large short interest would hold the price down, or why this is "inherently manipulative". It's certainly true that one very large player can corner a thinly traded market, because that player is in a position to BUY or SELL in size to bump the price back where they want it, without changing their own holding's size on a percentage basis nearly as much as a small player would have to. But just keeping a constant large short position open without doing any more selling does nothing to suppress the price. In short, Ted has never fleshed his argument out to a logical conclusion so far as I am aware, and as he states it (i.e. just the existence of a large position is inherently manipulative) the argument lacks merit so far as I'm concerned.

Strawman wrote:
You have Blythe Masters recently appearing on CNBC essentially stating that JPM doesnt have any naked shorts - they are all "hedges" put on for their "clients".  Considering the size of those "hedges" it stands to reason that their "clients" could easily hedge their own positions (they dont need JPM to be the intermediary) and secondly - if their clients are hedging their own positions - JPM doesnt have any risk anyways since they are simply acting as the agent.  Finally - if the client has physical positions (stored by JPM) and are hedging (courtesy of JPM) and if JPM wanted to hedge that - wouldnt JPM be long as a hedge against the short instituted on behalf of their "cleints"?

No, that doesn't stand to reason. That's what the bullion banking business is - big banks making a big markup to provide their "skill" to do something you could have done yourself, but might not have known how to. Remember that mining companies' management are not finance gurus. Hedging forward and rolling positions every month is not totally obvious - you have to understand end-of-month effects on price as contracts near expiry, etc. The banks sell their clients on the idea that this is such special work that they should trust the bank to do it. My understanding is that a big part of Jeff Christian's business at CPM Group is teaching mining companies exactly what you said - that they don't need the big bullion bank middlemen and their fees, and can learn to do this themselves, with his help. To your last point, no, if clients have physical in JPM's vault (a long), and are hedging that position forward with JPM, the client is short the hedge, and JPM is long, as the counterparty. To neutralize that long exposure, JPM goes short in the open futures market to delta hedge their long against their client's short.

Strawman wrote:
There have been numerous statements by various central banking folks over the years about how gold can and will be leased (in increasing quantities - if needed) in order to control the price of gold.  Volcker admitted that their failure to do so during the 70's was a mistake.

You had the Gordon Brown sell 1/2 of Englands gold reserves - he even announced this intention in advance which practically guarantees the price will be less - something that anyone trying to sell for "best value" would be an complete moron to do - unless the motive was something other than "best value".

Good points, and the reason why I never say manipulation fears are completely misplaced. I'm simply pointing out that people like Ted and Harvey don't know what they are talking about. There is still good reason to be concerned about the actions of central banks, and not just the more obvious ones like these examples!

Strawboss wrote:
There are frequently MASSIVE sales of gold/silver in very, very short timeframes (dumping of contracts - hitting all bids) which is something that someone selling for profit would be stupid for doing.

Not necessarily. First, one possible explanation is an actual short-term manipulative "stop clearing run" intended to fleece the weak hands out of their positions. This kind of short-term manipulation happens all the time in all thinly traded markets, not just PMs. Another possibility is that a natural move in the market (no manipulation) triggers a big cluster of stops during thin liquidity hours. But your statement that someone selling for profit would "be stupid doing" this is not correct. If someone wants to sell a lot but has no reason to expect others to be selling a lot, it's in their interest to slowly and carefully make their sales with little fanfare, to avoid moving the market. But if a big seller has reason (as was the case on Feb 29) to expect OTHER big sellers to also be selling in size, the whole move in reaction to news can happen in seconds, because it becomes a race for the door scenario.

Strawboss wrote:
You have the cap on gold typicall at 1% but RARELY (if at all) in excess of 2% in a day.  No other commodity has this upside limitation in price movement.  This has been consistent over the entire duration of this gold bull market.

I'm not clear on whether you are referring to an actual cap (i.e. daily price limits in futures trading), or observed max moves over time (not really a cap). In any case, I'm not clear what point you are arguing here. I would think extreme manipulations would yield higher volatility, not lower. In short, I don't understand your point.

Strawboss wrote:
Now - I am not providing references or a bibliography with this post so I am hopeful that you wont put me in the same category as Harvey Organ, Andrew MacGuire, GATA, et al... I trust that you are sufficiently cognizent of the "goings on" in this market that what I am referencing is factual and without hyperbole.

Of course I don't put you in the category of Maguire, Organ et al. You are asking intelligent questions based on logical deduction, and seeking explanations for things that don't add up, using logic and reason to form your views. Contrast with someone like Ted who is constantly posing idiotic rhetorical questions like "If a small number of banks have most of the short interest, how can it be anything other than a manipulation?"

@shudock

Sir, if you really can't see the tongue-in-cheek humor intended when I crack a joke about my own post as being "arrogant and pompous", and you still feel inclined to interpret my endorsement of Rickards work despite not yet having had time to read his book  as "dismissive", then I'm afraid I can't help you. I do admit that my tone becomes quite intense when I discuss this subject, because I find the perponderance of charlatans to be so overwhelming, and frankly the harm they do to retail investors financial wellbeing makes me angry. If you find my comments so offensive, there's always the "Ignore User" button to save you from ever seeing them again.

Best,

Erik

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Price cap on gold

Erik - let me try again on my price cap on gold statement.

During the course of the bull market in gold (nominally speaking in USD) you can count on 1 hand the number of times that gold has been allowed to increase in price by an amount greater than 2% using the London PM fix from one trading day to the next.  And - you probably wouldnt have to use all the digits on that one hand either.  The vast, vast majority of the time the price rise in gold is limited to 1%.

There is no other commodity market that trades like this - with those observed price rise caps.

Of course the same doesnt hold true on the downside losses in gold when price is falling - there is no 2% "rule" when price is falling.  (Use of the term "rule" is derisive).

Pertaining to your comments on concentrated positions not inherently being manipulative - I would differ in this respect.  When an entity the size of JPM is allowed to sell x number of contracts anytime they want to - irrespective of what their current position sizing is - that is manipulative.  The analogy I would use is the casino and blackjack.  The reason that casinos have limits on bet sizes at the blackjack table is to prevent someone from continually doubling down their bets every time they lose.  The casinos know that eventually - the person that is able to double down with no limitation will eventually earn back their losses.

By not having position limits - an entity with essentially unlimited resources to draw upon (JPM) can push down the price of silver whenever it suits them by selling however many contracts are necessary to start triggering stops - which then take over and further push price down.  Of course JPM does periodically cover some of their shorts from time to time to keep things manageable - but, they never have the impetus to completely cover their shorts because they dont have to.  If there were position limits - they wouldnt be able to do this and your statements regarding this point would make more sense to me.

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short position

Steve,

please see the link I included above.

I think the "big short position" is grossly misunderstood by Ted Butler & Co. The issue with gold and silver is that the banks and bullion dealers trade them as currencies over the counter, i.e. with cash (=allocated), credit money (=unaloocated), swaps and forwards. This market is about 8-10 times bigger than COMEX. So you would expect that the OTC market is where the price discovery happens, and then this is transmitted to the COMEX by arbitrage. So the large short positions that Ted Butler and friends complain about is one side of the arbitrage position. The other half is invisible to the public because it happens in the OTC market.

When GATA & Co talk about  "the central banks", I also think they get the teams wrong as well as the timing. Right now, all those central banks who can only use the OTC market in order to accumulate gold (BRICs, developing countries), must be interested in a low price because then they get more physical for their dollars. On the other hand, the U.S. may hate an uncontrolled rise of the gold price, but eventually they may want to take the paper price higher because this provides life support for the bullion banking system that might lose too much physical reserve if the price is too low. Finally, there are those central banks such as the ECB (and several oil states) who already own a huge amount of gold and who would love its price to rise. All this was different ten years ago before the introduction of the Euro. You have to be very careful when you take these Greenspan quotes out of their context.

Victor

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Strawboss wrote:Pertaining

Strawboss wrote:
Pertaining to your comments on concentrated positions not inherently being manipulative - I would differ in this respect.  When an entity the size of JPM is allowed to sell x number of contracts anytime they want to - irrespective of what their current position sizing is - that is manipulative.  The analogy I would use is the casino and blackjack.  The reason that casinos have limits on bet sizes at the blackjack table is to prevent someone from continually doubling down their bets every time they lose.  The casinos know that eventually - the person that is able to double down with no limitation will eventually earn back their losses.

By not having position limits - an entity with essentially unlimited resources to draw upon (JPM) can push down the price of silver whenever it suits them by selling however many contracts are necessary to start triggering stops - which then take over and further push price down.  Of course JPM does periodically cover some of their shorts from time to time to keep things manageable - but, they never have the impetus to completely cover their shorts because they dont have to.  If there were position limits - they wouldnt be able to do this and your statements regarding this point would make more sense to me.

I'm not so sure we differ, but I do get the sense you didn't understand my intended point in the last post.

As I said in my earlier post, we agree that big players who have the ability to sell more metal in size whenever they want to move the price can manipulate a market. But it is their buying and selling that moves the market. Ted has repeatedly asserted that the very presence of a large short position - without any further buying or selling - is inherently manipulative. It is that contention that I reject as bogus.

If your hypothesis is that JPM is manipulating markets, it is their buying and selling activity - not the size of a constantly maintained short position - that you would look at to prove the thesis.

You also have to go back to the question of motive. All of Ted's ramblings are based on his central contention that JPM has this huge short on as a directional bet, or that they are secretly doing the non-economically motivated trading work of the NY Fed. If you examine how banks have historically made their money for the last several hundred years, you realize it's very unlikely that JPM would make a directional (prop) bet themselves, especially in the current "Volcker Rule" political climate. If you instead conclude, as I have, that Blythe was telling the truth on TV, and that the large shorts on the COMEX are just delta-neutral hedges, you realize that JPM has no motive to manipulate the market.

Best,

Erik

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Bronsucheki, Victor the Cleaner and Erik

Ah, guys, what a pleasure to finally understand more about OTC trading, the existence of electronic quotes and prices being transmitted via arbitrage. Thank you.

Things make more sense to me now.

This is one of the most informative comment threads I've read in quite some time, especially after reading some of the links in various posts.

I am repeating myself a bit, but I still have questions and I am very suspicious of the many fishy events that occur, for example counterintuitive waterfall price drops before major CB announcements of more printing and/or devaluations. I do wonder whether central banks are entering the markets and trying to use the gold price as a signal at times like those. Comments from central bankers like the one that Volker made about his mistake in not containing gold during the 70's are not reassuring, plus other comments that have been made by important figures at various times. And one reads of other anecdotes such as Morgan Stanley (I think) having been sued, successfully, for charging customers storage fees on bullion that wasn't even in the custody of Morgan Stanley, if I remember correctly. It's the sum total of many little details like those that give people their doubts about the integrity of what goes in the gold and silver markets.

I have to say, one of "gut feel" problems with the idea of central banks relentlessly leasing more and more gold and shorting gold via intermediaries on exchanges to supress the price or JPM mercilessly dumping silver is that if you are going to short something to overwhelm the market with the intention of buying back your shorts at lower prices, why haven't enough futures market participants cottoned on to this? I don't believe markets are totally efficient, but surely they should be efficient enough that people would try to antipate these moves, making it more difficult for JPM to get away with it? That mechanism, which I think Ted Butler has written about, relies on the theory that longs, in the aggregate, get "flushed" out repeatedly and without learning from their mistakes and always eventually buy back at higher levels than they sold, does it not? I'm not a futures trader, but it just seems odd to me that they would be able to continually get away with this activity year after year. Also, it means the HFT algorithms are never improved upon. Maybe lots of traders are that stupid though, what do I know.

If JPM does have an advantage would it not stem largely from the fact that they bird's eye view of the OTC markets and the COMEX, and know exactly how much is really hedged, how much physical bullion is being delivered, what levels speculative interest are at, etc. etc, i.e. they have an asymetrical information advantage and are in a unique position to profit from it? Whether they are going long or short? I dunno. Maybe they would say that's unethical and they don't engage in that but who trusts what Wall Street bankers say these days. 

PS Victor, correct me if I am wrong, but gold and silver are the only futures traded commodities whose price is determined by arbitrage on the OTC market, and is dependent on what happens in the OTC market, then doesn't this make the COMEX gold and silver COT reports totally meaningless? So what if speculators are flushed out of COMEX, and so what if "commercials" are going increasingly net short or not? Without knowing what is happening in the (bigger) OTC market, it's totally impossible for us puny mortals to see the bigger picture, right? I guess all that the COT can tell you are things like the general level of speculative hedge fund interest in precious metals?

Erik, please send thanks to Jeff Christian for taking the time to give an explanation. And thanks for your excellent set of replies.

Hey, I'm a small investor (really, really small) and I'm trying to learn as best as I can.

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My pleasure.

Hi CPTWaffle,

Glad you've enjoyed the exchange, and yes I must say myself that I've been amazed at the life this thread has taken on. FIrst Jeff Christian and then Bron Sucheki personally participating in an online discussion forum is rather unprecedented, IMHO. For anyone who doesn't recognize Bron's name, he's one of the head honchos at Perth Mint, and definitely knows the market well.

I'm quite curious to see what Victor's thoughts are on your excellent question here:

CPTWaffle wrote:
PS Victor, correct me if I am wrong, but gold and silver are the only futures traded commodities whose price is determined by arbitrage on the OTC market, and is dependent on what happens in the OTC market, then doesn't this make the COMEX gold and silver COT reports totally meaningless?

I hadn't thought about this aspect before, but it's an excellent point. I could argue it either way myself, and don't really have enough knowledge to have any conviction on the matter. On one hand, you're right that if the market price is primarily determined in the London market and transmitted via arbitrage to the COMEX, then COT reports have far less meaning. I wonder if anyone has ever pointed this out to Ted?

But the counter-argument is that COMEX has a life of its own, and a lot of traders operate there. The arbs keep the price in line with the London market, but one could easily argue that the arbs can only do what trades are necessary to close any gap between markets. I can't see how they could game the COTs to their liking. So the COTs should be a natural and reasonably accurate reflection of the sentiment of that minority of PM traders who operate primarily on the COMEX. I need to think more about this to decide if there is any way to game the COTs to deliver a false signal, if that were someone's objective.

I'll let Jeff know his participation was appreciated. Thanks also to Bron for chiming in as well. This thread is suddenly becoming a who's who of the PM business!

All the best,

Erik

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OTC market

CPTWaffle,

just to make sure there is no misunderstanding. The banks trade gold and silver as currencies. In addition, by some coincidence, the CME also has some futures contracts on gold and silver similar to those contracts on commodities. Since the metals are the same, of course, the two markets are linked by arbitrage. Now it turns out that the OTC market is about 8-10 times bigger (both in terms of paper volume and in terms of physical volume), and so I find it very plausible that the major action is in the OTC market and then this is transmitted by arbitrage to the COMEX.

So, yes, the COT reports tell you a lot about COMEX (10% of the market) and nothing about OTC (90% of the market). Does this mean they are useless? Perhaps not enirely. Firstly, they do tell you the position of the arbitrageurs. Secondly, it sounds plausible that many leveraged speculators at the COMEX and OTC behave in a similar way.

Let me add another warning. I have a rough estimate (measuring the velocity at the COMEX, i.e. daily volume per open interest and then extrapolating this to the OTC market), that suggests that about 95% of all gold trading is paper and about 5% is physical. So it is plausible to think that the paper gold investors are leveraged and trade on margin, and so if there is a liquidity crisis and the prime brokers cut the credit lines of the hedge funds, then the price of gold would drop because the leveraged longs have to liquidate. Of course, physical gold is the ultimate hedge against systemic issues in the financial system, but the price action may be dominated by the leveraged longs rather than by the physical buyers. This is basically what happened in 2008. Everyone was scared and this is why they dropped paper gold. That a smaller number of other people bought physical gold is also true, but did not prevent the gold price from crashing.

I would always keep this in mind. Physical gold is the hedge. But the paper price can behave in a counter-intuitive fashion in the short run. In fact, this makes the gold market highly unstable because there are some who are trying to change their dollars for gold, and if the price drops, they take away more physical gold and drain reserves from the banks. So the gold market may well blow up because of a low price rather than because of a high price.

I wonder whether the U.S. would buy paper gold in this situation, just in order to stabilize the market.

I know that GATA and friends always tell you that "the central banks" want to suppress gold. I know that the U.S. have a serious difficulty with a high gold price because it undermines the role of the dollar as an international reserve, but many foreign central banks (the ECB for example) have no problem at all with a high gold price. In fact, the rest of the world has done a lot of planning in order to smoothly replace the dying dollar with gold as the major international reserve.

Sincerely,

Victor

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Excellent post Victor.. and great thread...

Victor said (highlight mine),

I would always keep this in mind. Physical gold is the hedge. But the paper price can behave in a counter-intuitive fashion in the short run. In fact, this makes the gold market highly unstable because there are some who are trying to change their dollars for gold, and if the price drops, they take away more physical gold and drain reserves from the banks. So the gold market may well blow up because of a low price rather than because of a high price.

I wonder whether the U.S. would buy paper gold in this situation, just in order to stabilize the market.

I know that GATA and friends always tell you that "the central banks" want to suppress gold. I know that the U.S. have a serious difficulty with a high gold price because it undermines the role of the dollar as an international reserve, but many foreign central banks (the ECB for example) have no problem at all with a high gold price. In fact, the rest of the world has done a lot of planning in order to smoothly replace the dying dollar with gold as the major international reserve.

This goes to the fundamentals of Gold (and Silver).  Much of what we have been talking about.. whether or not manipulation is happening ...  really addresses another aspect of the investment argument - call it the "manipulation arb".  The idea is that if/when the manipulation schemes break down due to overwhelming physical demand, there will be a big jump in price just due to this breakdown.  I do believe there is manipulation...I think Gold and Silver are being (tape) painted as risk assets, rather than the ultimate safe havens that they are. To be honest though, I have no idea how large I would estimate the manipulation arb differential to be.. and I don't really care to argue about it anymore.  I think we all agree in principle that Gold is a reasonable play for long term wealth preservation.. and that is enough for me.  

To Victor's point above;

http://thespellmanreport.com/2012/04/21/warren-buffet-and-the-new-calcul...

"What we are witnessing is a sea change in which market forces are driving a de facto return to the gold standard. All that is missing for this to be a de jure gold standard is some regulatory and legal recognition and one has been proposed. The Basel Committee for Bank Supervision, the maker of global capital requirements is studying making gold a bank capital Tier 1 asset.

This implies banks would be regulatory blessed to operate with less equity capital than is normally required of banks if they held more gold as an asset. Basically,  regulators would allow banks to be more leveraged, meaning the banks would not suffer as much equity dilution to recapitalize after sovereign and mortgage write downs. Not only would gold then be backstopping debt and currency but also be backstopping bank equity capital.  So the realm of gold is expanding to fill the void of other “money good” assets and elevating its demand.

The world has gravitated from one gold-backed paper currency to another before, and it likely is happening again. It would depend on whether investors in liquid, default-free, inflation-free paper prefer gold-backed Chinese Yuan to Swiss warehouse receipts or deposits from large international banks with large gold positions that operate with lots of leverage. This is a market choice that will determine the gold linked paper store of value, but the point is that all the paper contenders derive value from the gold backing, and thereby expands the demand for the shiny metal. This is the new calculus of gold. This state of affairs is likely to remain until developed world governments no longer reach for the unreachable and pressure their central banks to finance it."

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Cute metaphor, but physical

Cute metaphor, but physical cheese won't be called upon to perform its hedging role in extremis. ... Even though unallocated holders have no claim on physical, do fiduciaries believe their holding hedges them against a government money crisis? If they do, then fractionally-reserved bullion banking is effectively diluting real physical demand, and GATA's argument rings true.

50sQuiff, Victor makes the point about physical gold being the only real hedge and this is correct. However I find it hard to believe that the holders of unallocated accounts with bullion banks do not know exactly what they hold. An unallocated account with a bullion bank is not available to "retail" investors and is only held by large corporate or what many jursidictions call "sophisticated investors". The contractual terms of a metals account agreement with a bullion bank are very clear as to the status of unallocated and it is my view that the holders of these accounts are smart enough to read the fine print and know:

1. Unallocated is a mere liability of the bank
2. Bullion banks do not maintain 100% physical reserves
3. Bullion banks thus lend or use some faction of the unallocated
4. They (the client) is thus taking a credit exposure to the bullion bank
5. Conversion to allocated is normally possible but the bullion bank is not contractually obligated to do so

I would suggest therefore that many of the holders of bullion bank unallocated accounts are just interested in cash gains/losses. They are like the futures holders Erik mentioned - paper shorts AND paper longs. They are playing a paper game and they know this.

If this is correct, then fractionally-reserved bullion banking is not diluting real physical demand.

Regarding point 2, the 100:1 ratio that is often mentioned (and I don't know where that 300:1 came from), this is misunderstood as the physical fractional reserve ratio for unallocated accounts. As discussed in this personal blog post, the 100:1 comment by Mr Christian was a reference to the volume of trading of paper gold versus how much is physical delivery versus cash settled. In that post I have sourced references where Mr Christian reveals that the bullion banks operate at around 10:1.

My view is that a 100:1 physical fractional is ridiculous considering the crucial role London plays in the physical market. London unallocated simply could not function on a 100:1 ratio in my view. Those who accept this number do not appreciate to amount of physical delivery made ex-unallocated accounts by the trade.

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Erik T. wrote:My

Erik T. wrote:
My understanding is that a big part of Jeff Christian's business at CPM Group is teaching mining companies exactly what you said - that they don't need the big bullion bank middlemen and their fees, and can learn to do this themselves, with his help.

The funny thing about how Mr Christian has been painted by many as one of "them" on the side of evildoers is that actually his business is in opposition against the bullion banks. Consider this statement by Mr Christian in a presentation to the International Cotton Advisory Council in October 2002:

A producer should use an advisor such as CPM Group, which is not trading against the producer. Banks and dealers have a conflict of interest between their own trading positions and the hedges they advise their clients to take.

Or maybe Recent Lessons Learned About Hedging (January 2000):

Hedgers should not rely on their trading counterparts for hedging strategies. These entities take the opposite side of the hedge transactions, have inherent conflicts of interest, and always keep their own best interests in mind, even if these are the short-term best interests and arguably not in the banks’ own long term best interests.

These statements don't square with one working for the interests of bullion banks. Goldbugs should consider that Mr Christian is more closely aligned with their interest than those of bullion banks.

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Accredited does not mean Sophisticated!

bronsuchecki wrote:
I find it hard to believe that the holders of unallocated accounts with bullion banks do not know exactly what they hold. An unallocated account with a bullion bank is not available to "retail" investors and is only held by large corporate or what many jursidictions call "sophisticated investors". The contractual terms of a metals account agreement with a bullion bank are very clear as to the status of unallocated and it is my view that the holders of these accounts are smart enough to read the fine print and know:

1. Unallocated is a mere liability of the bank
2. Bullion banks do not maintain 100% physical reserves
3. Bullion banks thus lend or use some faction of the unallocated
4. They (the client) is thus taking a credit exposure to the bullion bank

5. Conversion to allocated is normally possible but the bullion bank is not contractually obligated to do so

I would suggest therefore that many of the holders of bullion bank unallocated accounts are just interested in cash gains/losses. They are like the futures holders Erik mentioned - paper shorts AND paper longs. They are playing a paper game and they know this.

Bron,

I concede that you know the PM market far better than I do, but I have to strongly disagree with you here, particularly on the points emphasized in bold. As you know, unallocated bullion accounts are available to both corporate accounts and accredited investors. But in the Private Banking biz, those accredited investors are more often referred to as easy targets than "sophisticated". I have personally met several HNWIs whose investment goal is to hedge systemic financial collapse risk, and who are proud of themselves for having negotiated zero storage fees in what are actually unallocated accounts. When I have tried to explain to them that they do not own bullion and are actually unsecured creditors in a fractionally reserved system, they not only refuse to believe me, but in some cases have been insulted and become indignant.

I have also been to professional-only conferences, and met licensed wealth management professionals who are completely confused about how allocated and unallocated metals accounts work. I concur with your view that it is their job to read the fine print and know what they are talking about, but that doesn't mean they do.

I've also had an HSBC Private Banker try to sell me an unallocated account, swearing up and down that the no-fee thing was a "courtesy", to the bank's "most valued" customers, but that the bullion was definitely mine, titled in my name, and free of any credit risk! When I told him he had a deal as soon as he provided me with the bar serial numbers I would be buying, somebody on his metals desk finally explained to him what I already knew. And he was the guy selling this service! FWIW, the guy in question was probably not sleazy but just plain stupid, which is usually the case with "Wealth Management Professionals", more commonly known by their clientele as predatory morons.

When I had to put up a sizable investment in Hong Kong to qualify for an investor resident visa, I told them to put it all in the HSI Tracker ETF (2800.HK). The same guy told me that was a big mistake and I needed to diversify the investment. I told him I didn't need to diversify because I intended to delta-hedge to flat net notional in my futures account anyway. Put your seatbelt on for his response... He said that was a poor strategy because Airline stocks are not a good hedge for a broader index like the HSI! When I used the phrase "Delta-Hedge", the guy actually assumed I meant I was going to short Delta Airlines stock to hedge the exposure! This was an HSBC Private Banking "Relationship Executive", a/k/a Predatory Moron.

That's a representative sample of the "professionals" of whom you speak, Bron. When you say these are big boys who are supposed to read the fine print and know their game, you're absolutely right. But that doesn't mean they do. They're mostly financially clueless salesmen who know how to wine and dine their clients, and little else. I know you and your team in Perth are top notch, but you're the exception, not the norm.

All the best,

Erik

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Jim H
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Bron....

Really a pleasure to have you posting here.  Not to butter you up even more... but one of my favorite possessions is my 1 Kg Lunar Dragon....

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unallocated

Bron and Erik,

I agree with Bron that many holders of unallocated gold are probably the same sort of people who would buy a futures contract on margin. This is why I said that once there is a liquidity crunch, it is understandable that a lot of (paper) gold is sold. This explains the price drop in 2008 without invoking the manipulation meme. In fact, in spring 2008, a fashionable trade was long commodities, gold, oil and short financial sector stocks. When short sales were forbidden later that year and when the prime brokers cut credit lines, the speculators had to sell their (paper) gold.

But I have further comments, too.

Even if, as Bron says, the unallocated does not divert physical demand, it does influence the price. This works as in every currency. If the banking system creates credit, more of this credit can bid for other stuff and thereby causes inflation if the other stuff is mesured in the currency in which we create credit. In our case, the currency is gold, and if you create credit (=unallocated), this credit can bid for other stuff (dollars) as well as physical gold can. This reduces the gold price in dollars.

It seems most people understand the following analogy best. If everyone has to pay cash for their house, the house prices are low. Now the banks create credit. Suddenly, some people who were not able to buy a house with cash, can take out a loan and join the bidding. The result is that house prices go up. In our case, the mortgage is unallocated gold and the house is a dollar.

Apart from the presence of unallocated gold which has an effect on the gold price, the unallocated contracts were used politically in the late 1980s and in the 1990s. Firstly, some oil countries were offered to buy unallocated gold (on the other side was a forward sale by a mining company) so that they were able to purchase gold in size without running the price. At the same time, many wealthy investors were talked out of holding physical gold and were talked into holding gold-like contracts.

There were a few estimates that around 1999-2001, there were more than 10000 tons of gold that had been leased or forward-sold, and so I would expect that a corresponding amount of holders of unallocated were in unallocated for political reasons, i.e. were not speculators. We have no idea how long it took to work this off - perhaps the last bit of these positions is still open.

BTW, I don't think any country will go back to a gold standard in the sense that their currency unit is backed by a weight of gold. Since the Euro zone is a major trade hub and since the ECB values gold at its market price, nobody would be able to fix the gold price in the long run. Whenever this results in an undervaluation of gold in that currency, this would basically just drain gold to Europe.

Sincerely,

Victor

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Giants

Erik T. wrote:
When you say these are big boys who are supposed to read the fine print and know their game, you're absolutely right. But that doesn't mean they do. They're mostly financially clueless salesmen who know how to wine and dine their clients, and little else.

That's good first hand feedback Erik and I won't disagree. The question then becomes what percentage (by ounces) of unallocated account holders are aware and which aren't. Any industry players/commercials would be and maybe some hedge funds who only care for their (as Victor says, leveraged) cash returns, those who blogger FOFOA calls the Giants. You feedback would indicate a fair if not all of the HNWI are not. They may be less industry ones than HNWI, but industry would hold some big balances relative to HNWI. We have no way of knowing but I'd guess that it isn't a case that 95% (by ounces) don't know, which is what most people think I bet and the basis on which they believe a "run" for physical will bust the system.

I'd just say the percentage who know full well what unallocated is and thus who don't care about physical delivery and happy to take cash settlement is much higher than many believe. If true, this means the system has more robustness or less risk of a run for physical and thus the game can continue for longer than many think.

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