Introducing New Gold & Silver Commentary for Peak Prosperity

davefairtex
By davefairtex on Wed, Jul 17, 2013 - 11:50pm

Chris and I are very excited to announce the launch of a new series of original daily precious metals market commentary for Peak Prosperity, authored by frequent and very knowledgable contributor davefairtex.

The content will primarily focus on recent price action and breaking developments in gold & silver, with an eye on the implications for the active precious metals investor. Commentary (frequently accompanied by charts and other TA visuals) will be published after each day of market trading, and a weekly summary will also be produced.

This new series is intended for Peak Prosperity's enrolled users, but for its first month or two, we're going to make it available to the general public. The inaugural update makes it's debut below. ~ Adam

After a relatively quiet day in Asia & Europe, PM attempted to break out today on the back of a bad Housing Start report [bad = good in today's world; bad economic news = no tapering] and gold eventually hit $1299 [a new cycle high] and silver $20.17 before falling back.  Then Bernanke started his testimony before the House and a few minutes in, gold dropped to $1270 on some pretty decent volume.  It recovered only modestly, closing the NY session at $1275, while silver closed near its low at $19.28 - a big move for silver.
 
Negative
  • gold/silver ratio rose to 66.1, last reached right before the cycle low of 1179
  • PM attempted breakout to new highs rejected even prior to Bernanke
  • CEF discount to NAV increased to -3.8%
Positive
  • silver mining stocks dropped less than silver
  • initial dollar rally on Bernanke testimony didn't stick; buck only up modestly.  Perhaps the currency market doesn't believe taper-talk?
Looking Ahead
If the buck continues its current downtrend, PM will likely be supported, at least to some degree.
 
Because medium term PM is still in a downtrend (it hasn't broken that 20 EMA yet to the upside, much less the 50), shorts get excited whenever it appears that a breakout fails and so they pile in.  Its been a no-brainer moneymaker trade for them for 6 months - why stop now?  And since a breakout failed today, I'm concerned - but about silver more than gold.  A near term retest of 18.66 is more likely to me than a breakout of $20.20.
 
Tomorrow we get Jobless Claims report at 0830 EST; if the recent past is any key, Bad News will be Good News for PM, and vice versa.
 
Below is Bernanke's market-moving text:
"Committee participants also saw inflation moving back toward our 2 percent objective over time. If the incoming data were to be broadly consistent with these projections, we anticipated that it would be appropriate to begin to moderate the monthly pace of purchases later this year. And if the subsequent data continued to confirm this pattern of ongoing economic improvement and normalizing inflation, we expected to continue to reduce the pace of purchases in measured steps through the first half of next year, ending them around midyear. At that point, if the economy had evolved along the lines we anticipated, the recovery would have gained further momentum, unemployment would be in the vicinity of 7 percent, and inflation would be moving toward our 2 percent objective. Such outcomes would be fully consistent with the goals of the asset purchase program that we established in September."
Translation: "If we had ham, we could have ham and eggs. If we had eggs."

25 Comments

Grover's picture
Grover
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Good Feature

Dave,

I always look forward to reading your posts. I don't have the trader mindset, but the psychology intrigues me immensely. I'm glad this will be a regular feature. Now, where did I put that ham?

Grover

Tycer's picture
Tycer
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I'm looking forward to this.

I'm also looking forward to JimH's additions very much!

 

Jim H's picture
Jim H
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Thanks Tycer!

I will be here - JimH, reporting for duty.... keeping an eye on the fundamentals.  When it comes to Gold, the most important fundamental of all has nothing to do with Gold itself.. it has to do with our currency system;  Debt-based paper money, completely untethered from any real asset backing.  

Chris commented on this earlier today, and we need to continue shouting it from the rooftops, because it underlies so much of what is happening.. this one thing;

http://www.peakprosperity.com/comment/155380#comment-155380

Why?  Because banks need to constantly be issuing increasing dollar amounts of loans so that the monetary/financial system can continue to function.  It is like a shark that must keep swimming in order to live. 

Our monetary system has built into it a form of dynamic instability.  Bacause money is created as debt, and the interest to pay off loans has to come from the same pool of money (think system-wide) that was created initially as principle, the only way for the system to work in a remotely sustainable fashion is for it to be in a state of relatively continuous growth.  The total debt will always run away from the total money because of this dynamic instability - continuous, exponential growth tends to cover up this instability.  If you understand this, you understand why;

1)  The FED, although having, "price stability" as one of their mandates, targets 2% inflation 

2)  The FED is such a willing enabler of our Government's increasing dependence on deficit spending (need...more... debt!)

3)  The FED and TPTB blow asset (and associated debt) bubbles, each one bigger than the last

4)  The Gold bull market is not over

I am not a TA guy, but much of Wall Street is populated with such types.. hence the ability to manipulate the price signals in the paper futures Gold market (which just happens to set the price, completely unlike, say, stocks) means that one can, as long as one can keep the supply:demand realities from exploding, paint whatever story or narrative one wants to tell if backed by enough cash, at least for a time.  The narrative since QE3 began has been, counterintuitively, that Gold is a sell.  This should be fun!    

 

 

 

 

 

Grover's picture
Grover
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It is all good

Tycer,

Jim H and davefairtex seem to be standing back-to-back on the same podium describing what they see. Jim is focusing on fundamentals and Dave watches the markets. In the long run, fundamentals always win out. In the short run, anything can happen. A helicopter can appear to defy gravity until it stops working (mechanical troubles, fuel issues, pilot error, etc.) but then it will obey the newfound gravity. ;-) When the market makers finally accept the gravity of fundamentals, the market will move and Dave's view will align with Jim's. That doesn't mean that either is wrong now. It is all good.

I align with Jim's view. I'm not nimble enough nor do I understand the inner workings enough to be a trader. I prefer a good night's sleep to skimming some profits in a volatile market. At most, I'm looking for a good entry point to add some more metal. I find the psychology of game strategy fascinating and I want to be a casual observer and learn some of the techniques. I appreciate Dave's ability to relate underlying stories for those of us who need interpretations of the squiggly graphs.

Grover

davefairtex's picture
davefairtex
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credit growth; definitely a fundamental

I agree completely with the whole insight that credit growth is a requirement for our system to function well.  Right now its tough to see how that happens after a debt bubble pop, but in more normal times, its definitely "just how things work" and most likely it is the earnest wish of every Fed Governor that brisk credit growth returns to the US economy as soon as possible.

However, this fundamental bit of insight doesn't imply that as credit goes, so goes the price of gold.

Gold moves in cycles.  Gold's cycles can be quite long.  For instance, from 1980-2000, gold...didn't do so well, even though total credit in the US grew from 5 trillion to 25 trillion dollars.

Here's some squiggly lines to give you a sense.  Picture = 1000 words, etc.

That right axis is big.  Credit grew over that period by a factor of FIVE.  During that whole period of credit growth, the price of gold dropped.  How can that be, if the price of gold is "eventually driven by fundamentals?"

How long is eventually, anyway?  Turns out - 28 years for buyers in 1980 to break even.  And that doesn't account for the currency devaluation from 1980-2008.

I'm not trying to say the gold bull is over.  Nor am I trying to "cast doubt" on gold, everyone's favorite metal.  Rather, my intent is simply to show that you might want to be careful about being solely driven by your faith in fundamentals (i.e. stories) as prices do not have to follow your fundamental stories for very long periods of time.

Or as Keynes said, the market can remain irrational longer than you can remain solvent.

We should consider using all the tools available to us - not just the fundamental stories we love to hear - to understand what is going on going forward.

Here's an article on why our brain constructs stories to explain what has happened.  See especially page 2.

http://discovermagazine.com/2012/brain/22-interpreter-in-your-head-spins-stories

Hrunner's picture
Hrunner
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Gold and Silver Commentary- Good Thing!

Thanks to Davefairtex for moderating/ authoring this thread.  I'm sure he will do a great job.

Grover, interesting analogy, please see my earlier, similar analogy of two guys watching a drunk teenager driving around the Indy 500 track in a Monte Carlo.  We're all watching the same guy, just betting and focused on different things.  I tend to align more with the Jim H. side of things (presumably Chris too, but don't want to presume). 

Not that I don't respect the talent of DaveF, but am fearful of highly manipulated markets, with big players who can push price around completely disconnected from fundamentals.  I think the purpose of market is naturally to trade on fundamentals, all else is manipulation at worse and hangers on at best.

However, I have some core beliefs (not proven beyond a shadow of a doubt, but with large amounts of credible circumstantial evidence and logical thinking):

Gold and Silver represent real money (see Mike Maloney's videos), as opposed to fiat currency, which always tends toward zero value as sovereign states get more and more irresponsible and desperate.

I acknowledge gold and silver could be useless/ worthless if we had a sound money system where money supply was tightly and objectively controlled based on actual hard wealth and not a mathematical model or abstract targets.  However, that is so far away from where we are now, it's not even funny.  If we had a trustworthy government, banking system, and a truly growing economy, we would not need gold or silver.

I don't really care too much about Trend Analysis.  I only care about it because it is so important to other people who impact the price, so by default, I have to care.

The gold and silver market (the number you see on your screen) represents a 100:1 paper to hard metal fiction of a market.  Key players can create gold and silver out of thin air (naked shorts), which to me, completely undermines the point of a commodities futures market.  A commodities market should be based on actual, deliverable goods (shocking concept, I know).

I follow the fictitous paper spot price in order 1) to make purchase decisions i.e. when to purchase more PM, 2) to make hedging decisions and balancing gold:silver ratio around PM holdings, 3) and yes when may be a good time to sell to convert to other forms of wealth possibly at time when PM are over-valued relative to land, the Dow, hard goods.  That time of sellling seems a long way off.

I believe in purchasing gold and silver as primarily an insurance policy against disaster.  As a financial backstop, but not to replace food, water, energy, security, skills.   I acknowledge I could be wrong, that there could be game-changers like unlimited Thorium energy, or a set of Western government leaders that do the hard but correct and moral maneuvers to get us out of the debt spiral.  If that happens,  that completely reverse the downward spiral, which would likely greatly result in significant devaluation PMs. 

Until I see that hard- to- predict game-changer, my belief is that we have a better than 50% of a major devaluation episode coming for the USD, and potentially a major upward price move/ price discovery in PMs when investor finally lose confidence in fiat currencies and things denominated in fiat currencies.

I would love to hear folks major premises, maybe some belief statements like I just laid out above.

What, besides simplly price, are the key numbers to watch?  Any key metric, like gold:silver ratio, that members use as triggers for an action either buying or selling?  I am a buyer now due to the fundamentals, and the major price drop, perhaps a little RSI and TA interest, the CoT structure being very bullish, and the fact that we are at or below the cost of mining for many miners.  I worry about being overweighted in my portfolio in PM, but the time to unload for me is not now, nor will it be until prices reach closer to 3,000 gold, 100 silver (at adjusted 2013 USD valuations, and assuming the stock market doesn't crash, making stocks such an irresistable buy to rotate out of some PMs)

Jim H's picture
Jim H
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Here we go again...

DaveF is posting links about how our brains are fooling us to think that Gold and Silver prices are manipulated.. these "stories".  I won't argue this too much since Dave seems to be the only one here who takes this perspective.  It was not my intention to say that Gold always goes up along with growth of money (credit, or debt).  The back story is one that I take for granted everyone here understands, but since DaveF took the opening to further his efforts to obscure the truth of metals manipulation, I will be more clear;

In an era where we have hit the max capacity to absorb more debt, or create more bubbles, as measured by a debt-to-gdp ratio that has stretched above 100%.. TPTB have only two choices; to find ways to create more money as debt, or to let the system deflate... allowing banks to die and the buying power of money to increase.  Chris has done a very good job of explaining how more and more money is being created without more and more real underlying, real wealth.. and this is where we find ourselves now.  Forcing the system to create more money now that we are choking on total debt, is a completely different animal vs. 1990.  I feel silly having to explain this.  

   

davefairtex's picture
davefairtex
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Posts: 5466
stories told since gold $1800

Jim is an awesome storyteller.  I enjoy reading them, I really do.  He doesn't think I do, perhaps he imagines that I'm an emotionless shill for Big Banking, or what have you.  But he doesn't really know me.  Humans are built to enjoy stories - its how we tag memories, how we learn language, and I'm no different.  I can always remember new vocabulary words in my current language class if there is an emotional story attached to it.  Like every other human on the planet, I really do enjoy stories, and Jim is pretty darned gifted in the telling of them.

What's more, most of us here believe in these stories together, me included, or else we wouldn't be here.

However, I'd like to point out that the vast bulk of the stories attached to gold [money printing, hyperinflation, credit growth, banking system instability, etc] - the fundamentals, if you will - have remained the same since gold $1800.  Gold $1700.  Gold $1600.  Gold $1500.  Gold $1400.  Gold $1300.  Gold $1200.  Wow, that was a long way down!  As gold price dropped further and further, the storytellers have definitely become more energised, as if to counter the dropping price through enthusiasm alone.

However, you might ask yourself, have these stories been a useful timing guide in terms of picking a good moment to deploy your hard-earned savings?  TA would have suggested all along "we're in a downtrend...wait for that knife to stop falling before you grab it."

In contrast, storytellers use the "manipulation story" to suggest its impossible, there's no way you can possibly pick a good moment to buy.  The story will win eventually, in the meantime you just need to keep the faith.

TA was designed as a way for humans to fight their natural love of following stories (and confabulating stories in an attempt to explain events that have occurred), allowing us to act coldly and dispassionately in a market that really wants us to behave emotionally so it can strip us of wealth.

The market (Big Banking) deliberately spins stories in order to get us to buy high and sell low.  Stories these days include chilling suggestions of gold $700.  "Better sell now before it drops right through the floor."  Two years ago those same guys were talking about gold $2000.

I think stories are useful, entertaining, and I believe in many of them too.  However, the reason I label them all as stories is so that I don't try and use them as a guide to when to buy and sell.  I use them to inform my trading, especially when they can be validated by data.  Bearish sentiment, gold premiums, gold leaving GLD, Big Banking miner downgrades only after 50% price drops, all of it is interesting.

But in terms of picking buy points, I try and let price & volume data drive my decision making.  I don't always manage this, I'm human, I like my stories too.  But I try.

 

Hrunner's picture
Hrunner
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Posts: 256
I've got a story

Davefairtex,

I've got a story for you.

There once was a man named Kyle Bass, who was told by market trend watchers, "Kyle you better get with the program, or you're going to miss the train and be left at the station"  "look, see, the 100 DMA has crossed the 200 DMA and 38% fibawhatchamacallit is in the seventh house, all of which say you need to buy, buy, buy mortgage securities". 

Kyle, who listened intently to the smart wall street traders, and looked at the elegant graphs regarding the 38% fibawhatchamacallit and thought they were very impressive.  But then he looked at fundamental data and graphs like this:

And he said to himself, "the 38% fibawhatchamacallit is indeed very impressive, but I don't understand how home prices can continue to go up, and U.S. household incomes remain flat.  I don't know exactly when something bad will happen, but I better short the housing market since it must deleverage at some point."  So Kyle purched credit default swaps on subprime securities and watched as the housing market did indeed crash and burn, despite the wise sayings of the learned men and women of the Federal Reserve and the 38% fibawhatchamacallit.  Kyle now has millions of dollars in the bank and a large ranch in Texas, and many home owners and house flippers are now bankrupt and homeless.

There was a second story that is related to the first one.

There was a man named Jim H., who was told by the followers of wall street trading, "you better sell your gold, the 38% fibawhatchamacallit is flashing a downtrend, and the learned men and women of the Federal Reserve say that the economy is recovering, which is bad for gold."  And Jim looked at the 38% whatchamacallit, and the sayings of the wise and learned men and women of the Federal Reserve, and indeed, they were all very impressive.

But then Jim looked at graphs like these:

And he said, "that sure is a lot of debt and new money being printed."  He said to himself, "I know everyone is telling me the economy is recovered, and there is no need for gold, and the trend is bad for gold and good for stocks, but then I look at graphs about the debt and money supply, and I am very concerned that the USD will eventually become worth much less.  And really, there aren't many more people being employed, and investors and nations will have to turn to the one form of money that cannot be debased.  I don't know exactly when something bad will happen, but I better buy some more gold, and a little silver too."

Davefairtex, I respect your thoughtful analysis.  Please keep on posting.  May all your trades be profitable. 

May I suggest you ponder the following quote by Paul Volcker, regarding the management of the 1980's inflation crisis:

"Joint intervention in gold sales to prevent a steep rise in the price of gold, however, was not undertaken. That was a mistake."

I also refer you to a reference summary by "Icarus" on the TFmetals blog, entitled "How Could We Be So Wrong?"

http://www.tfmetalsreport.com/blog/4848/guest-post-how-could-we-be-so-wr...

He also tracks events since gold was $1900 and tries to tell a "story" that I find very compelling.  Would I like to have tape-recordings of Bernanke calling up Mr. Dimon and saying, "here's the deal, Jamie, free money for gold price suppression, comprende?"  Yes, I would.  However, I am afraid that the best type of very solid evidence does not exist.  Most criminals and unethical humans know either consciously or unconsciously that what they are doing is wrong.  It is very rare, especially in our rapidly degrading society which undervalues integrity, that criminals come out with confessions or videotapes of their wrongdoing.

So like detectives, versus storytellers, we have to try to put together a case based on circumstantial evidence, from activities around the edges of the primary activity, and make a reasonably educated guess about what is truly going on.  You may call it a story, I will continue to call it an inference.

Looking forward to a vigorous discussion here on your forum.

davefairtex's picture
davefairtex
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Posts: 5466
great stories hrunner

Really great stories.

How do they help me in figuring out the best time to deploy my capital?  That same story could have been told for years; at gold $1000, gold $1900, and gold $1200.

Stories are a very poor timing mechanism.  Over the long haul they are most likely right - but then again, over the long haul we're all dead too.

Wouldn't it be nice to have something that would be of more help in picking a good time to buy?

 

HughK's picture
HughK
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Stories about options?

Hi all,

I don't want to hijack this thread on stories and narratives around gold and silver investment, but since it has been active for the past few days, I'd like to ask for help for anyone who knows a bit about options trading for PM securities.  I made a discussion thread about options trading for PMs here.

If any of you are willing to share your insight or experience in that thread, I'd be grateful.

Thanks a lot!

Hugh

Hrunner's picture
Hrunner
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Posts: 256
Dave, Now.

Now.

I believe in the 'better to be a year (or several) early than a day late' philosophy.  But A) I am risk averse, so I acknowledge my wealth is sitting on the sidelines when it might otherwise be used to play the stock and bond market, and B) I believe the next correction will be much worse than a simple recession.  The consequences of that correction outweigh the opportunity cost to make money in stocks and bonds.

Those are beliefs at the end of the day, with some historical and data backing.  But I acknowledge they are still beliefs.  I am not blindly believing, in that if macroeconomics change, or relative value of PM v. say real estate changes, I will sell significant amounts.  We are not there yet. 

Do I think "wow, if I had just bought SPX at the bottom in 2009 and sold it this month and converted it to PMs, wouldn't I have made a much tidier stack?"  Yes I do.  But discipline is hard for a reason.  (I did have a portion in dividend yielding equities, so it wasn't an all-or-nothing proposition for me).

I would have said the same answer going back to 2008 when it was clear the governments and world central banks favored money printing and profligate government spending over painful downsizing of government spending and government regulations.

A family, IMHO, should get themselves positioned so that a sufficient amount of their net worth, assuming they have positive net worth, is protected by physical gold and silver.  Chris had an interview with a gentleman several months ago re one metric (blanking on it now, but had to do with how many months salary was represented by gold and silver), but there are many other metrics.  The low end is 5% (too low to me) and 50% on the high end, but I could not fault anyone for going higher (Chris).

The broader message is Now, get right and sit tight. 

And then go out, enjoy life, get into shape, meet and do nice things for your neighbors, learn new skills, read a good book, go for a hike, watch a sunset.

sand_puppy's picture
sand_puppy
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Posts: 1931
When to purchase a spare tire for the car?

It's really hard to say, with the price of rubber fluctuating so much and the Brazilian market just opening up and the exchange rate issues.  Maybe I'll wait a while and just drive around without a spare tire a little longer.  Though all of the worsening potholes do make me nervous.....

Jim H's picture
Jim H
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Posts: 2387
Everything is not a story Dave...

Again, my view is that DaveF uses the term "story" to denigrate, or cast a negative connotation, to anything that is not price.  Certainly it is true to say that some things are more supposition... i.e. more lightly supportable by hard facts, than other things.. other pieces of information we who focus more on fundamentals use in weaving together a bigger picture view of what is actually going on.  Maybe Dave does this for himself because it is part of his own means of taking the emotion out of trading.. his own way of seeking some form of advanced "TA purification".. and that's fine.  What I dislike is the way DaveF's commentary often serves to cast doubt on the story of Gold's fundamentals, which leads me to question his motivations... it has no effect on me other than to concern me that someone new to the ideas on PP.com may read it and think that there is some kind of risk in starting to build a position in physical Gold, whereas I think that the PP.com consensus is that, if you have savings that are not otherwise being deployed to other forms of preparation, you are kind of crazy not to have some position in physical Gold and Silver, as well as some cash on hand for the inevitable bank holiday.     

To build a bit on HRunner's quote above from Volcker.. one would think that if in fact the Bernanke FED was either passively (by keeping the CTFC watch dogs at bay) or actively promoting the downward manipulation of Gold price in the paper markets, that he would tell his own "story" that would be supported by the Gold price tape.  Well.. the fact is, he did earlier this week in his testimony to Congress;

   http://www.silverdoctors.com/bernanke-gold-mope/#more-29435

  

Bernanke on Gold
In testimony yesterday on Capitol Hill before the Senate Banking Committee, Federal Reserve Chairman Bernanke remarked:

“Gold is an unusual asset. It’s an asset that people hold as disaster insurance. A lot of people hold gold as an inflation hedge.  But movements of gold prices don’t predict inflation very well, actually. But anyway, the perception is that by holding gold you have a hard asset that will protect you in case of some kind of major problem.

I suppose that one reason gold prices are lower is that people are less concerned about extreme outcomes, particularly negative outcomes and therefore they feel less need for whatever protection gold affords…

Gold price going down is not necessarily a bad thing from that perspective. It suggests people have somewhat more confidence, and are less concerned about really bad outcomes.”

And there you have it..   Bernanke using the manipulated Gold price drop to his advantage... using it as a jawboning confidence builder in the paper-ponzi driven economy, even as the real economy continues to be hollowed out.  And I know for a fact that the real economy continues to be hollowed out because I just had to lay off another of my team members - this time a highly experienced, hard working MS level Electrical Engineer, for no other reason than to lower our Corp. cost structure.  Many more went with him across the US.  Don't tell me this is a "story" that the economy continues to hollow out, because I am living it up close and personal.  Bernanke is lying through his teeth here, and we all know it.  Bernanke wants nothing more than for the debt slaves to go back to buying new cars at 0% down with low cost financing.  I refuse.. we will keep our two 100K + mile cars and put the potential of two car payments monthly into more PM's, thank you Ben.

Enough ranting.. back to the hard quantitive data, non-story facts;

The clearest signal coming from the marketplace right now that indicates the tightness in Gold bar supply is the GOFO rate, which has been mentioned here before.  I think Dave from Denver gives the most straightforward explanation of what this is.. but do realize that it is a cost (or price), every bit as quantitative or verifiable as the price of any stock at any time.

     http://seekingalpha.com/article/1542652-what-gofo-is-and-why-it-s-now-ve...

    

The Gold Forward Offered Rate (GOFO) is the rate that is used for gold/U.S. dollar swap transactions. That is, if you own gold and you need to borrow dollars, you can use your gold as collateral and pay a much smaller rate of interest to borrow the cash than otherwise. This is a common transaction in London and the GOFO rate is published daily by the LBMA (London Bullion Marketing Association): LBMA GOFO rates.

Under normal market conditions, the GOFO rate is always in a state of contango - i.e. the GOFO rate curve is positive-sloping and rises with the duration of the gold/$swap. However, on rare occasions, the GOFO rate goes negative, which indicates that someone is willing pay interest in order to borrow gold, using dollars as collateral. In fact, a negative GOFO rate means that a higher value is being placed by the market on gold in hand vs. dollars in hand. The negative GOFO is also more evidence that we have likely seen the bottom in this gold correction.

In a very rare occurrence, the GOFO rate went negative out to three months yesterday (see GOFO link above). It went even more negative today. The previous time it went negative was November 20th and 21st, 2008 - but only out to one month. Before that, it went negative out to a year on September 29, 1999, for two days.

The only reason a negative GOFO would occur is if someone desperately needs to get their hands on gold but thinks they'll be able to return it within the time frame of the loan. A negative rate out to three months tells us that there's a big delivery shortage and bullion banks or large investment funds are willing to pay an interest rate to borrow gold and put up dollars as collateral. It also tells us that gold today is worth more than gold re-delivered out to three months.

Let's read the end of that bold sentence again;  "bullion banks or large investment funds are willing to pay an interest rate to borrow gold and put up dollars as collateral. "  One of the knocks on Gold that the mass media plants in the minds of the sheeple is that Gold sucks because it has no yield.  One of my co-workers spit this line back to me a year or two ago in explaining why he had no allocation of his not insignificant savings in Gold.  The propaganda does work.  And the truth is, Gold usually does not have any yield, but you are compensated in many other ways, i.e. lack of counterparty risk, etc.  While a dollar today, put in the bank, will not have any real yield (real yield is negative), it will at least have some nominal, positive yield.  What the negative GOFO is saying is that Gold is presently yielding more than dollars, at least for the terms (loan periods) affected.  This is amazing stuff to behold if you think about it.. and you can see why the occurance is so rare in a system where TPTB want desparately for you to think of Gold as an asset with so many negatives, including it's lack of yield.  The message is simple, Gold bars are in such short supply that they now yield more than cash, in a system that is by it's very design set up to discourage such inversion.    

Let's look at some charts of this quantitive, price (cost) data GOFO.. I am surprised DaveF has not been posting these, so I will help him out here;

        

We can't know for sure where the bottom will be, or whether this time a negative GOFO will indeed even mark a bottom.. I have learned that they have more rabbits to pull out than I can imagine.. my own way of agreeing with DaveF that the Gold price could keep going down longer than I could remain solvent were I a leveraged bettor (I am not).  That being said, the banks can't make Gold, and it is in very short supply... the usual means by which markets adjust in such circumstances is through a rise in the price to release supply.     

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yogiismyhero
Status: Silver Member (Offline)
Joined: Jun 28 2013
Posts: 173
My own story:...

I have no clue what motivates or inspires anyone and the way they live their lives. I know for certain that not a soul understands or can even guess the Man I am based on what is said here. 

I like Jim and Dave very much, and they both add a great deal for contemplation. However, I have my own problems, concerns, and motivations and they do not at all jive with those who frequent this site except for what we share in common. The love of the outdoors, gardening, self sufficiency, preparations, pantries, a good essay written by some good people like Charles, Gregor, Adam, Chris and many of you here, etc...

I am neither in love with gold or not in love but the gold story gets too much ink here and is divisive, and who really cares.

You either got it or don't and no one really knows. No one really cares, do they? I think many here have no gold and it doesn't make them less, does it? I always feel like I have to go get more gold! It feels like a hard sell by some really good gold salespeople at times.

I like very much the stories from Wendy and how she has done the math and this costs that, and after 5 years this is paid off and we are off the grid and her investments start paying her back. I get all warm and cuddly inside when she writes. What a great writer she is too. Wendy, I was shocked that you didn't use wood chips between beds! I don't know why but I was. 

Some care too much on this site that they feel inspired enough to try and TELL another Man or Woman how they should think or act not even knowing their targets circumstance or lot in life as though the slipper fits all feet.

Treebeard gets all my thumbs up because he is a "love thy neighbor" type and I favor his speak, what can I say.

Gillbilly does the same, sandpuppy, and all the girls here are truly gifted and I favor their perspective a great deal.

I was told once that I "try too hard to be liked top much". I don't even know what that means. Is being nice a bad thing? Still mulling that over. Believe this but I felt I had to counter that statement with trying hard to being non-complimentary. In the end though I just decided to not talk to that person again as this person has no clue and I don't have the time. Anyways, a quick story: In my neck of the woods, everyone thinks I don't like anyone (I think it's a polite way of saying I speak my mind and some don't like it). Yet, if my wife and I sit out front we have quite a few neighbors who join us for a nice late evening. These people think of me as the Godfather of the neighborhood and I am the sweetest Man you will ever meet until I'm not. Same with you guys I am sure. Bottom line, "no one has a clue who I am". It's just the truth. 

The Jim's wins when gold goes to $1900 hundred, YIPPEE!, and the Dave's win when Gold goes to the $1200 hundreds, Super Dooper!. News flash: I don't give two hoots about any of that. I only care that if catastrophe, am I covered, I am. I hope. Now Dave before you write a lengthy reply I understand that you try and play the trend, by the charts so are looking to short or go long or pop in or pop out. I am just saying things as an open ended thought process. I love you Brother, Jim too. Jim I have learned as much about gold from you as a matter of fact. So thank you. However, gold is much lower than expected, in a bear market and that too is the truth. This game could be played for a while yet. Yes? 

Truthfully, all of this back and forth reminds me of a question Bill Clinton was asked, and his reply was: "It depends on the definition of what is, is". Or some darn thing. Now, what is the definition of is?

OT: Real quick too: When George the first said : "New World Order" I remember thinking, "Whoa Nelly"! I still feel this way, it was frieghtening to me and still is. 

Anyways, Gold hasn't lived up to the hype and that's the truth. It did a couple of years ago but we shall see. Either way, Gold will settle out based solely on the fundamentals, and that I still believe in, the fundamentals that is. Games will be played are played to keep gold surpressed, no question about that, and the Fed and the Boys Clubs are having their way right now. They can probably have their way for a good while yet but who really knows.

I don't personally like gold (I have it though because it;s a responsible investment decision). I don't like change either but change is a coming that is for sure and Detroit better be watched very carefully, and planned for because many more Midwestern Cities are about to enter their own Bankruptcies, and of course it will be the working class and tax payers and CREDITORS who take the hit. Now that can't be good, do you think? I see loss of jobs, less wages, more taxes, loss of pensions, loss of many things. All promises that cannot be met. OH!, that sounds all to familiar. I just know this, math, and if you can't pay for what comes in for what needs to go out then you are in trouble. Bankrupt. I see a lot of bankruptcies in the future, don't you? I have predicted this for a long time and personal bankruptcies will be all the rage you just watch. It's the game and it's a coming, big time. I believe the laws will be changed because so many will be filled and the Elite will want to be paid if it takes you the rest of your life to "get er done".  

Detroit has been in decline, serious decline for 45 years. It has looked like it does for the last 35 years and last night they made it final. I am here to tell you people that Detroit is not fixable, it has at its core the worst racial problems that exist in the world, it is a Union town gone bust, and what is left of that city has been stripped mined of all assets. It is a god aweful and fearsome town to even visit but for small pockets in and around our beloved Tigers Stadium and Ford Field. Everything else is a waste. It will be a miracle to even have its charter still intact when this settles out because it isn't a city nor will it ever be a city again as one visualizes a city. Nature though will reclaim all nooks and crannies and for that I smile a peaceful and just smile.

I liked my story. You?

davefairtex's picture
davefairtex
Status: Diamond Member (Online)
Joined: Sep 3 2008
Posts: 5466
glad we're having fun

HRunner -

Why choose this particular time & place to make your bottom call?  I'm not calling it into question, just asking you to elaborate on your decision making process.  Why this spot, and not the previous 3 might-have-been-bottoms?  Is this just your gut feel?  What sort of gut feel did you have at 1321?  Mine sure said "the bottom is in" and boy was my gut wrong!

Jim -

You are right, I do try and insulate myself from the emotional impact of listening to exciting stories that tell me I'm about to become absurdly rich any moment now because of...well...Gold Story Of The Day.

Gold, like every other position including cash, has risk.  Anyone who bought gold at $1500 or more, and now has things they want to actually buy with their gold savings understands this issue of risk very clearly.  If we are like a bank, and never mark things to market, we can imagine gold has no risk.  But if we adhere to the discipline we recommend for our financial institutions, then we must be consciously aware of the risks we take.

That said, I believe that gold is an important part of a diversified portfolio that includes cash, and that if you don't have any gold now, buying some now, or in the near future, will be critical insurance to help preserve your wealth during one of the possible scenarios we face going forward.  The inflationary scenario isn't guaranteed to happen (in my eyes anyway) but its likelihood is high enough to warrant buying insurance.  And more than just a token amount.  But that's just my opinion.

I also want to thank you for the nudge on the whole GOFO issue.  I've been overly lazy and hadn't run down GOFO data, but for some reason, your posts really motivate me!  That's why I like having you around so much!  The GOFO rate appears to track the 3M treasury bond - most of the time.

Notice that in the 1990s the GOFO rate trailed the 3M treasury, but in the 2000s GOFO moved above the treasury yield until just recently.  I'm thinking its current negative level is possibly an artifact of extremely low short term treasury bill rates.  But I am not sure it's the smoking gun held by the second goldbug on the grassy knoll.  :-)  Submitted for your approval...

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davefairtex
Status: Diamond Member (Online)
Joined: Sep 3 2008
Posts: 5466
yogi - I liked your story but...

You realize this IS the Gold & Silver group, after all.  :-)

I feel gold is oversold too sometimes.  Gold is one of those things you can consider getting after you're out of debt and are wondering where to put your remaining spare cash.  Not so many in America are in that position these days, so...the subject is likely to be academic for many people.

Which is why I think we're tucked away into our little gold corner!

 

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Jim H
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Posts: 2387
Ridiculous GOFO comments Dave...

To show a long term correlation between short term interest rates, as represented by the 3-month T-bill rate, and GOFO, which is itself derived from short term interest rates (Libor), is absurd.  By creating the long term chart, talking about this relatively meaningless correlation, and suggesting that the long term over/under is somehow relevant, completely misses the point, and makes me think you are indeed here to obfuscate rather than educate.  The point is that periods of sharp and extreme negative divergence like now have in the past marked bottoms in price trend, which is not surprising given what negative GOFO implies, as described in detail in my earlier post. 

This is troll-like behavior in my book Dave.  You are smarter than this.. I don't consider your post an amateur mistake, but rather a very, very sophisticated, purposeful attempt at misdirection which would, if left uncorrected, cause some less informed members here to underestimate the uniqueness of what GOFO is signalling right now.  Indeed, nowhere in your commentary did you actually try to directly counter the meaning of what GOFO is.. you only did your misdirection game of, "look over here in my other hand".  Answer the question directly Dave:  Why is it that Gold will currently yield more interest than dollars?  Does this mark something other than a dramatic shortage of deliverable Gold? 

  Your chart, by being both long term and ending with a black border on the right side to cover up the recent negative divergence, does a disservice to my message (surprise!).  Here is a better chart that shows the depth (across several terms) of the current, historic GOFO divergence;

           

sand_puppy's picture
sand_puppy
Status: Diamond Member (Offline)
Joined: Apr 13 2011
Posts: 1931
JPM gold holdings--almost out

JPM gold holdings plummet.  From this evening's zerohedge.

Hrunner's picture
Hrunner
Status: Gold Member (Offline)
Joined: Dec 28 2010
Posts: 256
Looking at a bigger picture

Jim,

Thanks for your capture of the Bernanke's words, that is very telling in my opinion.  I came to appreciate a couple of years ago that economics is one part numbers, things like ore yields, which "are what they are", and one part psychology of participents (see Chris' excellent interview with Dan Arielly re wiring of human thinking).  Perhaps even two parts psychology.  

Jim's quotes help us see the picture of a Fed chairman that is now totally focused on PERCEPTION.  Again, that is not irrational, and I can't totally fault him, but I would expect a Ph.D., and a person of integrity with that much power and responsibility, to give us more of the honest truth and some honest paths forward and some honest, perhaps hard, choices.  Ditto for our "leaders" in government.  We're big boys and girls, we can take it.  Wishful thinking perhaps

Mr. Bernanke is playing a different game, he knows the real truth, as well chronicled by Jim, that the economy stinks, that we are in historically uncharted waters- trillions of dollars of stimulus and no GDP effects or jobs effects.  He is likely very worried inside.  I believe inside he is very confused and deeply concerned, and is doing everything, between QE and jawboning Congress, and manipulation via Hillsenrath and the Wall Street Journal, and the ridiculous campus lecture series, to push things around in the direction of 'growth'.  I believe now that things are not working according to his models, he is down to simply buying time, with all his might.  And praying.  Unfortunately, all his manuevers are doing great damage to the dollar and the real economy, and as is well documented, hurting savers and seniors to the benefit of the banks. 

Dave, I love you, man.  I probably didn't express myself well.  I was not calling a bottom.  I have no idea if gold will dip back to 1200 or climb back up to 1800 from where we are.  My thesis and worldview was not focused on calling bottoms and peaks to make a little money off of catching trends.  Ok, fair enough, if I was buying physical metal, I would rather buy near the bottom, which is the only use I have of TA, but even that is tenuous at best.  Let me take a stab at some basic thesis statements.

1)  We are in an unprecedented phase of USD currency debasement.  Until recently, the USD was continuously and gradually debased over decades, but we can admit that it was a chronic phenomenon, slow, and most importantly the economy grew relatively fast.  I can speak honestly for myself that gold and silver were never on my investment radar until 2008.

2)  I believe we are at the end of an era, an inflection point in global economics.  I admit I don't know how things will turn out.  On the plus side, the U.S. and Western Powers do have tremendous natural resources (well, Japan not so much), great numbers of educated people, and technological prowess.  On the other side, we have irresponsible, corrupt government who spends like drunken sailors in a very cynical manner.  This would not be possible without a fiat money system and fractional reserve banking system, which sadly caught on with the rest of the world.  I believe virtually all countries have some level of over-indebtedness and over-promise of benefits and standard of living that the natural resources will simply not support.  Que the Crash Course.

3)  I believe that as we transition from the last 100 year system of cheap energy and exponential credit, it will not go smoothly.  The best way I can describe it is that something(s) will "break".  This happened in 2008, and the effects were very bad with generational recession and loss of jobs, but honestly I believe the economy was not allowed to deleverage to where it "wanted" to go.  Instead it was resucitated with heroic amounts of epinephrine (Stimulus and QE).  IMHO, the economy still wants to reset.  This means virtually everything wants to go lower- house prices, the number unnecessary unproductive jobs (starting with the government, extending to the financial world), wages, stocks, bonds.  And I believe these markets will find their natural set points, one way or the other, but call me an Austrian.

4)  When things break, they can break many ways:

-  a slow grinding inflation over several years that steadily destroys the wealth of all dollar denominated goods

-  a sudden currency event, specifically the BRICS annoucing that they will not use the USD as a settlement tool, and instead use a partially gold-backed basket of currencies.  The USD could devalue 50% overnight, triggering additional bad things.  The more I wargame this, the more I think a sudden move by the BRICS is unlikely, since the other players are likely afraid of triggering global recessions or worse, global military conflict.  If I were them, I would go for the slow bleed until the host was so weak they were not a threat.  This is underway, see the number of countries that are right now weaning off of the dollar.

-  a sudden bank failure, and bank runs, one of the Euro countries exits suddenly triggering bank failures with subsequent derivative implosion and insurance company failures ala AIG.  The Fed and TPTB can control a lot of things, but at the end of the day, people can revolt and ask for their money back, and riot if they don't get it.

-  a "garden-variety" middle east conflict or terrorist event (911 type event) that triggers an oil price spike and triggers bank failures that way due to way-overleveraged speculators.

-  a deflationary spiral that the Fed and Government is unwilling to act on or unable to catch up with.  I personally think this is low probability due to fanaticism that the Fed works against deflation, and the weak character of politicians.  But it is a formal possibility.

In other words, our irresponsible spending and debt, decades of malinvestment, too interconnected and overleveraged banking system, and a corrupt government that is more interested in its own survival than the well-being of its people is an ugly mix that can lead to any of the 5 scenarios above.  There are many ways a drunk teenager can crash a car.  The point is that the ingredients are present.  When that happens, I would like to have some type of life raft my family can climb in.  And I'm not really concerned if that life raft costs 1200 or 1800 dollars an ounce.  I'm just happy it is available and I can afford it.

davefairtex's picture
davefairtex
Status: Diamond Member (Online)
Joined: Sep 3 2008
Posts: 5466
troll-like behavior

This is troll-like behavior in my book Dave.  You are smarter than this.. I don't consider your post an amateur mistake, but rather a very, very sophisticated, purposeful attempt at misdirection which would, if left uncorrected, cause some less informed members here to underestimate the uniqueness of what GOFO is signalling right now.

Simply amazing.

Unfortunately, I'm not an expert at how this particular rate works at LBMA, so I can't answer your question.  [No, I'm not being sneaky, or sophisticated, just honest.  Sorry if that confuses.]

Let me try this from a different angle.  Can you help us all out by telling us what we can expect to see if this historic situation continues?  If LBMA is having this dramatic shortage of deliverable gold, what is the impact?

Presumably this shortage will be reflected in other places.  What places should we be looking at for confirmation?  LBMA does not exist in a vaccuum.  If LBMA has a dramatic shortage, the demand for gold must be tremendous.  Premiums should be blowing out everywhere that gold can be found.  Do we have evidence of an increase in premiums happening at the same time as the historic activity in the GOFO rates?

Charts are good.

Jim H's picture
Jim H
Status: Diamond Member (Offline)
Joined: Jun 8 2009
Posts: 2387
Why did you comment on GOFO Dave?

Why did you feel the need to make an attempt to negate the information I presented if you are ignorant of such things?  Why won't you answer my question about your views on GOFO?  Again... really simple stuff;

Why does Gold yield more than dollars right now all the way out to 3-months duration?  

Gold is supposed to have no yield, right?  This business of Gold having yield, against the ever strong all-mighty US dollar, is really weird then, right?  No?  Cat got your tongue?        

The answer to most of the questions you posted above can be found in this very string, including the Icarus link placed by Hrunner.  The answer to your question on premiums for large bars can be found here (noting that the first sentence refers to the GOFO situation);

  http://www.goldcore.com/goldcore_blog/premiums-high-china-and-india-chin...

The cost of borrowing gold remains near its highest level since January 2009, reflecting a lack of supply from bullion banks and resilient demand for physical gold products, especially in Asia.

Trading volumes for gold and silver on the Shanghai Futures Exchange (ShFE) rose to record volumes on Friday, with premiums in Asian gold products remaining at sharply higher levels than in North America and Europe.

Gold premiums in China remain high at nearly $30 per ounce (see table above) an indication of strong demand in the People’s Republic of China and premiums in India remain robust despite the recent fall in demand.

Chinese gold demand remains insatiable with record deliveries being seen on the Shanghai Gold Exchange (SGE). Physical gold delivered to buyers by China’s largest bullion bourse in the first half of this year almost matched the entire amount taken from its vaults in all of 2012, and was more than double the country’s annual production.

The Shanghai Gold Exchange supplied 1,098 metric tons in the six months through June, compared with 1,139 tons for the whole of last year, according to data from the bourse reported by Bloomberg.

You are not going to bait me into making predictions Dave... the bullion banks have gotten rid of most of their short position.. they could "sell" 500 tons of Gold that they don't presently have in an instant and drive the price down $120 on Sunday night... that is the reality we live for now.  Until something breaks... and we appear to be very, very close to something breaking (I agree with HRunner)... then we may not see price reflect the tightness of supply being suggested by the negative GOFO.  I bought more Sprott PHYS today... I am now about 30% miners and PHYS, 70% cash.  Inching into the pit of death.. one foot in.  Sunday night should be really interesting.            

yogiismyhero's picture
yogiismyhero
Status: Silver Member (Offline)
Joined: Jun 28 2013
Posts: 173
Dave, I thought we were telling stories...

...my bad. I get side tracked a lot.

davefairtex's picture
davefairtex
Status: Diamond Member (Online)
Joined: Sep 3 2008
Posts: 5466
actionable intelligence

I just posted the full chart on GOFO when I found the data.  Looking at the full historical chart, it really didn't seem all that dramatic to me.  It still doesn't, but I'm willing to be convinced.  Certainly zoomed in it looks quite exciting, but I'm not sure what it means, or how to make money from it.  It reminds me of the study I did on LBMA price movements.  There's a noticeable downward bias into the LBMA morning gold fixing (manipulated markets!) but it only netted out to perhaps 50 cents per day - academically interesting, but not big enough for me to make money what with spreads and commissions.

Lots of stuff is dipping below 0, strange things are afoot in the world.  Until last year, I had never seen Swiss bonds with a negative yield before either.  That happened for a time, and then it went away.  My instinct is to say the same thing here, but I'm willing to be convinced.

Jim, I'm not asking you to "make predictions" but go to the next level and make connections since you have done the research on this.   I'm asking you to take the next step and convert this historic situation you are excited about into verified, actionable intelligence that we can all benefit from.

That's why we're here right?

Unfortunately, the article you posted a link to did not provide any actionable intelligence, at least not the kind I'm asking for.

A meaningful (as opposed to an academic) historic situation should have observable historic side effects that we can make money from affecting other markets other than the LBMA, should it not?

So given your expertise here, how do you think the historic shortage at the LBMA will show up in other (related) gold instruments?   And how should we be able to make money from this historic situation?  Should the historic shortage at the LBMA show up in premiums on PHYS, do you think?  CEF?  We can't trade Shanghai so that's not so useful.  Anywhere else?

If you don't understand the connections, that's fine.  If you don't know how we can make money from this, that's fine too.  I don't know either.

And you don't have to make predictions.  If-then scenarios are where it's at for me.  "IF the GOFO rate continues negative, THEN shanghai premiums should expand, and the PHYS premium to NAV should also rise."  Or something like that.  Again, its connections I'm looking for, not the certainty of predictions, which nobody can provide.

I'm always looking to understand how the connections work, so I can make a nice trade.  For instance I made some "rent money" from a long CEF short SLV/GLD trade, when the discount to NAV eventually dropped from -7% down to -3%.  By shorting SLV/GLD I was able to factor out the price risk from silver & gold movement, and make money on the compression of the historic discount to NAV that CEF had at that time.  That's what I mean by actionable intelligence.

Just FWIW I agree with the observations on Bernanke.  If you had seen his actual body language during the whole brief "gold" testimony you'd have gone right off the deep end.  He was definitely quite happy with what happened to gold.  The whole exchange felt staged.  That doesn't tell me he arranged the drop, but it was clear that he was most definitely happy about the outcome.

Grover's picture
Grover
Status: Platinum Member (Offline)
Joined: Feb 16 2011
Posts: 864
Where's The Boat?

Wow. Did I miss the boat. I heard that Japan rewarded Shinzo Abe's Abenomics by electing his party's candidates for the upper house. This essentiallly gives Abe a blank check to ram his 2% inflation policy along. So, I thought that news would drive the Yen lower. Consequently, I thought that the dollar would get stronger. With a stronger dollar and gold bumping against resistance, I was sure the gold shorts would be emboldened and drive the price lower.

At last check, the Yen is stronger, the dollar is down slightly, and gold is bumping around $1320, the next resistance level. As Jim said,

Sunday night should be really interesting.

May you live in interesting times.

Grover

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