PM End of Week Market Commentary - 8/24/2013

davefairtex
By davefairtex on Sat, Aug 24, 2013 - 5:03am

Gold finished Friday up $25.50 on above average volume to 1396.40, with silver up $1.01 to 24.05 on heavy volume.  The gold/silver ratio dropped to 58.08, a level last seen in April prior to the gold crash.  A poor new new home sales report was the catalyst for the week's big move; bad news in housing means (presumably) a lower chance of tapering at the next Fed meeting.  PM prices closed the week at or near their highs, which is a good sign.

Over the week gold is up $21.30 [+1.55%] while silver is up $0.86 [+3.71%].

The dollar this week was largely neutral again, up 0.06 [0.07%] to 81.41.  The dollar remains in a medium term downtrend, although momentum appears to be slowing as the dollar seemed to find some support at 80.75.  While this week the buck was not a factor for PM, moves down in the buck are generally supportive of PM prices, while moves up will provide headwinds.

The gold/silver ratio has descended from its peak at 67 on July 28th to its current level of 58 in only a month.  It is right at the 200 day MA for the ratio.  A falling GSR is a bullish sign.

Mining shares were up on the rally in PM Friday; GDX +2.62%, and GDXJ +5.43%, with the juniors outperforming.   Volume was heavy in GDX, but the price action was a bit lackluster.  While gold has clearly broken out setting a new cycle high, GDX has not done so.  For the most part, miners have traded sideways this week - with GDX up only +1.17%, and GDXJ +4.93% overall this week.  As of now, the miners have not confirmed the breakout in PM, which I interpret as a bit bearish.

Here are the two charts: you can see that gold had a breakout, while GDX did not.

Physical Supply Indicators

* Gold premiums in Shanghai dropped $3.88, closing the week at a premium of $4.39.

* The GLD ETF gained +4.81 tons of gold this week.

* The COMEX lost -0.90 tons of registered gold this week, the losses coming largely on Friday.

* LBMA GOFO and Gold Lease Rates were virtually unchanged.

* Premium/Discount to NAV: Based on 16:00 EST Friday prices, gold 1396.30 and silver 23.99, CEF 16.33 -2.25%, PHYS 11.65 -0.08%, PSLV 9.64 +2.89%.  Compared with last week, Sprott's fund premiums dropped somewhat, while CEF's discount improved.

The physical ETF premiums are more or less even, Shanghai premiums are disappearing, and GLD ETF has put in two straight weeks of increasing gold holdings.  COMEX registered gold is still dropping, however, so I'll label the supply situation as mixed.  Overall, rising prices appear to continue helping the gold physical supply situation, but let's call the supply situation mildly gold-price positive.

I have an explanation for negative GOFO rates later on in the report.

Futures Positioning

The COT report for gold shows the Producer category reduced both long and short exposures this week, with long exposures dropping more than the shorts, netting out to a drop of 5,000 contracts or about 5%.  Managed money more than made up for this by dropping shorts and increasing longs by a net of 10,000 contracts, a big move.  Smart money is taking some profits and managed money are both covering shorts and increasing long exposure.  Positioning is still bullish.

Moving Average Trends [20 EMA, 50 MA, 200 MA]

Gold: short term UP, medium term NEUTRAL, long term DOWN

Silver: short term UP, medium term UP, long term DOWN

Gold this week moved from medium-term down to neutral, and silver moved from medium-term neutral to up.  Things continue to look good for PM from the trend perspective; even if PM were to track sideways, the moving averages would continue to move up.

GOFO, LIBOR, and Gold Lease Rates

Negative GOFO rates have been considered by some to be the harbinger of an imminent default at the LBMA.  In some sense, the question to be asked is, how on earth could Gold Tomorrow be worth less than Gold Today except as an indication of a potential default in the offing.  But is an impending default the only reasonable explanation?

Looking at history, I've concluded that negative GOFO rates are not a sign of a coming gold-supply-apocalypse, but rather an artifact of an increasing Gold Lease Rate (GLR) combined with a very low LIBOR rate.    Viewing charts of GOFO without understanding LIBOR's movements are potentially deceiving.  Since GOFO = LIBOR - GLR, as LIBOR moves closer and closer to zero, GOFO = -GLR.  And, the 6 Month LIBOR is at its all time low of 0.39% - it has never been lower than this in the history of the timeseries.  This simple math means, if the GLR moves above LIBOR [and historically the GLR was often > 1% from 1990 - 2002], GOFO goes negative.  If LIBOR had been 0.39% during the 1990s, GOFO would have been negative for all of that time.

My conclusion: negative GOFO rates are all about an all-time-low LIBOR, combined with a mildly increasing Gold Lease Rate.  A GLR over 0.40% is nothing historic; therefore the "historic" negative GOFO rates are all about LIBOR's historic lows along with some mild moves in the GLR.

I'm not saying a supply shortage does not exist.  All I'm saying is, negative GOFO rates aren't "smoking gun" evidence of this with LIBOR at 0.39%.

Why Did Gold Lease Rates Increase?

So half the story is about historically low LIBOR rates, and the other half is about an increase in the Gold Lease Rate.  The next question is, what made the GLR rise?  Perhaps its an impending default at the LBMA?

This article describes gold leasing and its associated mechanisms.  http://www.silveraxis.com/commentary/gold_silver_leasing.pdf.  One excerpt I found possibly explanatory is the following section:

3) Gold mining companies can upset the gold swap market and create conditions that make it lucrative for banks to engage in gold "leases" and other transactions as a result of mining company hedging activities that create an artificial short supply of futures and forward contracts, thus depressing the Gold Forward Offered rate.

Translated, that means when mining companies in aggregate start to hedge more, they dump a bunch of short futures contracts onto the market further out in time than the front month contract, depressing the price of "gold tomorrow" vs "gold today" - exactly what we are seeing right now in negative GOFO.  I believe that mining company hedging is causing GLR to slowly rise.

How does this work mechanically?  One futures contract instance exists for each month in the future.  You can't have a futures contract without an expiration date: December 2013 Gold is the current front month.  So presumably, a mining company that wants to lock in gold prices (and thus assure themselves of a profit) would sell a number of contracts at different dates further into the future than the current month.

Imagine a company completely hedging a 1 million ounce annual production: it would have to sell 833 (100-oz) contracts for each future month; 833 Jan 2014, 833 Feb 2014, 833 March 2014, approximating the expected production rate of the mine.  This additional "supply" of futures contracts would depress future prices relative to current prices.  If enough companies did this, "gold tomorrow" would eventually end up being worth less than "gold today" especially with the absurdly low LIBOR rate.  Perhaps a month ago, Dan Norcini at http://traderdannorcini.blogspot.com/ talked often about miners increasing their hedging as a result of the gold crash, using evidence he found in the gold COT reports at the time.

From a business perspective, this sort of activity makes sense.  If you ran a gold mining company, perhaps you too would find it worthwhile to lock in a slightly lower price that guarantees you a profit, rather than gambling your job and your company's life on an uncertain future price of gold which might well end up with you and your friends on the street if the price of gold were to tumble further.  Hedging is all about risk reduction, and that's not a surprising reaction after a 30% downside move.

There may be other things going on besides mining company hedging, but I believe it is a reasonable explanation for the mild increase in the GLR.

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29 Comments

ikoch's picture
ikoch
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Posts: 2
Your discussion of the

Your discussion of the GLR/GOFO/GLR is not correct.  It is not a two way math equation.  GLR (gold lease rate) is the artifact of GOFO and it can never be the other way around.  GLR is not the rate at which you lease gold.  It is a measure of profitability for the arbitrage of LIBOR vs GOFO.  It is not a two way math equation.  GOFO Is a market set rate.  LIBOR is a set rate.  GLR is a meaningless abstraction of value only to derivative traders and arbitragers.  It is not the rate at which you lease gold.  GOFO is the only important number for gold and it stands alone.  You can construct "what if" scenerios based on the GLR and LIBOR all day and all night but they will never give you any insight into the the actual rate of interest you will recieve, or would have been given, loaning your gold out.

If you want to say GOFO is complete horsepoo.  Ok.  I cannot argue with that.  But to use GLR in the way you are using it is like saying you have to drive 300 miles on one tank of gasoline, but there is only one gallon in the tank.  Therefore 1 gallon goes 300 miles. 

ikoch's picture
ikoch
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Added note on backwardation.

I also want to add that backwardation means nothing compared to GOFO.  If I thought the market was trading freely and the backwardation was bigger, I'd rethink it.  BUt the futures market is a joke.  What matters is that I get an interest rate paid to me for taking a loan is fiat and using gold as collateral, instead of paying interest on taking loan where gold is collateral.  And that is what negative GOFO is.

Jim H's picture
Jim H
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Ikoch

Thank you thank you thank you.  I was reading the latest davef propaganda piece this morning and thinking exactly the same thoughts as you but was on the way to the beach      I am so glad to see someone else in here fighting the good fight for truth.  Few can stand up to the subtle manipulations of our resident banker mouthpiece davef.  Even our beloved proprietors don't see it.  

davefairtex's picture
davefairtex
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Posts: 1338
GOFO, LIBOR, and the search for truth

ikoch, Jim -

I find that when a line of reasoning runs counter to the long-held biases of certain individuals, they call it propaganda or engage in name-calling, etc.  Argumentum ad homenim clearly is convincing for the choir, but I do not find it compelling.  And my portfolio really isn't impressed.

I think I'd have an easier time with a trader such as Dan Norcini, who would be able to follow the argument I made without resorting to arguments like "hey, you can't use math that way", "the futures markets are a joke", or "you're such the banker mouthpiece."  Dan understands the futures markets cold, you can see that in every line he writes.  If he disagreed with what I said, he'd do it on the merits, and thats the kind of discussion I love having, because it can only lead to the truth coming out.

I would dearly love to find a smoking gun that I can prove to my satisfaction.  That woud give me an advantage.  Morever, it would be really fun to write about!  Lastly, my core position would be really happy if we did have an LBMA default, so I really am predisposed to believing such things.  Unfortunately over the years I have grown allergic to seeing red in my portfolio, so I can no longer simply believe things without proving them true or false on my own.

Its why I calculate the NAV myself, rather than trusting the website.  Why I calculate the premiums in Shanghai myself.  Why I validate trading strategies such as "buy in NY, sell in London" (it works, but unfortunately not well enough).  I've found about 30-40% of the stuff out there is just faith-based Cargo Cult bunk.  That is why when someone comes up with a claim, I have to prove it to my own satisfaction before I actually put real money on a trade based on that claim.  It takes more work, I have to write a lot of code to do it, but - the truth can set you free.  Or in my case, possibly make me money.  Or at the very least, avoid actually losing me money.

Ikoch, Jim - you want a discussion on the merits?

Naturally if you think "the futures markets are a joke" that short-circuits any sort of dialog and obivates any need to understand how they work.  But if we notice that the futures markets set the price of gold these days, and the price of gold is something of interest to you - perhaps such a discussion becomes more worthwhile.

Things you might consider: how do short term interest rates affect cost of carry?  Where are short term rates now?  How does cost of carry affect the likelihood of backwardation?  What the heck IS cost of carry anyway?  How does futures supply affect futures prices?  How does all that stuff fit together anyway?

Jim H's picture
Jim H
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Reasoning?

DaveF.. you got caught treating the relationship between GOFO and GLR as if it is a two way chemical equilibrium... it is not.  And you did it as a means of brushing of the consequence of negative GOFO, as if it really didn't represent the scarcity of Gold available for immediate delivery.  If someone here, usually myself, is not constantly on you, you always seem to revert back to any kind of reasoning that will obscure the truth of Gold's scarcity, rather than face it.   

From Dave Kranzler, who posts as Dave from Denver and also on Seeking Alpha;

http://seekingalpha.com/article/1634162-update-on-the-negative-gofo-gold...

First, I want clarify some confusion about the GOFO and the gold leasing rate. Most analysts are incorrectly referring to the GOFO as the gold leasing rate [GLR]. In fact, there is a subtle but distinct difference between a dollar/gold swap and a gold lease transaction. Technically, the GLR = LIBOR - GOFO. GOFO is the rate paid on a dollar/gold swap. In other words, someone with gold needs to borrow dollars short term and uses the gold to collateralize the loan, thereby achieving a lower interest rate on the dollar loan. The market sets the rate for that swap and the LBMA publishes the rate (link above).

A gold lease transaction, on the other hand, is one in which a Central Bank leases out its gold to a bank, the bank pays the lease rate to the Central Bank and takes the gold and sells it in the market. The bank then gets use of the cash from the sale proceeds. In general, gold lease transactions are much longer in duration than dollar/gold swaps. The gold lease transaction was started as a "carry trade" of sorts when gold was in its 20 year bear market that started in 1980. The lessee leased the gold from a Central Bank, paid a small rate of interest then sold the gold and used the cash for higher yielding investments. When the lease term expired, the bank could repurchase the gold at a lower price, making money on the sale/buyback plus "carry" on the cash, and return the gold to the Central Bank.

A dollar/gold swap might appear to look like a lease transaction when the GOFO is negative, because the entity with the gold is swapping out its gold in exchange for cash collateral up front and is being paid a rate of interest on the gold for the swap. But a dollar/gold swap is not a lease. In a lease transaction, the entity with the gold does not receive any cash up front, but must bear the market risk of the gold being returned when the lease expires. As you can see, a lease transaction, because there is no collateralization of the gold loan, involves counterparty risk that is not embedded in a dollar/gold swap. In fact, in a bull market for gold, the lessee will lose money on the back-end of the lease transaction, as it will have to buy the gold back at a higher price. If the lessee defaults on the lease, the lessor does not have the benefit of cash collateral. In a dollar/gold swap, the both sides of the transaction have collateral.

The fact is, the future's market for Gold has become a joke.  It has devolved into a big circle jerk where the bullion banks deliver to other bullion banks... mostly at this point JPM is the one taking the deliveries into its house account.  As well, since DaveF likes charts so much, I will repost a chart that I saw on Jesse's site that is the best single representation of the joke that Comex has become (look down at the bottom to see the dramatic degrade in the Comex' ability to actually deliver Gold should holders of futures contracts want it delivered... worst situation by far in the last 10 years).  There it is, in black and white... and it says, "THE COMEX IS A JOKE".  I don't know if the Comex will default or not.. it does not really matter.. it's relevance is waning as can be seen by the decreasing open interest.. which kinda makes sense based on the obvious lack of ability to deliver in size.

source:  http://jessescrossroadscafe.blogspot.com/2013/08/comex-registered-gold-falls-to-new-low.html   

So DaveF...  Don't make it out like I am trying to get points here (the choir and all).. I don't really care if anyone here at PP.com likes me or not.  I am here for me and I have evolved past the point where I care what others think of me   ... this is where I have landed, and if you say stuff that is wrong, expect that you will hear about it from me, or that I will pile on when some other intrepid seeker of truth inserts him or herself. 

The truth, and the direction your portfolio will move Monday are not necessarily the same thing.  I have nothing against technical analysis.  The truth is hard to devine because the powers that be are so hard at work to obfuscate it in their pursuit of perception management.  In their pursuit of centrally managed markets.  Let's close with a quote from David Stockman's recent book, "The Great Deformation", Chapter 33, which was my beach reading today;

Alas, none of these solutions are even remotely possible within our now fully corrupted constitutional framework.  The latter is no longer a system of democratic choice and governance;  it is a tyranny of incumbancy and money politics.  As such, it has set in motion a financial doomsday machine that is inexorably speeding toward national fiscal insolvency and monetary collapse

Got Gold and Silver?     

davefairtex's picture
davefairtex
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Posts: 1338
COMEX jokes, gold backwardation

Hey, happy to see all the charts.  You're right, I love them because they provide context.  Picture = 1000 words, etc.

Your quote from Dave didn't address my central point: namely that gold backwardation could be caused by increased mining hedging combined with extremely low interest rates.  I'm puzzled why you thought it did - perhaps you didn't understand the case I was making?

Regarding why you think COMEX is a joke, as I understand it, your issues are threefold: 1) JPM is now taking delivery of gold and has been for the past month or so, 2) COMEX registered gold is dropping - to the lowest level since before 2003, and 3) open interest in gold futures has declined from a high of 60M oz to its present level of around 40M oz.

JPM has been taking delivery of gold.  They're also net long.  This is a curious matter, and I suggest, a bullish sign.  I don't interpret it as COMEX being a joke, I think its gold-price positive. Same with COMEX registered gold dropping: its gold price positive.  Someone has to go out there in the market and refill the COMEX.  I hope it goes to zero, but I think JPM & crowd will take delivery from all the hedged miners and the gold will return.  They'll find some way out of the trap, it is in their interest to do so, so I'm betting on them to figure out the details.  They've managed to completely escape prosecution for all their fraudulent acts before, during, and after the crash.  I think they'll manage COMEX.  But if they don't, I'll get well anyway.  Core position and all.

I do think its curious timing that COMEX registered is so dangerously low at the same time JPM is net long.  I wonder why that happened?  Think JPM's position benefits from this?  I do.  I think when those guys are concerned, I don't believe in coincidences.

The drop in open interest?  Sure, I can see that as good evidence that COMEX is losing influence, that overall argument makes perhaps the most sense to me.  One of those long term things that will play out in the fullness of time, and something to keep an eye on.  I'd like to see the same chart for LBMA, and see how they're doing.  If they are declining too, that would be interesting to know as well.  Maybe I'll add that chart to my longer term meta watchlist.

But at the end of the day, the rubber meets the road in prices.  And right now, gold prices worldwide really are guided by COMEX prices, regardless of all the evidence you provided.  As we saw after the crash, the worldwide gold arbitrage brings them closer together.  All that gold moving out of GLD and off to Shanghai to collect on that $30 premium: that's the market doing its thing.  Gold doesn't have to come from COMEX registered for it all to play out properly.  COMEX prices affect GLD and the LBMA, and almost certainly vice versa - and physical gold gets sucked out of wherever it can be obtained and sent off to Shanghai, problem solved.  And that flow stops happening when prices rise.  Perhaps GLD gold and LBMA gold should be included in COMEX registered gold, because its all linked together.  That seems to be how it works in reality anyway.

So while this state of affairs continues, I'm going to acknowledge reality and that is that worldwide gold prices are currently set by COMEX interacting with LBMA interacting with GLD.  Once they start to meaningfully diverge, my core position is there to make sure I'm laughing at the COMEX joke right alongside you.  But not until then.  And if that never happens?  That's ok with me too, I will take what comes.

In the meantime, I'm looking for those divergences.  And I certainly hope if you notice them, you'll post about it.

As for obfuscation in markets - truth in markets is always tough to discern.  Every market is trying to deceive you, all the time, 24/7.  Not just gold, not just equities.  Its just how they work.  Think about it.  If reading the markets were a simple matter, it would be called "collecting money and getting rich" rather than trading.  Most think all you need is to be smart and understand "the real story" and doing well in the markets is a simple matter.  [In actuality and in aggregate, that's just the definition of dumb money]  Turns out, there's real skill involved that takes time and focus to learn.  The emotional manipulation bit is the worst part, and its been designed in by the big guys at the start.  All markets do this to their participants.  If we imagine that gold is some special case here...really, its not.

And to make matters worse, our friends at the Fed have been frantically manipulating stuff all over the place for the past...well it seems like forever, but its gotten worse over the past 5 years.  Jawboning, printing money, buying stuff, wanging rates around - all of it, distortionary and manipulative.  And these days, if its not a Fed meeting, its a Fed president speaking, or Fed minutes being released.  I'm sick to death of this worshipping at the Fed Altar, and I hope someday it will stop.

But in spite of it all, trend-based trading really does still seem to work more often than not.  And I'm all about going with what works.

One last point.  As far as the big money goes, guys who know, don't talk about it, or if they do, its entirely self-serving in order to benefit their own position.  They are operating under the poker-player's motto: "don't tap the glass."  The market needs dumb money so that smart money can continue to get rich.  So every time I read about how JPM can't possibly get out of some pickle they're in, and all the while JPM is net long, I imagine their trading desk is laughing after work, reading selected passages from various websites, talking about dumb money, and making darned sure that nobody on the desk taps the glass.

I really enjoy hearing facts presented by intrepid seekers of truth, like you did here.  Thank you.

Jim H's picture
Jim H
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Posts: 1516
You seem real again Dave... for now

The Obama administration is reportedly proposing Cass Sunstein as a member of a panel to review the surveillance practices of the National Security Agency (NSA), among other former White House and intelligence staffers. Sunstein was the head of the White House’s Office of Information and Regulatory Affairs until last year, when he returned to teaching at Harvard Law School.

While at Harvard in 2008, Sunstein co-authored a working paper that suggests government agents or their allies “cognitively infiltrate” conspiracy theorist groups by joining ”chat rooms, online social networks or even real-space groups” and influencing the conversation.

The paper also suggests that the government “formally hire credible private parties to engage in counterspeech.” That sounds an awful lot like the 50 Cent Party of online commentators who are paid per comment by the Chinese communist party to sway public opinion.

source:  http://libertyblitzkrieg.com/2013/08/25/obama-picks-cass-sunstein-americas-joseph-goebbles-to-serve-on-the-nsa-oversight-panel/

We can seek the truth together if you want to.  It's up to you.   

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yogiismyhero
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Posts: 173
Yawn......

ZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZzz!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

Goooooo Tigers

Night

wink

davefairtex's picture
davefairtex
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Posts: 1338
seeming real & proving innocence

Well I'm relieved to know I seem real!  I was worried there for a bit.

I totally believe that the government and other organizations have hired credible private parties to engage in counterspeech.  But it does not therefore follow that all credible private parties that happen to disagree with some aspect of your belief system are government-employed counterspeechers!

I can't possibly prove my innocence to your satisfaction.  All those accused Communists ran into the same thing during the McCarthy witch hunts in the 50s.  Ever tried proving innocence?  It's not possible.  Someone thoroughly wedded to their worldview will assume that any evidence presented is simply proof of a really excellent set of cover stories.  Think about it.  How could I possibly convince you to your satisfaction that I am who I say I am?  Seriously.  What's your list?  I lived in the the bay area for a couple of decades, I have lots of friends, lots of places I've worked, a friend of mine is the Vice Mayor of Sunnyvale (!) - but then again, it might all be just an incredibly thorough cover story concocted just to convince Jim H (indefatigable defender of truth and freedom) that this Dave guy (likely evil banker mouthpiece) really is a real person.

Furthermore, it does not appear to be in your interest to believe that I'm real.  If I am real, then you have to consider the possibilty that someone intelligent doesn't believe in exactly the same thing that you do.  We really do seem to agree on most things - but this issue of my "reality" always comes up when I challenge one of your belief systems.  The possibility that I enjoy challenging belief systems in my search for the truth - nah that couldn't be it.  Better to assume I'm just some clever and subtle agent provocateur, since it allows you to instantly dismiss what I say without seriously engaging in discussion.

Its all very curious to me, knowing the truth of my own life's story as I do, and yet knowing that it is impossible to prove.  It is a constant reminder to me of why we have that 5th Amendment to the Constitution.  Those Founding Fathers were smart guys.

I will say this though.  Inside, I am definitely flattered that you think I'm some well-paid government COINTELPRO agent.  The truth is far more mundane...ultimately disappointing...perhaps I should just let it all rest...Of course, that's exactly what a real counterspy would say!

HughK's picture
HughK
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Falsifiability, Karl Popper, and the truth

davefairtex wrote:

 Ever tried proving innocence?  It's not possible.  Someone thoroughly wedded to their worldview will assume that any evidence presented is simply proof of a really excellent set of cover stories.  Think about it.  How could I possibly convince you to your satisfaction that I am who I say I am?  Seriously.  What's your list?  

We really do seem to agree on most things - but this issue of my "reality" always comes up when I challenge one of your belief systems.  The possibility that I enjoy challenging belief systems in my search for the truth - nah that couldn't be it.  Better to assume I'm just some clever and subtle agent provocateur, since it allows you to instantly dismiss what I say without seriously engaging in discussion.

Dave, Jim,

First, I'd like to say thanks to both of you, as well as Ikoch, for your different perspectives on the GOFO, the GLR, and the LIBOR.  My non-mathematical mind needs a little more time to process all of that, which I will try to do ASAP.

Jim, you have put yourself in an awkward position, at least vis a vis many readers, with the labels and innuendos towards Dave.  I don't mean in a good/bad sense, but rather in a logical vs. illogical sense.

I tend to prefer your long-term fundamental view on precious metals, over the short to medium term focus that trading-oriented technical analysis offers.  In other words, I think you're probably right about a lot of what you say regarding gold and silver, regardless of short or medium term fluctuations.  

But then you sort of undermine your excellent points with labels, claims, and innuendos that are so hard to back up with evidence and which leave the bounds of rational productive discourse.  Examples of this include the time you called Dave a troll, as well as calling him a "banker mouthpiece" and saying that his contributions here are propoganda.  Most recently, you imply that he is a government mole.  All this for a guy who simply has offered to post informational daily market commentary on the PMs, and who has said that he holds a core of precious metals that he trades around.  How many fund managers, traders, or Wall Street bankers are going to say that they trade around a core of precious metals?

Now you have said that you don't care what other readers think of what you write, and we all have a right to speak freely here.  But I do assume that you want to write things that are logical.

Dave makes a good point when he says that it's very hard to prove innocence.  That's why one of the better aspects of anglo-american law is that people are innocent until proven guilty.  The burden of proof is on the accuser, not on the accused.  So, if you think you are making a logical conclusion when you accuse Dave of being an infiltrator, what is your evidence?  Is it conceivable that someone might have the beliefs that Dave has, and write the things that Dave writes, and NOT be a government infiltrator?  Why or why not?

You also sometimes imply that you know the truth about gold investment.  This also does not seem like a very logical claim to me, because of the complexity of markets, economic systems, and possible future outcomes.  For example, you might encourage someone to own gold and silver because the truth is that it's the best investment in this age of bank malfeasance and government money printing.  Then, the government decides to first impose a massive capital gains/windfall tax on precious metals,  and next to confiscate all privately held PMs, and finally even to categorize people holding precious metals as terrorists.  (Note: This is an exaggerated scenario, just for the sake of argument.)  In that scenario, the people who invested in farmland might be a lot better off than the gold and silver investors, and those of us who advocated gold and silver investment to our colleagues, friends, and families would have ended up giving advice that led to an undesirable outcome.  Another interpretation of the truth about precious metals invesment could be from the perspective of the future generations of human kind.  In that perspective, the truth is that people who buy precious metals are simply accelerating the degradation of the biosphere due to the serious consequences of PM mining:  habitat destruction, strip mining, heavy metals contamination, etc.  From that perspective, the truth is that none of us who can afford them should be buying precious metals, but instead should all be investing our excess capital in land reclamation and rebuilding natural habitats so that our great-great-great grandchildren have a better chance at survival.  For future generations, the best way to value something may not be ounces of gold but rather calories, as the biosphere's productive capacity falls and food becomes increasingly scarce.

Again, I agree with you that from the perspective of one's unenlightened self-interest gold and silver is a really good idea - maybe the best way to protect one's money from the various kinds of devaluation.  But I would never claim that I know the truth in the way that you have.  

Also, Dave - as well as trader Dan Norcini, for those of us who read his blog or listen to him on KWN - are two people who have been very helpful to me to hear, because they provide counter-arguments to the fairly wild claims of people like Jim Sinclair or Egon von Greyherz, who are constantly claiming that gold is on the verge of a breakout.  I realize that Jim Sinclair has made some outstanding predictions at times.  But he and many other gold/silver cheerleaders (including von Greyherz, Stephen Leeb, and Sinclair, and many more) have also made some claims on the timing of the PM breakout that proved to be incorrect.  None of them anticipated this big drop over the spring/summer.  But, if one had listened to Trader Dan's more short-term, trader-oriented technical analysis this spring, one would not have heard such bullish claims, and may even have picked up on the short-term signals of the market to have waited to buy, putting some cash aside to buy during the summer lows.  

So, for me, Dave's observations are very valuable and educational, as are yours.  I like to see both of you discuss your viewpoints on the PM prices and markets, especially when the focus is on the argument and not the person making it.

I like the following quote by Karl Popper, the famous German philosopher of science and advocate of open societies:

the criterion of the scientific status of a theory is its falsifiability, refutability, or testability

                                 -from Popper's Conjectures and Refutations p. 48

Popper believed that all knowledge is provisional.  That the closest we can get to the truth is a sort of provisional outline, a facsimile that should always be open to amendment, alteration, and especially refutation.  He didn't think that everything was relative, just that we have to be careful when we think we know something for certain and we can close the book on that subject.  Certainty breeds hubris, whereas provisional knowledge engenders a careful and more open-minded demeanor.  I make a lot of mistakes, including thinking I'm sure of something when I really don't know enough, so I am not saying that I practice what Popper preaches as well as I could.  But I do consider his view on truth to be very helpful to my own journey through the world.

Cheers,  Hugh

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KennethPollinger
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Posts: 178
Congrats to Hugh

Hugh.  I appreciate your balanced comments about this ongoing debate. Popper's formulation strikes me as brilliant.

        As for Dave and Jim's raging discussion I gladly admit that, as a neophyte, I have learned much from each, however still somewhat overwhelmed with it all.  Yes, I too, have a core position in actual physical--that's the easy part.

But it's the trading and/or investment part, especially in junior/major miners, that baffles me.  Jim, some time back presented his list of juniors that he followed and then, I believe, jumped out of some, if not all.

Dave talks about having his CORE and then trading around miners but hasn't said much about which ones and why.

Hugh, I think, suggested John Doody's Top 10 might be a help but then added, "not sure of the legitimate audit,"--SO, how know FOR SURE? (Oops. Popper again?)

The debate IS educational (if name calling, etc., can stop) but I, as a neophyte, need some assistance in deciding whether to invest in miners and when, and WHICH and WHY.  Can anyone help me out on this or make a helpful suggestion?

There must be THOUSANDS of miners out there, no?

Maybe a CORE of majors (like Mish: ABX, GG, NEM, PAAS) and then about 10 or so of minors, such as ???????

With appreciation for all, Ken

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sand_puppy
Status: Gold Member (Offline)
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Posts: 429
Different kinds of disagreements

The first two are what most would call an honest difference of opinion.

1.  Disagreements based on access to different information sources.  

2.  Disagreements based on differing perspecitives.  The information gathered may be fairly similar but the "story" used to organize thinking differ.

And the second two, most would consider dishonest differences of opinion:

3.  Disagreement for the purpose of monetary gain.  (Advertising)  The National Association of Realtor always positive and unrealistic numbers seeks to convince us that *now is the perfect time to buy a house.*  Pharmaceutical company sponsored research (that is published) invariably supports the use of the new, expensive, patented drug.

4.  Disagreement for political power.  (Propaganda)  If I can convince you that a certain event is true, you may be willing to divert tax dollars to a certain program or even send your children to fight and die in a war that I would benefit from.  Bill Moyers had a special on the way that the Iraq war was sold to the American people.  One of the tricks was to have local news stations interview "local retired generals."  They would appear on camera, out of uniform, and offer their "personal thoughts" on the dangers of Iraq's proven WMDs.  It turns out that these retired generals were not independent individuals and their thoughts not their own!  They were drawing special income from the pentagon for these appearances and each morning were sent from the pentagon the specific "talking points" for that day.

Here on pp we have lots of different people and personalities.  We don't actually know each other and each other's motivations.  So when a dramatic difference of opinion surfaces we wonder which level of motivation the other might be coming from.

This problem is particularly acute in the light that various political forces are actively working to shape public thinking.  Some have gotten very organized and effective.   From the Washington Post a few days ago they discuss the use of paid "shills" who visit chat rooms to sway public opinion:

Cass Sunstein was the head of the White House’s Office of Information and Regulatory Affairs until last year, when he returned to teaching at Harvard Law School.

While at Harvard in 2008, Sunstein co-authored a working paper that suggests government agents or their allies “cognitively infiltrate” conspiracy theorist groups by joining ”chat rooms, online social networks or even real-space groups” and influencing the conversation.

The paper also suggests that the government “formally hire credible private parties to engage in counterspeech.” That sounds an awful lot like the 50 Cent Party of online commentators who are paid per comment by the Chinese communist party to sway public opinion.

And, from the great utilizer of "information" to guide public consensus:

“It is the absolute right of the state to supervise the formation of public opinion.”

- Joseph Goebbels, Head of Hitler’s Ministry for Public Enlightenment and Propaganda

My own conclusion from all of this, is that we must each seriously consider the level of motivation that each speaker might be coming from.  To fail to do so would be to be naive.

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Jim H
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Posts: 1516
Excellent post HughK

You said,

In that scenario, the people who invested in farmland might be a lot better off than the gold and silver investors, and those of us who advocated gold and silver investment to our colleagues, friends, and families would have ended up giving advice that led to an undesirable outcome.

And I agree with you, there are scenarios one can imagine, i.e. Gold being confiscated or criminalized, where you would be better off having made other prep-related investments.  I would never deny this possibility, though my own position would be to hold onto some or most of your Gold but get it outside of your country into safe storage elsewhere. 

There is only one thing I am certain of, hubris be damned ...  that the dollar will, sooner or later, return to the intrinsic value of all paper monies - zero.

I will remind the board that this whole string got started based on bad math to support a theory about why Gold may not really be so scarce.  (negative) GOFO is reflecting the lack of Gold available today... and has nothing to do with the tendency of miners to hedge with futures.. or not... Dave's theory was based on a false mathematical premise, which Ikoch immediately pointed out.  This string is not about belief systems, even though that is the way it has been steered.  My own belief system is stated immediately above.  When you say something demonstrably wrong about how the Gold and Silver markets work, please expect me to jump in.

I know that my protestations about DaveF's motivations upset some here, and I understand that.  I might be wrong... I might not be.  If I am right, then my protestations have had the effect of keeping DaveF in a tighter box than he otherwise would be in, which means he pollutes my chosen community less with his propaganda - and my own sense of pattern recognition suggests that this may indeed be the case.  If I am wrong, then I just look dumb... which I don't care about.  I am not a mean person... when I attack DaveF I am attacking the same forces of propaganda that would want someone newly awake to be frightened away from building a position in Gold and Silver.  I would actually be quite happy to come to the conclusion that I have been wrong.  I don't take this lightly... I will tell you all that I did at one time have an extensive PM conversation with DaveF, and I have also had a call with both Chris and Adam, and in neither case was I able to convince myself that I was wrong. Out of respect for DaveF (if I am wrong) I am not going to reveal any details of these conversations.  I know this might sound silly to some of you.. so be it. 

Kenneth,  I continue to believe that fortunes will be made in the PM miners.  I am currently holding SA, MUX, NEM, and EXK.  As it has been for the last year... one has to be very cautious about the possibility of more attacks on the price of Gold via dumping of futures... and you really have to be ready to sell out to cash at any time, or run tight stops to achieve same... but everything is aligned very well now in favor of a significant run higher.

Meanwhile.. I am looking in the closet for my old Gold 1400 hat.. looking forward to wearing it again later today.

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 1338
more GOFO, and more about me

I will remind the board that this whole string got started based on bad math to support a theory about why Gold may not really be so scarce.  (negative) GOFO is reflecting the lack of Gold available today... and has nothing to do with the tendency of miners to hedge with futures.. or not... Dave's theory was based on a false mathematical premise, which Ikoch immediately pointed out.

My math was just fine.  The GLR is what is called a yield spread, comparing two interest bearing items of the same duration with each other.  I realized after my post that going down that path was probably too far in the weeds for most people to care about, so I didn't respond to this earlier.  However, it is the explanation that works best for me.

But rather than go into the whole "math thing" again, I tried to simplify: negative GOFO is reflecting a preference for gold now over gold later.  This could be because gold is scarce now, or because supply of "gold later" (i.e. forwards and/or futures) has grown.  Heck, it might even be both.

I made the case for the latter, and this was based partly on miners starting to hedge because of fear, and partly because some of the other indicators of supply stress that we watch were calming down (GLD ETF, Shanghai premiums) as prices rose.

Here's a thought.  If negative GOFO continues for the next six months, and the LBMA doesn't shut down and the COMEX doesn't default, and the other signs of gold supply shortages continue to calm down, perhaps the mainstream goldbug community will pay more attention to alternate theories of what negative GOFO combined with low LIBOR really means.

And if I'm wrong - make sure you have a core position.  [Did I mention that before?]

I might be wrong... I might not be.  If I am right, then my protestations have had the effect of keeping DaveF in a tighter box than he otherwise would be in, which means he pollutes my chosen community less with his propaganda - and my own sense of pattern recognition suggests that this may indeed be the case.  If I am wrong, then I just look dumb... which I don't care about.

Ok, my background, who I am, what my motivations are, I'll reply in brief: Jim is dead flat wrong about me.  He couldn't be more wrong than if he had deliberately set out to be wrong, then doubled down on it.  But I don't get to control the lies and innuendos he writes about me.  All I can do is say they aren't true.  It would be nice if he cared about truth in this matter, but it is quite plain to see that he doesn't care at all.  Name-calling is just one of his techniques in his ongoing campaign to suppress opinions he doesn't approve of.  I can't control that either, but now that everything is clear, I'm better equipped to deal with it.  I won't bore all of you with any more on that subject.  The dogs bark, but the caravan moves on.

About me: I keep a core position in PM.  Miners get traded using trends and price+volume data from the futures markets, with an eye kept on fundamental supply situations.  When I get a particularly good intraday read, I'll buy gold or silver futures contracts.  I will sometimes sell a portion of my miners at what I perceive to be peaks, wait for rebounds, and attempt to rebuy at low risk entry points.  Sometimes I buy breakouts, depending on how much risk I feel like taking.  If miners misbehave and drop below my stop point, I sell them.  Some miners are held as dividend stocks.  I also write naked puts and covered calls to make extra money, which works out more often than not but requires a significant amount of understanding of risk and implied volatility.  If you want to learn about any of these areas, I recommend starting with very small positions and watch how things behave.  The price of your education will likely depend on the position size you select.

I may occasionally talk about a miner I own, but only because I know how it moves, not as a recommendation of any sort.  Miners have country risk, execution risk, management stupidity risk, and are not created equal.  Miners move in mysterious ways sometimes.  I have a basic understanding of where different miners operate, but I use price & volume action to help me choose which miners to overweight and which ones to throw off the bus.  Sometimes I use insider trading data as well to look at a particular miner more closely.  Some miners have been seeing a fair amount of insider buying, which I rate as a usually positive sign.  (There are some cases where insiders "paint the tape").  Currently, miner insider buying is yet another positive sign we see.

I also trade other equities and options, and sometimes I go short, but that's not relevant to the PM group, so I don't talk about it much here.  I also do a lot of macro data analysis about markets and economics in general quite apart from the gold market, because I like knowing the big picture.  I can tell you the total credit outstanding in the eurozone (34.2 trillion euros, and deflating), Hussman's Shiller PE-based future market returns projections (3.4%), the US industrial production index (98.9, basically flat), how much of US GDP is spent on social programs (13.9%), how it all ties together and what it means at least to me.  There are lots of things I track on a daily and weekly basis, other stuff just gives me an idea of how good or bad things are overall.  My goal is to see the train coming before I get run over.

And that's me.

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Jim H
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Posts: 1516
Still wrong on GOFO

I am trying to make sense of this;

But rather than go into the whole "math thing" again, I tried to simplify: negative GOFO is reflecting a preference for gold now over gold later.  This could be because gold is scarce now, or because supply of "gold later" (i.e. forwards and/or futures) has grown.

OK... so your contention is that miners hedging, which means they are selling futures contracts... i.e. they are selling ahead their future Gold, is somehow having an effect on the market for immediate Gold?  And why would this be?  Why would anything related to paper in the future have any bearing on physical Gold now?   Miner hedging does not change supply today.  I have shown charts above that illustrate the fact that open interest is in decline... so how is it that all this miner hedging is changing the market structure?  I see less future paper Gold, not more.  GOFO relates to supply, available for swap for dollars, for various term lengths, today.  I continue to contend that there is no interaction between Gold today and future Gold in the way you are suggesting.  I can't imagine any reason to proffer alternative explanations other than  attempt to convince people that  .  The negative GOFO is simply the latest signpost along the way of the heavy-handed Gold manipulation road we have been on for two years now.  The hubris-filled manipulators have so distorted the price out of line with the supply vs demand equilibrium point that they have now succeeded in causing Gold to yield more than dollars.    

I am sure many here think I am overreacting to a technical point.  What needs to be understood is that DaveF has been given a pulpit, and through this pulpit his (sometimes wrong in ways that can misdirect a Gold neophyte) words get beamed around, often in the name of Adam Taggart, or Chris Martenson himself;

source:  http://www.gata.org/node/12953

Chris Martenson: An unapocalyptic explanation for negative GOFO

Section: Daily Dispatches

2:24p ET Saturday, August 24, 2013

Dear Friend of GATA and Gold:

Market analyst Chris Martenson writes today that negative gold forward offered rates (GOFO) may be less an indicator of imminent defaults in the gold market than a product of a record-low London Interbank Offered Rate (LIBOR) combined with increased hedging (and futures shorting) of gold by mining companies. Martenson says he isn't disputing that gold supply may be tight but rather disputing suggestions that the apocalypse has arrived for the gold market. His commentary is posted at his Internet site, Peak Prosperity, here:

http://www.peakprosperity.com/discussion/82709/pm-end-week-market-commen...

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

DaveF argues with vigor that GOFO does not necessarily mean what it means.  He creates strawman arguments to make it seem like I have contended that negative GOFO means that Comex will imminently default (so that his argument wins once Comex does not in fact default!)... I don't recall making that case.  What I do say is that physical Gold, available for delivery today in size, is getting more and more scarce, and that something is eventually going to break.  I don't know what will break, and I don't know when.  There is a run on the banks right now.. physical Gold is moving to stronger hands, and the fractional reserve system is under stress.  Exactly why DaveF makes arguments that end up defending the sustainability of this fractional reserve bullion banking system is really beyond me.. and I have offered my ideas on that subject.  It's not like an interloper could just come in to a place like this and spew anti-Gold rhetoric to any extent.. the effort would necessarily have to be much more subtle than that.  Clearly DaveF is a very smart guy.. very well spoken/written.  He also knows a heck of alot about markets.. I don't doubt that he trades successfully.  We shall see I guess where the conversation goes next.....  

davefairtex's picture
davefairtex
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Posts: 1338
GOFO misunderstood

Jim -

OK... so your contention is that miners hedging, which means they are selling futures contracts... i.e. they are selling ahead their future Gold, is somehow having an effect on the market for immediate Gold?

No, that's not correct.  Market for spot gold is unaffected by miner hedging.  And the miners likely use forward contracts rather than futures, but the mechanism is largely the same.

GOFO is not just about spot gold.  GOFO is about the price relationship between spot gold and future gold over a specific time period.  Thus, an increase in hedging in that time period must affect that relationship.  Inherent in GOFO is a time period.  It's 1-month GOFO, 2-month GOFO, etc.  Negative GOFO-6 says, "gold now is worth more than gold 6 months later".

Of course the spot price (and thus physical demand) also plays a part in the GOFO relationship, as do interest rates, and the possibility of default.

Here is a definition of a forward contract vs futures contract which may help you understand:

http://www.investopedia.com/ask/answers/06/forwardsandfutures.asp

And so yes, an increase in miner hedging in month N must affect that GOFO-N price relationship.  For instance, If a given miner were to sell forward their production 3 months from today rather than wait and sell it at the spot price 3 months from now, that would affect the GOFO-3 rate.  The bank taking the other side of that forward deal has to either hedge the gold price risk (going short gold futures), or take on the gold price movement risk themselves.

I continue to contend that there is no interaction between Gold today and future Gold in the way you are suggesting.  I can't imagine any reason to proffer alternative explanations other than  attempt to convince people that.

So first, I think you continue to misunderstand how this stuff all works.

Second, your issues surrounding my reasons and motivations no longer concerns me.  That's because you have made it crystal clear that you don't care who I am or what my motivations are, your only goal is to suppress any divergent opinion from your idea of truth, and the whole motivation issue is just a red herring.  But I'll assume your question is legitimate and answer it anyway.

Negative GOFO rates stuck out to me - the other signs we were watching of supply-side pressure had relaxed, and only this GOFO rate and the COMEX were still signaling trouble.  Initially I simply accepted the mainstream goldbug press explanation for what negative GOFO rates were all about.  But when I looked into it more deeply, I started to doubt the validity of the signal.  And so I presented an alternate explanation.

The mainstream goldbug press presents its theories all the time about why this or that thing is signaling the end of the gold market as we know it.  They've been doing this for years.  Yet the gold market hasn't ended, at least not yet.  Has their utter failure deterred them?  Not so much.  Is it possible that this negative GOFO rate issue is yet another one of these flawed mainstream goldbug end-o-the-world indicators?  You can make your trades based on it.  I won't.

I don't consider the premiums in Shanghai to be the same thing at all.  Those premiums are signs of supply tightness that are clear and convincing, at least to me.  I like this indicator a lot, because it can't possibly lie to us, its not complicated, and it can only exist for reasons stemming from spot gold supply issues.  COMEX registered too - when the gold is gone, it has to be replaced from somewhere.  That's a clear signal to me.

My goal is to trade on clear signals, not doubtful ones.  I want to avoid losing money.  That's it.

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crissman
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Posts: 3
Ad Hominem Defense

Dave:

Defending oneself from ad hominem attacks is not easy, or particularly rewarding.

I admire the patience and equinimity you have maintained in attempting to do so in this stream of comments.

Whether you are right or wrong about the significance of negative GOFO for the past month and a half is not the issue - I have yet to get my mind soundly around all of the arguments, one way or the other, and if I ever do, I may post something here as well as on screwtapefiles.blogspot.com, where there has been a discussion of the subject since early last month: http://screwtapefiles.blogspot.com.au/2013/07/is-negative-gofo-significa....

Here and now, I just want to congratulate you for how you have handled all the agro directed at you recently on this thread.

L. Crissman (AKA SlowLorisLarry)

slowlorislarry@fastmail.com.au

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Denny Johnson
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Posts: 324
Thumbs Up

The Thumbs Up feature does not seem to be working for me this morning, even after a reboot.

I couldn't let crissman's observations re Dave's patience and equinimity pass w/o comment.

Thanks crissman, and thanks Dave for the sharing of your well considered beliefs.

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davefairtex
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Posts: 1338
significance of GOFO, STF thread

crissman (denny, others) -

Thanks for the kind words.  Really.

Crissman (SLL), I enjoyed reading your thread at STF.  I came away with the sense that this whole thing is a quagmire that some people get, but most are just trying to understand.  I think its especially interesting that, in terms of price action, the hot action was in silver where there is no GOFO issue.  The ticking GOFO bomb is in the gold market, yet the explosion happened...in silver?

I too would love to hear from the people you referenced in your post.  My gut tells me that miners selling forward should end up dropping more paper gold onto the future months thus pushing gold towards backwardation (and given cost of carry is low with low LIBOR, backwardation is much easier to fall into), but I'd love to get feedback from the guys who have actually worked in the area.

I used that paper from Szabo as one of my source materials, even quoted from a paragraph.  It was one of the few sources I found that painted the broad picture of how hedging affected lease rates, and it helped explain the slow decay in lease rates as hedging was removed from the picture.  And Norcini was my source for the suspected increase in miner hedging.

If we all work together and avoid the ego and false certainty, we can sort it out, I'm confident of that.  We just have to be careful of the "pumpers", as one of your posters referred to them.

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Jim H
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Posts: 1516
It is telling

That a Kid dynamite screwtape regular has come to Dave's defense... and most here probably don't recognize that they are seeing, in my "attacks" on DaveF, the battle lines of a war of ideas between those who see manipulation vs. those who deny it.  I will stop now, because it's pretty clear that most here do not see the war, or just don't care about it.  If you don't see the war, all you see is the acrimony.. and that is understandably a turn off.  If the community wants to see an anti-manipulation bent to the dialogue here, they will surely get it.  Like a virus it invades unless there is a strong immune system.  I was trying to be part of that immune system.  You are naive if you think that there are just regular people like you and me on the other side of this war of ideas.  The fractional reserve Gold system is at risk, and the powers that be will throw anything and everything into this propaganda war in order to slow down the demand for physical Gold... to create doubt that there even exists strain on the system.       

The good fight is being fought elsewhere, by other bloggers...   and if you don't believe me, you can read some of the comments from Dave Kranzler's blog;

http://truthingold.blogspot.com/2013/07/the-negativity-of-gofo-rates-and...

Hi Dave. I have never posted before, but read your work and have respect for it. Question: I follow many, many sites, for as much information as I can find, in my efforts to seek truth and clarity. There seems to be a lot of confusion, and now bickering amongst many of the bloggers, regarding two current items. Which leads to my question finally. Is gold in backwardation or not, and has JP Morgan settled their June contracts or not? Nick Laird says NO backwardation, everyone else says yes. Harvey Organ has been screaming for weeks that JP Morgan has yet to settle it's June deliveries, and outside of Turd and Bill Holter, nobody else is even talking about it, other than some folks in the comments sections of said blogs saying it's inaccurate. With the exception of that idiot "Kid Dynamite" whom I disregard completely. (I disregard anyone that claims there is no manipulation in the PM market place) Can you please give your take on these two items, I would be enormously grateful.

Reply

Replies
 
  • Picture%2B013.jpg

    Thanks for the feedback. You are perceptive in discerning that Kid Dynamite is an idiot.

    Nick Laird puts together some nice looking charts that are sometimes helpful, but mostly a different "flavor" of the same that is available in many places. He is someone whom I have always regarded as being analytically "light." I don't know how much time he has to do real research and thinking about the subject matter of precious metals, given how much time he must spend churning out pretty charts. In fact, I've never seen anything from him print other than his charts.

    The idea that there's no backwardation was given some visibility by Bron Suchecki, chief promoter of the Perth Mint. I sent an email to Bill Murphy with the request that he forward it to Ed Steer, who also only regurgitates what he reads and lacks any depth in his thought process:

    Sorry Ed, once again Bron - the interminable GLD apologist - has it 100% wrong. Backwardation exists when the market is willing to pay more for physical gold delivered immediately than gold delivered next month. That is backwardation. Ask any futures trader. Ask James Turk, etc.

    The negative GOFO rate means that the physical market in London is willing pay MORE for gold in hand today vs. gold re-delivered tomorrow or next month or in two months or in three months. That's just a mathematical fact of the time value of money.

    Regarding Bron's interminable and catastrophically flawed defense of GLD, of course he defends GLD: The Perth Mint is one of the bigger fractional bullion operators out there.

    Facts are facts.

JAG's picture
JAG
Status: Diamond Member (Offline)
Joined: Oct 26 2008
Posts: 2490
Bravo!

Dave,

Thanks for all your hard work.

I can't tell you how refreshing and important your input is to this community. You have an amazing ability to present information selflessly, without the need to derive identity from your perspective. This quality is absolutely neccessary in market analysis because Wall Street thrives on exploiting blind spots created by investor self-image.

Bravo!  

Keep up the great work and thanks again.

Jeff

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davefairtex
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Joined: Sep 3 2008
Posts: 1338
wars of ideas

Jim -

I'm not sure what new content is in your post.  I'm completely on board with what negative GOFO means; gold now worth more than gold later.  I've said that many, many times.  I just disagree how it came to be, and that it necessarily must imply a tight supply situation.

...Like a virus it invades unless there is a strong immune system.  I was trying to be part of that immune system.  You are naive if you think that there are just regular people like you and me on the other side of this war of ideas.

I'm a big fan of a war of ideas, engaged in a civil but enthusiastic way with the goal being enlightenment.

You, on the other had, try to suppress ideas that you find too dangerous to discuss.  Your "disease" metaphor is a perfect description of how you view thoughts and concepts you disagree with: they are life-threatening, they must be wiped out, no mercy, with whatever tactics are required.  And then you pile on by suggesting (once again) that anyone espousing one of these disease-like ideas must be working for the banking establishment.

I'm not working for the banking establishment.  I'm just a regular person - although I've done a lot of different things in my life, so maybe regular isn't the best definition.  But I'm not in the employ of the shadowy powers that be.  I'm just not.  I just disagree with certain elements of your worldview, that's my only crime.

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Jim H
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Newsflash
AP Top News at 11:05 a.m. EDT

Syria vows to defend itself as pressure grows

AP Photo

DAMASCUS, Syria (AP) - Syria's foreign minister said Tuesday his country would defend itself using "all means available" in case of a U.S. strike, denying his government was behind an alleged chemical weapons attack near Damascus and challenging Washington to present proof backing up its accusations.

But in bigger news, a lone prepper/engineer from New York who goes by the pen name Jim H did irreparable harm to banker and MSM interests by piling on against someone else on the internet espousing the Gold anti-manipulation theme.  

If only.....     

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bronsuchecki
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davefairtex wrote:The bank

davefairtex wrote:
The bank taking the other side of that forward deal has to either hedge the gold price risk (going short gold futures), or take on the gold price movement risk themselves.

Apologies for coming late to this discussion.

There is a another way the bank hedges themselves when a miner sells gold forward. The bank is agreeing to buy gold from the miner in the future, so they hedge themselves by:

  1. Leasing gold (which would increase lease rates)
  2. Selling gold spot (which would push gold down)
  3. Lending cash from 2. (which would decrease cash rates)
  4. When miner delivers them gold in X months time, they:
  5. Recall loan and use that cash to pay miner
  6. Use the gold to repay the lease

Gold forward rates are determined by the bank working out the net cost of steps 1-3.

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bronsuchecki
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ikoch wrote:GLR (gold lease

ikoch wrote:
GLR (gold lease rate) is the artifact of GOFO and it can never be the other way around.  GLR is not the rate at which you lease gold.  It is a measure of profitability for the arbitrage of LIBOR vs GOFO.  It is not a two way math equation.  GOFO Is a market set rate.  LIBOR is a set rate.  GLR is a meaningless abstraction of value only to derivative traders and arbitragers.  It is not the rate at which you lease gold.

GLR is the interest rate for gold
LIBOR is the interest rate for cash
GOFO is the yield spread between the two currencies gold and dollars.

GLR is not a meaningless abstraction - it is a real market with real rates and the Perth Mint does lease gold outright (ie without posting collateral) on a regular basis.

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bronsuchecki
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Explanations for increasing GLR

"There may be other things going on besides mining company hedging, but I believe it is a reasonable explanation for the mild increase in the GLR."

There are some other explanations for the increase in the GLR, which I blogged on here:
 

my current view is that it is reflecting the shift by speculators to the short side - more shorting results in more demand to lease gold, which drives up the lease rate (thus GOFO goes down). I have read that liquidation by specs out of long positions has also restricted supply of gold to lease (as the gold has been sold to those unable or unwilling to lease their gold out) and seen comments that increased physical demand has resulted in more metal being tied up in the value chain, so that results in more demand for leasing (or inventory to hedge).

 
So I think there is a case to say that negative GOFO as more driven by tightness in the gold leasing market. Note that shortage in the borrowing and lending market does not have to coincide with a shortage in the buying and selling market.
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gold lease rates

bronsucheki-

So I agree that an increase in shorting in future months will end up depressing the future price relative to the spot price, regardless of who does it or why.  Likewise, an increase in demand in the spot market relative to futures will do the same thing.  "Gold now" worth more than "gold later."

You think it is speculators, I think its miners, and others think its a sign of a very tight spot market.

What is your evidence that it is speculators causing the price movement?  I have strong evidence that miners started to increase hedging activity in the wake of the crash.  And we both agree that increased sales of futures (be it hedging or speculating) will depress the future price.

Regarding the speculators - it could be that some number of speculators are putting on a COMEX default trade (long physical gold bullion and short the front month futures) but that wouldn't explain why GOFO 6-month went negative too.  There's no reason for any speculator to go out past the front month for this trade to work out for them.

To me, the miner explanation makes more sense.  It takes less work to explain.  Simplest explanation is most likely correct - Occam's Razor and all that.

That said, it is really not something either of us can prove, unfortunately.  I will have a bit more evidence on my side if GOFO starts to slowly rise as miners reduce their hedging, but it still won't be a smoking gun one way or the other.

The fun thing is, we could all be right, just each of us less right than we currently suspect.  :-)

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bronsuchecki
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Reasons

I don't think it is a case of only one reason, I think all of them, including miner hedging, are factors behind it. The comments about more short specs, less metal for lease by spec longs and value chain were from a Reuters article interviewing market professionals.

There is also some intersting work by Alhambra on collateral shortage in financial markets as a factor, see http://www.alhambrapartners.com/2013/09/13/gold-hit-with-another-collateral-shortage/

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