PM Daily Market Commentary - 1/13/2014

davefairtex
By davefairtex on Tue, Jan 14, 2014 - 2:24am

Gold closed up +3.80 to 1252.30 on moderate volume, silver closed up +0.24 to 20.40 also on moderate volume.  The gold/silver ratio dropped -0.53 to 61.40.  Gold traded sideways with an upward bias, hitting a new cycle high of 1255.30 in early asia trading.  Silver eventually overtook gold, scoring its new high during the afternoon in NY.

Both gold & silver moved above their respective 50 day MAs, but not with any real power.  The big number for the next PM breakthrough is 20.50 for silver and 1260-65 for gold.  Any break above those levels should cause one of those astonishingly violent short covering rallies - triggered by a resistance level being broken.  To the downside, these violent moves are seen by goldbugs as clear evidence of evil banker manipulation.  To the upside, the same sort of violent moves are...well I don't know what they think about them, because they don't say anything at all.  To me its just stop-hunting, and it happens in both directions, in order to make a buck for the bankers.

The dollar retreated a bit, closing down -0.15 [-0.19%] to 80.60.  The dollar tried rallying before the open in NY but failed, closing below its 50 day MA.

GDX broke out today, up +2.91% on moderately heavy volume, moving right through its 50 day moving average and closing at the highs for the day.  GDXJ was up even bigger, +5.50% on truly massive volume - more than three times normal - breaking above its 50 MA and its consolidation area and also closing at the high.  This move above the 50 MA with such power is a good sign, especially in the face of the SPX dropping -1.26% on the same day.

All the ratios I monitor are bullish - GDX:$GOLD, GDXJ:GDX, $gold:$silver.

Money appears to be rotating out of the "stuff that went up last year" into the "stuff that went down last year."

But we need to see gold move above 1260-65 for the medium term downtrend to be over, because that will break the pattern of "lower highs" that traders judge as one important sign of a downtrend.

58 Comments

Hrunner's picture
Hrunner
Status: Gold Member (Offline)
Joined: Dec 28 2010
Posts: 256
Schizophrenia

Dave,

Nice write-up.

However, you sound a bit schizophrenic.

 "these violent moves are seen by goldbugs as clear evidence of evil banker manipulation"

and then shortly later you say:

"To me, it's just stop-hunting, and it happens in both direction, in order to make a buck for the big bankers"

Soooooooo... I am saying it is manipulation by bankers and you are saying it is manipulation "to make a buck for the big bankers"

But I am the unhinged, "goldbug", and you are the calm, rational analyst.  Okay, got it.

Let me restate my position for clarity, and you are free to express your opinion about my argument and mental soundness.

I believe the gold market and the silver market has a heavy overlay of banker manipulation by commercial entities that A) have the ability to create naked paper futures in unlimited amounts, unbacked by any physical commodity, an activity that is fraudulent and makes a mockery of a true commodity market.  B) work in concert with the directional wishes of the Federal government that willfully allows the fraudulent and bank-profitable activity, free of meaningful criminal enforcement by the DOJ, SEC and CFTC as long as it serves their purpose of manipulating the overall economy, in the exact same manner that the Federal government and their delegates like the Federal Reserve openly manipulate the bond market, the stock market, the mortgage and housing market, the labor market, and all markets in which the federal government can invade with regulatory "oversight" to achieve their utopian and personal goals.

 

The majority of market participants, such as myself, do not have the ability to create naked paper futures, thus providing a huge unfair advantage and destroying the concept of a free and fair market that seeks to set correct prices.

I believe that there can be a coincident amount of market activity alongside the fraudulent banking activity by non-banking entities behaving as if the market was free and fair, and using things like technical analysis to make guesses i.e. investments about which way the market will go.

I have never stated that the manipulation is in one direction and that manipulation is used in both directions, first and foremost as a thermostatic mechanism to keep PM prices in a manageable range where the federal government wants them. to ensure that there is A) no panic in the domestic economy, and B) no competition for the USD, which would detract from the federal propaganda that the USD is safe and sound, that bond rates should be low, and that the government is fiscally sound with a sound balance sheet, and C) to avoid the pressure to return to a sound money system such as a gold-backed currency since this would enforce fiscal discipline on a government that clearly enjoys the power of printing 'funny money' to buy favors and keep politicians in office, to run utopian social programs and to project power around the world.

And that there is no reason to change the current world petro-dollar system, which greatly benefits the United States in that the U.S. can do things like export inflation and have a measure of control over ex-U.S. countries.

 

I believe that markets should fundamentally reflect fundamentals. I.e. a relatively scarce and commercially important element such as silver should be expensive and a relatively common substance such as sand should be cheap.

I believe that fundamental analysis of natural resources such as energy and the amount silver and gold available to human populations relative to needs, including the massive amount of fiat currency created world-wide, destroying the function of the way money is supposed to function, would by necessity set the prices of precious metals multiples higher.

I believe that manipulation of markets in opposition to the direction that markets would naturally move in alignment with fundamental forces, compared with the cheating and stealing currently going on in our markets, has very bad outcomes since one of the key benefits of free markets is that they constantly regulate human activity to stay in line with physical reality.

I believe that aligning human activity with physical reality is the "right" way to live, and supported by faith systems such as Christianity, because failure to do so leads to chaos, starvation and death.

Is there any point which I have left out that you need more clarity on or would like to raise?
H

KennethPollinger's picture
KennethPollinger
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Posts: 654
Another SRSrocco Report on SILVER
AIbEiAIAAABECLKkw9uf6OOxyQEiC3ZjYXJkX3Bob3RvKihjY2FmNzdhNjI2ZjEwODZhYTg1Mzg0ZWI5OTQ3ZmJiMjE4ZDVlMWUxMAE8Dq_EaOnVD0TEHQwTwakQQdmHdQ?sz=24
 
 
 
 
 
 
 

http://srsroccoreport.com)" rel="noreferrer noopener">SRSrocco Report

 

INSTITUTIONAL BUYING: The Coming Silver Game Changer

Posted: 13 Jan 2014 10:38 PM PST

The key to investing in silver is getting in before the big gains are made.  Even though the price of silver is up substantially in the past decade, it has only kept in par with the rise of the cost of energy.

In 2004 the price of a barrel of Brent crude was $38 and silver was $6.67.  Today the price of silver is $20.50 and Brent crude trading at an average $110 for the past month.  Basically, the price of both have tripled in the past decade:

Brent Crude = $38 X (3) = $114

Silver = $6.67 X (3) = $20.01

The market price of silver is keeping pace with the percentage increase in the price of oil.  This seems to be how the market is currently pricing silver.. same with copper.  The price of copper was $1.25 lb in 2004 and in 2013 it averaged $3.30 lb.

Copper = $1.25 lb X (3)= $3.75

Of course there are many additional factors that go into pricing a commodity, however we can see that the price of energy is good indicator in finding a base guideline.

This should give the silver investor some reassurance that the average price of silver will not fall much in percentage terms below its present level.  I say average because short-term movements in price can be highly volatile.  A perfect example of this is the price of Brent Crude:

Brent Crude Monthly Chart

Brent crude had a big price spike to $132 in July 2008 and then a huge decline to $40 in Dec… just five months later.  Although the short-term fluctuations in price have been quite volatile, the average trend has been steadily higher.

Analysts who are forecasting a deflationary collapse in the price of oil, fail to understand the market today needs a much higher price than it did just 3-5 years ago.  If the price of U.S. West Texas Intermediate oil were to fall below $70-80 and remain at that level… well that means you can kiss goodbye the supposed “Shale Oil Revolution.”

Martin Armstrong recently wrote a blog entry titled, “Dollar Bears May Get Slaughtered”in which he wrote the following comments:

It has been American technology that has also changed the game in energy.The dollar bears just refuse to believe anything has changed. The American oil boom is real and nothing is more self-evident that the sheer fact that 15 major European refineries have been driven out of business in the past 5 years because the US no longer is importing oil from Europe.

Currently, domestic drillers are starting to even threaten change the whole dynamics of energy on the West Coast eliminating the producers in the Middle East and South America. The cheap oil coming out of the Rocky Mountains, has seen output surge by 31% since 2011.

This bullish trend for the dollar that is on the horizon may be sparked by the political trends, but it is far more fundamental. It is reflected in all commodities from gold to wheat.

Armstrong touts “American Invention” for the recent great boom in domestic oil production.  That’s total rubbish.  Hydraulic fracking was invented more than half of a century ago.

According to Wikipedia:

The first experimental use of hydraulic fracturing was in 1947, and the first commercially successful applications were in 1949. George P. Mitchell is considered by some the modern “father of fracking” because he successfully applied it to the Barnett Shale in the 1990s.

Horizontal drilling and Hydraulic fracking have been around for decades.  The technology is old as dirt.  The only reason why we are producing a great deal more oil in the U.S. presently is due to the HIGHER PRICE… not the technology.

I would like to take this time to kindly remind the reader that:

TECHNOLOGY COSTS A LOT OF FIAT CURRENCY

Who on earth would spend $80-$90 a barrel on advanced oil drilling technology if the market was only paying $50-$70??  Maybe Chesapeake, as they are still losing their shirts producing natural gas at $4.

Armstrong goes on further to say that this new energy revolution in the U.S. will be bullish for the Dollar, thus bad news for the Dollar Bears.  Armstrong believes in this market strategy because he has fallen victim to the shale energy propaganda.

While shale energy in the states has bought some time for the U.S. Dollar… it won’t last long.

Putting the Comex Silver Inventories Into Perspective

Silver investors today have this notion that the build of inventories at the Comex to be a negative or bearish indicator for the price going forward.  This may seem plausible at first glance, but when we look over the longer term, inventory builds or declines tend to have little impact on the price.

The chart below is a 5 year chart of total silver inventories at the Comex:

Total Comex Silver Warehouse Stock chart NEW

If we look at the chart we can see a build of 79 million oz from the low set in May, 2011.  However, if we consider the net build since 2009, it has only been 40 million oz.

While the decline in total Comex silver inventories bottomed at the same time the price of silver peaked (May 2011), looking at past data, we find no real correlation between price and warehouse stocks.

This next chart shows the Comex Silver Inventories from 1993-2005.  Inventories declined from 270 million oz in 1993 to 50 million oz by 1999.

Comex Silver Inventories 1993-2005

In seven years the Comex silver inventories declined 220 million oz (81%).  So what was the impact on the price?

1993 Comex = 270 million oz / Average Silver price = $4.97

1999 Comex = 50 million oz / Average Silver price = $5.22

After the Comex lost 81% of its silver inventories, the net change in the price of silver was a whopping $0.25 or 5%.

The very next chart provides additional proof that warehouse stock movements have no bearing on the price of silver.

2011-2012 Comex Silver ZeroHedge

First, in Sept. 2011, the price of silver fell an amazing 27% with no apparent build of inventories.  Second, from Jan-Mar 2012, Comex silver warehouse stocks increased 15 million oz while the price of silver rose from $28 to $38.

Lastly, the future value of silver will be determined by the size of institutional and retail investor demand and not by warehouse stock levels at the Comex.

Gosh… What About Silver Industrial Demand & Price?

Another concern silver investors have is a fall of industrial demand.  While silver is an industrial metal, its price appreciation over the past decade had more to do with rising energy costs & investment demand rather than industrial consumption.

The chart below shows the 7-year trend of industrial silver consumption:

Silver Price vs Industrial Consumption 1

In 2007, silver industrial consumption was 486 metric tons (mt) while the price averaged $13.38.  Then in 2011, industrial consumption increased a paltry 2 mt as the price jumped 162% to $35.12.

If we look across the chart (except for 2009), annual silver industrial consumption ranged from 470-490 mt with a linear trend of 475 mt for the overall period.

So, if industrial demand was basically flat over the past 7 years, why did the price of silver move up so much?  Simple (as I have stated time and time again)… it was due to investment demand.

Global Silver Investment 2007-2012

Global silver investment demand increased from a measly 4o million oz in 2007 to over 250 million oz in 2010.  Thus, it had a dramatic impact on the price of silver.

Silver investors who want to know where the price of silver is headed in the future need to be concerned more with investment demand rather than industrial consumption.

INSTITUTIONAL BUYING:  The Silver Game Changer

The sector that will have the largest impact on future silver investment demand will be institutional buying.  According to Rick Rule of Sprott Asset Management, we may be witnessing the beginning stages of what could be a big move of institutional investors in the physical precious metal market.

Rick Rule Interviewed on King World News, stated there has been big money circling the natural resource sector and now it looks like a portion is finally making its way into the market.  Recently, Sprott Asset Management won two very large mandates.

1) $100 million from Chinese Zijin mining to partnership with Sprott Asset Management with another commitment of $300-$400 million for future investment.

2) Sprott to co-manage $750 million South Korean private equity fund.

Rick also believes the precious metals offer a much better investment potential for institutions because gold and silver are presently undervalued compared to its overvalued competition — U.S. Treasuries and Long Sovereign Bonds.

Furthermore, Rick speculated on how big money could impact the silver market (paraphrasing):

If $2 billion went into the silver futures market and called for delivery, the relatively low inventory in warehouse stocks could take these markets to a cash basis and really drive the price higher.

There is very little participation on the long side while there is a great deal on the short side   So, it wouldn’t take much to give the shorts a truly religious experience.

Finally, Rick went on to say that Sprott Asset Management believes there will be increased institutional sovereign participation in the physical and certificated physical precious metal markets.   Certificated physical funds are those such as the Sprott PSLV which guarantees the investor an exchange of shares for physical silver metal.

The writing is on the wall.  The Fed & Western Central Banks are propping up the world financial markets by pumping in huge amounts of liquidity.  This policy has put into question the long-term viability of the Treasury & Bond markets.

Even though the East is participating in the Grand Paper Liquidity Scheme, they are forced to do so because the Dollar is still the global reserve currency.  However, as confidence in the Treasury & Bond markets begin to wane, we are going to see more institutions and retail investors rotate out of paper and into physical assets.

This is clearly shown by the huge increase of physical silver demand by India in 2013:

Indian Silver Imports 2007 - 2013

Due to the government regulating the flow of gold into the country in 2013, Indian investors switched to purchasing silver which drove imports to a record high.  Indian silver imports are forecasted to reach 5,400 metric tons (mt) in 2013 up from 1,900 mt in 2012.

If we consider the 2,457 mt build of Comex silver inventories since 2011, it averages about 1,000 mt increase per year.  It wouldn’t take much in the way of institutional buying to absorb that extra 1,000 mt.

In conclusion, I have to get a laugh at the brokerage houses who continue to put out the typical supply and demand forecasts for silver as the world financial system heads closer towards a systematic collapse.

Retail investors today are worried that the paper price of silver could fall even lower in 2014.  While this may be true, how many Americans have been throwing their hard-earned fiat currency into 401K’s for the past 20-30 years?  Who cares where the price of silver trades in the next few years if the best fundamental strategy is for long-term investing.

I’d rather lose a few bucks if the price of silver fell in the short-term rather than watch hundreds of thousands of Dollars evaporate in a 401K when the greatest paper Ponzi scheme in history implodes.

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davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5456
crickets!!

Hrunner-

Well, I can see why you have this view of me, since you only look at what I say taken out of context.  I'd think I was crazy too if I just read what you quoted.

You also imagine that I was somehow pointing the "goldbug finger" at you.  Well, I can't help that.  I didn't write this at or for you.  I'm not quite sure why you would think I would do such a thing!

But if you've ever read mainstream goldbug news, you would know that there is often a big hullabaloo made whenever gold goes down and long stops get triggered.  This is held out as clear proof that "the bankers are trying to keep the price of gold down."  When gold goes up, and short stops are triggered, I just hear crickets from those same sources.  No NANEX millisecond charts (minus Chris, whom I don't count as "mainstream goldbug news"), no "long side goldbug manipulation" accusations - its just crickets.  Same market action, just with the chart upside down.

The majority of market participants, such as myself, do not have the ability to create naked paper futures, thus providing a huge unfair advantage and destroying the concept of a free and fair market that seeks to set correct prices.

Really.  I daresay that's simply because you're misinformed.  If you want to become more empowered, you can always open up a standard futures trading account, and you too will have this magical power.  I have it, this Ultimate Power in the Galaxy to open a short position in many, many commodities - I don't feel it is hugely unfair or anything - but then again we're not seeing things the same way so I'm not surprised.

You do realize this is the way futures are designed to work.  Speculators take positions on which they do not intend to take delivery, which helps provide price discovery and liquidity.

That's not to say I don't have issues with how the market currently works.  On many, many occasions I've said that position sizing is critical for proper price discovery.  So the issue I have is not "naked shorting", it is  one of position sizing.  I feel you're ranting against the wrong thing.  But again, we differ on these things, so I'm not surprised.

I believe that markets should fundamentally reflect fundamentals. I.e. a relatively scarce and commercially important element such as silver should be expensive and a relatively common substance such as sand should be cheap.

And this is the key point.  Its the single biggest reason why people lose money in the markets.  They expect the markets to move according to their understanding of the fundamentals.  Unfortunately, the market isn't comprised of Hrunners.  It has all different sorts of participants, each with their own understanding of the fundamentals, each motivated by their own reasons.

Although I daresay the market will most likely agree with your assessment with the relative valuation on silver vs sand.

I can't emphasize enough how often I had bad trades when I tried focusing on "fundamentals" (i.e. I stubbornly focused on my Dave-centric view of How Things Should Be) rather than on what the market was actually doing.

This often counter-intuitive behavior is standard in all markets everywhere.  They behave oddly, from the standpoint of common sense.  Why on earth would a great earnings report cause a company's stock to go down.  It's clearly manipulation!  Either that, or everyone who wanted to buy already had, and the market baked the good earnings into the cake already.

A fantastic real time example: I said to my friend that the best time to sell Dollar/Baht was on the day the big protest in Bangkok was due to start.  That's the point of maximum fear - so sell the event.  Should Baht have risen on the first day of the Bangkok city shutdown?  What are the fundamentals there?  A protest shutting down the city would certainly seem to be bad news, which should lead to the Baht selling off even more.  But how on earth could I figure out it would rise?  And - isn't that just manipulation by the Thai Central Bank? 

Not so much.  Many people experienced in markets would have made the same suggestion.

People imagine that markets should be rational (meaning, "markets should do exactly what I think they should do"), and when they don't do what people expect, those same people feel the need to place the blame everywhere but upon themselves and their poor understanding of how markets really function.  "Money printing means gold should be infinitely valuable."  And the implication is, "this trading thing should be easy."

Well, its not.  And its not because there is a conspiracy of bankers trying to keep the price of gold down.  Again, if this were the case, gold would not have risen from 2001-2011 with nary a down year.  Keystone Cops Conspiracy - least successful conspiracy ever - alleged by the goldbugs all during that move up.

But does anyone talk about that?  Again - crickets.

 

Jim H's picture
Jim H
Status: Diamond Member (Offline)
Joined: Jun 8 2009
Posts: 2387
Good morning (US) Dave, HRunner, and Kenneth

First off, I want to comment on something that SRS Rocco brought up in the Silver piece that Kenneth brought into the conversation.... I mentioned this once before in a post here at PP.com, but I think it bears mentioning again.  First, the reference from SRS Rocco; 

Armstrong goes on further to say that this new energy revolution in the U.S. will be bullish for the Dollar, thus bad news for the Dollar Bears.  Armstrong believes in this market strategy because he has fallen victim to the shale energy propaganda.

While shale energy in the states has bought some time for the U.S. Dollar… it won’t last long.

And this is correct... the boom won't last long.  You don't need me to tell you this, because in one little corner of the market, the free market is actually alive and well, giving us meaningful information in the price of one particular equity (oil trust);  SDT

SDT sports a Dividend of 25% !!!!!  The market has brought this about because of the rapid decline in revenues thrown off by these wells, vs. the original projections by which the trust units were sold. The market is saying that even at a 25% dividend rate today, it's not clear that you will get back the capital from your original investment before these wells go defunct.  Here is a sniglet that illustrates the point, quantitatively, from a commentary on SDT found on seekingalpha.com;

SDT owns a share of the proceeds from the sale of oil and gas from 37 "PDP" wells that were brought online between Q4 2010 and Q1 2011 and 124 "PUD" wells that SandRidge was obligated to develop after the initial sale of trust units. SandRidge completed production of the PUD wells in Q3 2013 and all are now online.

Simply put, the performance of SDT's wells has been terrible. Total production reached a peak of 185 mbbl in Q3 2011, but has dropped sharply to 102 mbbl in the most recent quarter. Making matters worse, this nosedive occurred while SandRidge was adding wells; now that new well development has ceased, total production has nowhere to go but further down. The decline in performance has been so substantial and widespread that I wonder whether the wells are simply a junk asset.

link:  http://seekingalpha.com/article/1890371-sandridge-mississippian-trust-i-...

So my simple point is that the shale oil boom is a short term phenomenon, and the market is actually signaling this if you know how to put your ear to the pavement in the right place.

Moving on to HRunner's commentary, we simply see things economic and monetary in very much the same light and I appreciate his voice here.  I do think that the drain of finite, limited, and scarce physical Gold stores, which has resulted from the prosecution of Gold and Silver paper price suppression, will come to an end as the stores run out.  I believe the most important job for us here in the Gold and Silver group is to try to identify the signals indicating that the end is near, since this should mean a bottom in price, and an ultimate reversion to a more physical, supply vs. demand market.

One thing that struck me yesterday was a piece I found by a Gold commentator that is thought by many of us, "Goldbugs" to speak for TPTB... or the status quo, or however you want to characterize the system as it stands today, Comex and all.  That commentator is Bron Suchecki, of the Perth Mint.  Here is the piece;

http://goldchat.blogspot.com/2014/01/coin-shortages-and-rationing-are-in...

The gist of this piece is simply this;  When coin shortages appear, and they might appear soon.. don't worry.. it's not signaling a Gold shortage, just a coin blank and casting capacity shortage.   What I see here is the initiation of a new propaganda campaign by the Gold cartel to try to distract the sheeple, and keep them calm in the face of impending Gold supply shortages.  

Finally, I want to mention that I am a bit suprised that Dave didn't bring up the big news in the Gold mining industry yesterday in more detail;  GoldCorp (GG) making an offer to buy junior miner Osisko.  Dave Kranzler, a Gold commentator and PM fund mgr. who happens to be a whip smart University of Chicago MBA with expertise in forensic accounting, had this to say;

      http://truthingold.blogspot.com/2014/01/goldcorp-offers-to-buy-osisko-mi...

Goldcorp knows where the price of gold is headed and this why they are buying Osisko now.  They also probably know that the window of opportunity to buy 30 million ounces of gold in the ground at this price is quickly closing.  In other words, this deal marks the turn in the massive gold and mining stock sell-off of the last two-plus years.  While I expect Goldcorp to sweeten its offer, don't get caught up in the details of this transaction and miss the big picture:  the bottom is in and gold is back on track to resume the upward trajectory it was on in 2011.

Keep your eye on the ball.. things are starting to get very, very interesting.  

 

     

 

 

 

davefairtex's picture
davefairtex
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Posts: 5456
GG, ANV

Jim-

Thanks for pointing out GG's buy, I didn't see it!  I was focused on some other things.  But I did wonder why Goldcorp took a price hit on a day when the other miners did well.  The industry has done a bad job in acqusitions over the past years and the market appears to be not so happy with the GG buy - but this time could be an exception if gold moves back up to the 1500 level.  Buys now could seem like a work of genius.

And the seeking alpha article lays out the numbers, and suggests this isn't a particularly rich premium for a good property that has a very low AISC:
http://seekingalpha.com/article/1942511-should-goldcorp-buy-out-osisko-mining?source=yahoo

Today I saw a trading halt on one of the stocks I own, ANV.  Its being bought out by China Gold Stone Mining, but for $7.50, a substantial premium over yesterday's closing price of $4.30.  Can't say I know much about the acquiring company - its private, in Hong Kong, and was incorporated 3 years ago.  More gold moving from west to east?  Who knows.

But in general, this could be the start of something very interesting.  Once the acquisitions start - and they do seem to have started - the speculative frenzy it ignites may well squeeze the living crap out of the mining share shorts, especially in the juniors.

Likely thats the reason behind the massive move & volume in GDXJ yesterday.

And the rise in mining shares likely puts pressure on acquiring companies to strike now before the rally makes the shares of the target company more expensive.

Its a nifty virtuous cycle, and we may get to see it play out if we're lucky.

 

davefairtex's picture
davefairtex
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Joined: Sep 3 2008
Posts: 5456
ANV buyout offer - possible scam?

Curiouser and curiouser.  ANV trading halt ended, +12% on the day currently - but is it a real offer?

FWIW: I'm out.

http://finance.yahoo.com/news/allied-nevada-responds-china-gold-175311272.html

Allied Nevada received a letter from China Gold Stone yesterday which included such a proposal (the "Proposal"), however, for a number of reasons, the Company seriously questions the credibility of the Proposal and advises shareholders to review announcements from China Gold Stone with caution. The Company identified the following concerns with China Gold Stone's announcement and the Proposal:

How's that for an example of possible manipulation?  Announce a fake buyout from a Chinese company (everyone knows the Chinese will pay crazy amounts for gold), stock skyrockets on the news, and anyone buying calls a few weeks prior gets rich.

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HughK
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Posts: 761
Talk of a gold smash

Hi Dave, Jim, Hrunner and all,

Here are two predictions of a fall in gold prices in the near-term.

According to this recent KWN podcast interview, William Kaye believes that the bullion banks (and the Central Banks) are looking for one more big gold smash in the first two quarters of 2014, down to some level between $1150/oz and $1050/oz in order to increase their current net long position.  Note that on the KWN blog these comments have been edited out with ellipses (...) but you can hear Kaye's view on this in the audio interview.  Now Kaye, like most of us here, is a goldbug, and this is not the type of prediction you typically hear at KWN

Also, Jeffrey Currie Goldman Sachs' head of commodities research, is calling for a fall in gold prices in 2014 similar to Kayes' projection, down to about $1050/oz.  I don't take anything from Goldman Sachs at face value, but they did forecast a drop in the gold price a short time before the last big smash last summer, and then, if I'm not mistaken, they bought up a bunch of PM securities during the smash.  While that seemed to be dishonest media manipulation, it served them well, and their red flag did come just before the big smash im PM last June/July.

So, what I'm wondering is, if you guys see any reports on a short-term fall in gold prices.  For the record, Kaye sees much higher gold prices in the medium term (he says 12-18 months) and I also believe that in the medium to long term there is a very high likelihood of much higher real gold prices.  But, after having watched the PM market for the last three years, a short-term smash in the gold price wouldn't surprise me.  

Any ideas?

Cheers,

Hugh

 

Hrunner's picture
Hrunner
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Joined: Dec 28 2010
Posts: 256
Apples and Oranges

Dave,

Good thoughtful response re the irrationality of markets.  Since I admittedly lean to the fundamental side of things, you touched a nerve when you described the anger at markets behaving irrationally.

I suppose a fair modification is that free and fair markets can certainly behave irrationally i.e. out of sync TEMPORARILY (yes, I know markets can behave irrationally longer than I can remain solvent), but it is only a temporary phenomenon.  It cannot last for "very long".

Remind me where I can buy Enron shares, WorldComm shares, or a really valuable pet rock?  All those were all rockin and rollin in Mr. Market with very rational explanations for their prices for quite a while.

Maybe I should give you a little more insight into my gold view.  If I am ruthlessly honest, yes, I would like to make money i.e. profit from my gold and silver purchases.  So perhaps that "greed" may account for some fraction of my anger.

But know this- I now own gold and silver because I am a husband and a scared father of three beautiful children.  I did not own an ounce of gold except for my wedding ring before 2007.  The financial collapse started my personal journey of investigation and seeking an answer that gnawing feeling that something is seriously wrong in the world.  Deeper problems existed than just the garden variety graft and corruption that I became aware of as "background" noise in a society that (I thought) was mostly overall free and fair.

Which led me to sites such as this.  Thankfully. 

I now own gold as a life preserver to try to get my family to the other side of what is shaping up to be a very ugly transition to a world that will come to its day of reckoning with the fundamentals.   A very ugly transition.

The anger I feel now about the behavior of markets is that they are all a manipulated fabrication of a fascist government system that is A) misleading people with old school, garden variety "media propaganda", i.e. Bernanke, Obama running around telling people everything is fine, don't worry about raising the debt ceiling another $2 trillion, don't worry about doubling the national debt and B) "numbers propaganda" i.e. 'gee, the stock market is up, and gold is down, the unemployment rate is decreasing, so everything must be okay'.

Rising gold is supposed to be a signaling mechanism, among other interpretations, that bad inflation is coming, and financial collapse is imminent.  Depriving the world of that 'canary in a coal mine' signal is akin to burning the life rafts on a sinking ship.  In other words, it is immoral and corrupt.

I would be so happy if we could return to a sane world with honorable government officials, serving in a constitutional government, where I and my fellow citizens are free to create, work, make money based on our abilities and level of effort, save the fruits of labor free from confiscation by the government by direct punitive taxation and by indirect theft in the form of inflation which is a design feature of an ever-expanding debt-backed currency created by the fascist coalition of bankers and government "leaders'.

I leave it to you to tell me if I am a "goldbug" or not.

As far as your point about me creating naked paper- surely you don't believe what you are writing. 

I understand well that it may be true that there is widespread underwriting of unbacked contracts to investors such as myself for relatively small futures amounts, that still doesn't make it right and of a high integrity.  I don't agree with doing something that is wrong in small amounts or large amounts.  A thing that is wrong is wrong.

Commodities futures should never be offered without actual physical material backing it, or the clear backing of by, for example, an acre of planted corn or a piece of property containing proven mineral and ore reserves backing. 

I think you will acknowledge that clearly the futures offered gold and silver markets, do not have any semblance of a reality connection to actual metal and mineable metal.

To test your mental experiment: What if I had a propaganda mission of my own and wanted to send gold higher to warn people of the coming collapse?  And perhaps I just have a lot of gold already and am very greedy that I want prices to be higher to make my stash worth multiples more.

If I had the dollars to back a buy on margin of a sufficient number of futures for my little plan, do you think that I could bid  up say, 2,000 gold contracts, day after day, say in 20 milliseconds 'melt ups' every night for a month?  Or two months?  Do you have any idea how high the price of gold would be in short time, as I cleared the ask stack, hour after after hour, night after night?  Would the JPMs of the world push back with 2,000 contract dumps of their own?  Possibly.  And I would double my melt ups to counter.  Ad infinitum.

Do you think for a New York minute that our vaunted federal government would let me do that?

Of course not.  This was tried already, as I'm sure you well know, in a different variation by the Hunt brothers, though not the same path I described above, the net result was a very high spike in silver prices, that the government very promptly stepped in and squashed by forcing an unwind of their position.

But when 2,000 contracts get dumped in the dark of night by some unknown entity, in a completely inefficient and nonsensical way, resulting in a price smash in face of a steadily rising PM price, the response of our same vaunted government was .....

Crickets!

So, as far as fundamentals go-

We have had 5 years of the most anemic "recovery" in the history of recoveries, with the lowest labor participation rate in 36 years, with household income contracting and debt burdens of governments and private entities increasing, and the most massive global currency printing in the history of mankind, led of course by the trillions of dollars fabricated by the Federal Reserve, and the price of a scare industrial metal which relies on $100 barrel oil to dig out of the ground in increasing poor grades of ore and is being consumed at the rate of a billion ounces per year is going down for two years.

And from Dave,

Crickets!

Enjoy the rest of your week,

H

 

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
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Posts: 5456
you can't steal my crickets

Hrunner-

The anger I feel now about the behavior of markets is that they are all a manipulated fabrication of a fascist government system... [etc, etc, etttttc]

[snip]

I would be so happy if we could return to a sane world with honorable government officials, serving in a constitutional government, where I and my fellow citizens are free to create, work, make money based on our abilities and level of effort, save the fruits of labor free from confiscation by the government by direct punitive taxation

Yes, we mostly agree on what's wrong, and how the folks in charge are focused on maintaining the status quo at all costs.  And I sympathise with your feelings on all of it.

However, here is where I think you go wrong:

Rising gold is supposed to be a signaling mechanism, among other interpretations, that bad inflation is coming, and financial collapse is imminent.  Depriving the world of that 'canary in a coal mine' signal is akin to burning the life rafts on a sinking ship.  In other words, it is immoral and corrupt.

This whole "supposed to be" thing is where I think you go off the rails.  You write this as if this is some natural law somewhere.  It's not.  Rising gold isn't a signal of anything more than an increasing interest in having exposure to gold in all its various incarnations - futures, GLD, PHYS, coins, bars, miners, etc.  And the market is comprised of people - lots of them - each with their own viewpoint, and the sum total of all participants are what determines if there is increasing interest or not.

And then you goes a step further when you assume that a falling gold price, in the face of what you see to be (basically) the end of Western Civ, is prima facie evidence of government control.  And then you get angry about that alleged government control!

Such ego!  You do realize that it could just be that most of the rest of the western world that has money to manage doesn't see things the same way you do?  And that they are the marginal gold buyers at the moment?

And I daresay, if most of the western world felt the same way we did, likely we wouldn't be engaged in all the silliness that is going on today.

As far as your point about me creating naked paper- surely you don't believe what you are writing.

Surely I do.  And...stop calling me Shirley.  Ha.

There's nothing wrong with a naked paper short.  Or a naked paper long.  That's the essence of speculation.  And allowing speculation provides liquidity and price discovery.  If the only buyers of wheat contracts were companies that bake bread, and the only sellers of wheat contracts were farmers that grew wheat or had wheat in a silo, there would be zero liquidity, and the spreads would be massively wide.  The market simply wouldn't work - it wouldn't serve either the purpose of price discovery, or of providing liquidity with a low bid/ask spread to the people who need to hedge.

This state of affairs would be an improvement to you?

Again, position limits are important.  But there is nothing wrong with naked shorts or longs in commodity trading.  In fact, I'll make a stronger statement: they're necessary for the markets to function as designed.

But when 2,000 contracts get dumped in the dark of night by some unknown entity, in a completely inefficient and nonsensical way, resulting in a price smash in face of a steadily rising PM price, the response of our same vaunted government was .....

Eh, that whole "dark of night" thing again.  Its the light of day in Asia, if I recall.  Or Europe.  And Shanghai has a few gold traders, if I recall correctly.  And so does London.  Right?

I've seen the vast majority of "smashes" - even in asia - hammer prices further down when in a downtrend, and then when the market is ready to turn, those same "smash" events turn into a "buy-at-a-discount" events that end up being trend turning points once the price gets cheap enough.

Again, "that's how markets work."

As for this bit - it feels like you just wanted to use my favorite word, "crickets":

We have had 5 years of the most anemic "recovery" in the history of recoveries, with the lowest labor participation rate in 36 years, with household income contracting and debt burdens of governments and private entities increasing, and the most massive global currency printing in the history of mankind, led of course by the trillions of dollars fabricated by the Federal Reserve, and the price of a scare industrial metal which relies on $100 barrel oil to dig out of the ground in increasing poor grades of ore and is being consumed at the rate of a billion ounces per year is going down for two years.

And from Dave,

Crickets!

So let's see, where do I begin?

More credit creation occurred in 1 year of bubble-era borrowing than in all 5 years of Fed money printing.  And that credit creation didn't sit at the Fed as Excess Reserves, either.  No credit creation = no inflation = no higher gold price, at least from what I can tell anyway.  Every goldbug I know focuses on the Fed, and not so much on how much willing borrowers did to bring us here.  They seem to be a bunch of people with broken models of the world - cargo cultists, to use a CHS phrase.  At least in my opinion.

Household income contracting: deflationary.  Anemic recovery: deflationary.  $100 oil: deflationary - just like a rate increase is deflationary.  I'll add one more - defaults & credit contraction: deflationary.  And deflation is NOT good for gold in a non gold-backed currency, regardless of what the sellers of gold would have you believe.  Evidence says otherwise.  Again, more cargo-cult market models.

[Note: "Cargo Cult" means, in this case, a model of how things work that is either directly contrary to the evidence, or simply ignoring bits of evidence that don't fit the model]

And last point: there are 37 years of above-ground supply of gold.  Poor ore grades will take a while to make itself felt in the supply/demand equation.  [Less so with silver - much less so.  And that could be an interesting outcome.]

The western marginal buyer has to return for gold to continue its move up.  And everyone will hail the end of "the grand suppression scheme" - just like the suppression scheme that failed during the 11 years of the gold bull market.

As to whether or not you're a goldbug - I can't answer that.  But if you can't see the symmetry in intraday market activity when the chart behavior looks identical to a - more neutral observer - well perhaps you have a name for that.  I think that people who don't see the symmetry I do either aren't watching, or they don't know what to look for, or their semi-religious inclinations blind them to the obvious.

So again - I believe the same things about the decline that you do.  Its just my model for how the market works that we differ on.  That, and my extensive exploration into the data that has convinced me the story is not as simple as "Fed Money Printing will inexorably lead to a hyperinflationary crash that will send gold to $50k/ounce."

This year, if John Williams is to be believed.

bronsuchecki's picture
bronsuchecki
Status: Bronze Member (Offline)
Joined: Apr 22 2012
Posts: 73
Speaking for TPTB

Hi Jim H,

If you look at the totality of my blogging you could hardly consider me speaking for TPTB.

As regards to "initiation of a new propaganda campaign", well I have been blogging on the "capacity shortage vs raw gold shortage" issue since 2008 when that problem first appeared. So if I am indeed doing propaganda for the Cartel, well I should have been sacked by now because my "capacity shortage vs raw gold shortage" idea has not been picked up at all since 2008.

I am surprised that you haven't seen the real potential conspiracy, which is that as I work for a mint, playing up shortages is a way to not keep people calm and get them to rush and buy coins.

I'd suggest taking your tin foil hat off and considering the possibility that what I have to say on this issue is just the reality of the industry situation.

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Jim H
Status: Diamond Member (Offline)
Joined: Jun 8 2009
Posts: 2387
Welcome Bron!

This is kinda unique.. like getting pulled over by a cop where you basically pay his salary.. and I say that because I am a huge fan of what you produce, having I kg versions of the Silver Lunar Dragon, and the Lunar Snake, and various other examples of the coinage produced by your mint, including a Gold 1 oz. snake, and a Gold 1 oz. Kangaroo.  That being said, as with the cop, I question his (your) allegiance to the State.. you get your Gold at the pleasure of, and you have your charter from the State;

http://www.perthmint.com.au/about_us_the_perth_mint.aspx

Gold Corporation’s functions, as described in Sections 10, 36 and 49 of the Act, include:

So I have to question whether you are really here to support me, the common man, or the State, who ultimately holds the key to your paycheck.  Anyway.. who wants to talk about such complications.. right?

Bron, I don't argue that what you say is true... we may see shortages of Gold coinage in the future.. and one of the bottlenecks may indeed be blanks.. but the fact is, Gold is currently in shortage at all levels.. at all points in the supply chain (and I am a materials supply chain guy in the semiconductor industry, so I understand this stuff pretty well).  I stand by all that I said in the previous post, and you have said nothing of substance to convince me that there is not in fact a raw materials shortage.  What say you about the story that has been passed along by both Alex Stanczyk AND Jim Rickards about lack of supply?;

  http://www.ingoldwetrust.ch/alex-stanczyk-physical-supply-never-been-tig...

What can you tell us about the flow of Gold to counter this story?  Why should I believe that blanks production is in fact the rate limiting step?  Why should I believe that in fact the Swiss refiners are not melting 1960's era LGD bars into 1 Kg. .9999 bars destined for China?  Why should I believe that others like me (as well as those much richer than me), who can do simple math (pity the under-schooled) are not also transferring much of their fiat into these metals which are precious?  Oh, here is the math by the way, at least for the US;

http://globaleconomicanalysis.blogspot.com/2014/01/when-will-fed-hike-pa...

The real bottleneck is the availability of physical Gold, period.  Lots of paper to be had... and we must keep the common folk believing that paper = phys, right?  I like the blanks bottleneck story because I agree that it's true (or will be true in the end).. only it's not the real story at all, is it Bron?  The real story is  that there has never been more demand, in bulk, ever.  Negative GOFO.  The real story is that the price has never been more disconnected from the physical supply limitation, ever.  I believe you could tell the real story if you wanted, but I very much understand if you don't.

       

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davefairtex
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Posts: 5456
coin making - costs & margins

Bron-

I'm curious about the cost structure for making the various gold products: coins, bars of varying sizes.

How much does it actually cost to make a coin?  A 1-oz bar?  A kilo bar?  Labor + some fraction of the capital investment in the machinery is what I'm looking for.  And what's the profit margin on the resulting product?  Is coin-making (or blank-making) a high margin business?

I can see what you are saying about the cost of maintaining a large inventory of blanks - those carry costs will eat up your profit, and if you scale up blank-making machinery in advance of demand, you sink capital into something that's not providing you any ROI until that demand appears - if it ever appears.

And when it does appear, you have to guess if that demand is just a spike, or if it will be steady enough to justify the investment in more machinery over time.

When I consider this as a business decision, seeing if I can justify buying more coin-making machines vs risks of demand falling off and my machines going idle, coin shortages make a lot more sense.

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Jim H
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Posts: 2387
Remember Dave...

There is always the Comex, which can be used to hedge off those inventory cost swing risks....  : )

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davefairtex
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Joined: Sep 3 2008
Posts: 5456
honey, Jim, remember honey

We can always catch more flies with honey rather than throwing vinegar at them and then wondering why they fly away.

Just saying.  :-)

Perhaps we could ask him, is he seeing any difficulty in sourcing gold for the mint right now?  Rather than telling him, I mean, which might be seen as possibly arrogant, coming from someone who doesn't work for a mint.  And the Shanghai premiums right now are around $6 or so, and delivery volumes are pretty strong, so I'm not seeing massive supply shortages showing up at the moment at least in the places that I can measure it.

Perhaps the mint gets its gold from Australian mining companies, and maybe they have long term supply contracts priced at spot, so they aren't exposed to the worldwide gold supply chain.  Bron?

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davefairtex
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Posts: 5456
hedging inventory cost swing, carry costs

I've always wondered if they do that, hedging cost swings I mean.

However, the cost I was referring to was the cost of carrying the inventory.  A lot of money sunk into inventory is money that either has to be borrowed (at an interest rate) from somewhere else, or its capital that is sunk into inventory not providing any ROI which is an opportunity cost.

Presumably, this opportunity cost is made up by profits from the premiums over spot gold charged on the coins, but the larger the inventory, the higher the cost structure for the mint.

In some sense, if the cost of short term money in AUD is about 3%, then the cost of maintaining a billion-dollar pile of gold is about $2.5 million per month - either in borrowing costs, or opportunity costs for the capital that paid to buy that pile.  And that's a cost that can't be hedged away at COMEX.

 

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Jim H
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Posts: 2387
inventory.....

Dave,  when you have unallocated accounts, as the Perth mint does... you can always find a way to account  for that pesky inventory.  You can even fractionally reserve it!

Maybe what I need to do here is reiterate the quote from Alex Stanczyk, recalling his meeting with the managing director of a Swiss refinery;

…At this Swiss refinery there have been several times this year on which they were unable to source gold, this shocked me. They’re bringing in good delivery bars, scrap and dore from the mines, basically all they can get their hands on. This gentleman has been in the business for 37 years, he was there during the last bull market in the late seventies. I asked him when was the last time this has happened, that he was unable to source gold, he said never. And I clarified it, I asked: let me make sure if I understand what you’re saying to me, in the last 37 years you’ve worked in the gold industry this has never happened? He said: this has never happened.

…There was one other comment that was fascinating, he said sometimes when they get gold in, it’s coming from the back corners of the vaults. He knew this because these were good delivery bars marked in the sixties. This is a huge supply squeeze and its worse than anything that has happened in the last four decades. At some point there is going to be a massive squeeze on the price.

link:  http://www.ingoldwetrust.ch/alex-stanczyk-physical-supply-never-been-tig...

Do remember that this story has been separately attested to by Jim Rickards on an RT.com interview? 

I continue to believe that the blank shortage story is a smokescreen... you are welcome to believe differently, and you are welcome to back up your point of view with quotes and data, as I do... but please don't accuse me of being somehow mean.  If your paycheck depends on the State... then your paycheck depends on the State (legal charter in the case of Bron).  We all talk our book, right.. just like all those KWN guys who are pimping mining shares?  Was I being mean to those KWN guys by saying that?  I happen to agree with much of what they say, but I never lose sight of who butters their bread.       

 

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bronsuchecki
Status: Bronze Member (Offline)
Joined: Apr 22 2012
Posts: 73
Got caught up today with work

Got caught up today with work stuff and 5:45pm and I'm going home. Will reply tomorrow but in the meantime this blog post will give a bit of a response http://goldchat.blogspot.com.au/2014/01/how-to-know-when-there-is-real-p...

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Hrunner
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Joined: Dec 28 2010
Posts: 256
Asymmetry versus Symmetry

As I've said repeatedly, I don't like the concept of "inflation" because it is too general.  We need to focus on "prices"

No one walks into a grocery store and says "I'll have a gallon of milk, how many inflation units does that cost?"  Mere unwashed masses like me just want to know, how many dollars does a gallon of milk cost.

You said:

"More credit creation occurred in 1 year of bubble-era borrowing than in all 5 years of Fed money printing. And that credit creation didn't sit at the Fed as Excess Reserves, either. No credit creation = no inflation = no higher gold price, at least from what I can tell anyway. Every goldbug I know focuses on the Fed, and not so much on how much willing borrowers did to bring us here. They seem to be a bunch of people with broken models of the world - cargo cultists, to use a CHS phrase. At least in my opinion.

Household income contracting: deflationary. Anemic recovery: deflationary. $100 oil: deflationary - just like a rate increase is deflationary. I'll add one more - defaults & credit contraction: deflationary. And deflation is NOT good for gold in a non gold-backed currency, regardless of what the sellers of gold would have you believe. Evidence says otherwise. Again, more cargo-cult market models."

The concept I don't believe you appreciate, and I sympathize, because it is a bit counterintuitive, is that in a market-distorting, highly central-bank manipulated world, deflation equals inflation.

In a world monetary system that is based on debt-backed currency, central banks know that deflation is death.  Well, death of money.  It is kryptonite.  That single fact explains the vast majority of the Fed's actions for decades.  Of course, in a sound money world, deflation is not death, in fact it is great for those who worked hard enough to make excess capital, and were smart enough to save their earning in a stable money.  But I digress...

So to modify your statement:

"Household income contracting: potentially deflationary. Anemic recovery: potentially deflationary. $100 oil: potentially deflationary - just like a rate increase is potentially deflationary. I'll add one more - defaults & credit contraction: potentially deflationary."

It is potentially deflationary because our hardened ideologues at the Fed will not let deflation happen.  I agree with you that it is trying to happen.  The Fed will move heaven and earth to not let it happen.

Perhaps you missed the counter- intuitive up moves in the stock market when bad jobs reports come out, or bad GDP misses come out- now why would the stock market go up on news that the economy is getting worse?  Why indeed, Dave?

Those moves are entirely based on a "bad news is good news" theme.  To translate, the worse the bad (deflationary) economic indicators are, the higher the likelihood of more QE from the Fed.  More QE, higher asset prices.  You may call it stock inflation, bond inflation if that makes you feel better, but it is bubble-blowing by the Fed, pure and simple.

Virtually all asset classes have gone up or stabilized and not deflated (housing e.g.) with all this QE, except precious metals and some exchange commodities futures- I find that very strange, don't you?  But I'm sure you'll attribute that to a market that has too much metal supply, decreasing investor demand, or some such.

There is a titanic struggle going on between the natural forces of deflation, as evidenced by the deflationary factors mentioned above,  as a consequence of an increasingly over-leveraged world, being opposed mightily by the forces of inflation due to massive money printing.  We have never been witness to such a titanic struggle in the history of the world.  The reason very few appreciate it is that it is the tectonic plate phenomenon: unbelievably massive forces can push against each other with no appreciable result because they are in exact opposition.

We all know what happens when one tectonic plate loses the battle against the other tectonic plate.

Enough force to create the Great Western Uplift and eventually the Grand Canyon.

Gold prices should reflect the massive money printing simply because of the almost inevitable massive inflation that will result when the Fed "wins" and inflation sets in.  You are absolutely right to point out that there are piles of reserves and credit sitting on the sidelines.  You are absolutely wrong to say that there is no potential inflation, and that the Fed will be able to unwind the massive QE and credit expansion without huge inflationary overshoots, and potentially lethal hyperinflation.

By the way, about that 37 years of gold above ground, about 15 minutes of it is in the weak hands of Aunt Sarah who is going to sell her gold necklace to buy a European vacation.  The remaining 36.99999 years is in the strong hands of myself, the wealthy BRICS investors, the Eastern central banks, and sitting in Kyle Bass' University of Texas vault.  It ain't going anywhere. 

As far as your symmetry, was this the unmanipulated market symmetry you were referring to?:

I watch the spot price charts of gold and silver not as reflecting any semblence of a market, but  as the best open air conversation that I have access to between the bullion banking system as operatives of federal government corrupt policy, who are screwing around with price and screwing us in the process, versus the rest of the constituents which include scared buyers seeking insurance such as myself, smart institutional investors and smart wealthy investors.

At some point, the Comex conversation ends something like this-
(institutional and wealthy strong hands): "Okay, you want to put gold on sale again, gimme a whole truck load.  Physical gold of course, please"
(bullion bank, who has made tens of billions of dollars fraudulently while allegedly being the trusted and responsible custodian of the precious metals market, all under the watchful eye of the CFTC):  "Gold, we don't got no stinking gold.  Did you think we were going to give you actual gold?  After all, did not you realize that Davefairtex (and the CFTC) are perfectly fine with us giving you worthless paper money for your futures contract that in theory says (should say) that you are entitled to physical gold.  Go pound sand.

At this point, things get very interesting.  By very interesting, I mean potentially very ugly.

 

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5456
opinion vs evidence

Hrunner-

As I've said repeatedly, I don't like the concept of "inflation" because it is too general.  We need to focus on "prices"

Yes, me too.  Commodities overall have deflated - excuse me, their prices overall have gone down - since 2011.  I've presented hard evidence to back up this claim.  I don't see you presenting any evidence to the contrary.  My opinion is that western money managers have used this same evidence as their guide to the question "is inflation coming" and they've concluded "no, not yet" and so they've sold GLD and COMEX gold contracts.

Gold prices should reflect the massive money printing simply because of the almost inevitable massive inflation that will result when the Fed "wins" and inflation sets in. [italics added]

Yes, Hrunner dictates to the market how it "should be" valuing an asset, based on his personal assessment that a particular economic outcome is almost inevitable.  Unfortunately, the markets don't listen to our assessments.  At least, they don't listen to mine.

You are absolutely right to point out that there are piles of reserves and credit sitting on the sidelines.  You are absolutely wrong to say that there is no potential inflation, and that the Fed will be able to unwind the massive QE and credit expansion without huge inflationary overshoots, and potentially lethal hyperinflation.

Hmm, I don't recall saying there is no potential inflation.  Oh right, that's because I never said it!  Please do me the favor of quoting me when you make claims as to what I'm "absolutely wrong to say."  Any moment borrowers could start borrowing, and that would indeed kickstart inflation.   So far, they haven't.  And after a multi-generational debt-bubble - I believe the odds are against it.

However, even given my assessment of the odds, I still watch credit creation like a hawk.  I try hard not to let my opinion or my assessment of odds cloud my analysis of the hard evidence - what is really going on.  That's because I'll lose money if I let that happen.  Evidence needs to win, every single time.

One more time:

There was more money printed by willing borrowers during ONE YEAR of the bubble than in ALL the years of Fed "massive money printing."  Its just that willing borrowers spread the newly created credit around the economy, while the Fed's printed money ended up dropping onto a much smaller set of financial assets.

Were you even curious how I could make such a statement?  Did you ask to see the data behind this statement?  This lack of curiosity as to why I should say such a crazy thing (that flies directly in the face of goldbug orthodoxy) suggests to me you may be opinion driven rather than data driven.

By the way, about that 37 years of gold above ground, about 15 minutes of it is in the weak hands of Aunt Sarah who is going to sell her gold necklace to buy a European vacation.  The remaining 36.99999 years is in the strong hands of myself, the wealthy BRICS investors, the Eastern central banks, and sitting in Kyle Bass' University of Texas vault.  It ain't going anywhere.

I would really love to have some evidence of this weak hands/strong hands claim of yours.  Do you have any such evidence as to who holds that 169.9 kilotons of gold?

Your numbers suggest this claim is nothing more than hyperbole.  I'll go with the odds here and say this is an unsupported claim, backed up only by your personal opinion.  (Just as a back of the envelope: "15 minutes" of world gold demand is about 4,000 ounces.  All the rest is in strong hands?  Really?)

When I see you reaching for hyperbole, it suggests to me you're just throwing opinion at me because you don't have any actual facts.

I'm long gold.  Really, I'd love for your opinion to be correct.  But - should I jump in, getting even longer, just based on your opinion tossed out when you are apparently angry at the market for not behaving the way that you think it should?

I don't base my strategy on angry people's opinions.  I don't want to get poor.  I prefer evidence.  I'd love for you to provide some, so I can make an informed trade.

As far as your symmetry, was this the unmanipulated market symmetry you were referring to?

No, it wasn't.  My symmetry case still stands.  Your response is a non-sequitur.

But I'll play along with this one, because I found it interesting.

Some time ago I did my own study of the whole LBMA fix claim.  I came to the conclusion that, indeed, I saw a clear distortion of the market over time.  (Mythbusters says: CONFIRMED)  I concluded that the market is almost certainly manipulated - in exactly the same way forex rates were manipulated by the banks - at two times during the day centered around the AM & PM fix times.  I had hoped I could take advantage of this move to make money.

I did a study of 1-minute GC trades over the course of seven years to come up with this answer.

Method: divide the trading day into 15 minute time buckets.  For each tick, drop it into a time bucket, calculating the amount of the move on that tick during that bucket.

Average 15-minute time bucket: 4 cent move (absolute value; each bucket on average was either +/- 4 cents).

Time bucket 15 min before AM Fix: -22 cents

Time bucket 15 min before PM Fix: -23 cents

If you saw the data, you'd see the time buckets around the AM & PM fixes are total outliers.  I think its a smoking gun.  If I were more of a stats guy, I could give you more of a chapter & verse.

But at the end of the day, can you make money on an average move of 22 cents - shorting at the start of the bucket, and covering at the end of the bucket?  No way.  Spreads are 10 cents on either side, then you pay commission, and any profits are gone.

But I have to say, that chart sure looks dramatic.  The results I came up with - not so much, simply because I was actually trying to see if I could make money from the manipulation and so I think mine is closer to representative truth.

Hint: if the manipulation were as massive as suggested by that chart, making money from that size of a distortion should be CHILDS PLAY.  Sadly, the truth is less exciting.  It usually is.

Oh and FWIW, I believe those bankers need to get punished for manipulating the market and stealing all that money.  Preferably jail time.  Orange jumpsuits all around.

After all, did not you realize that Davefairtex (and the CFTC) are perfectly fine with us giving you worthless paper money for your futures contract that in theory says (should say) that you are entitled to physical gold.  Go pound sand.

I'm not exactly sure why you drag my name into your fabricated COMEX default conversation.  Instead of putting words in my mouth that suggest that I'm aligned at some level with some distasteful activity, I request that you do me the courtesy of quoting what I actually say.

 

DrZaius's picture
DrZaius
Status: Member (Offline)
Joined: Jan 15 2012
Posts: 3
Comex inventories
Hi everyone. This is my first post. I've been following the forum for a while now and enjoy the discussion. I thought this video regarding comex inventories might be relevant to this discussion:
 
Hrunner's picture
Hrunner
Status: Gold Member (Offline)
Joined: Dec 28 2010
Posts: 256
Evidence for historic tightness of gold supply

Dave,

I appreciate you want to label me as histrionic, promoting crazy theories with no evidence, like a Mel Gibson in "Conspiracy Theory"

And if you accuse of not having perfect evidence, then I agree with you.  I've said before, as an example, I wish we had a transparent government that would hire a rock-solid trustworthy auditor to go in and be shown every single bar of gold to be recorded and summed in a proper audit report, as is done thousands of times each year for private companies, but apparently our government's opinion of us citizen's is "don't worry, just trust us, the gold is all there".  In the wake of the recent "if you like your doctor, you can keep your doctor.  Period" ironclad promise, let's just say I'm a bit reluctant to accept the good word of our leadership.

And world investors you may be aware have a perhaps understandable reluctance to tell the public exactly how much gold we have, in exactly which building.  This behavior makes sense to me, in fact, I would use the same discretion.  But it makes the kind of "show me beyond any atomically small shred of an infinitesimally minute iota of doubt that 169 ktons of gold is not all floating around on the open market" level of proof challenging.  Agree.

As we have discussed before, a big percentage of the world makes decisions based on imperfect circumstantial evidence.   True, sometimes these evidence sets cause us to arrive at wrong conclusions.

If I come home and find chocolate smeared on my kid's face, all my chocolate bars missing, I typically "leap" to the conclusion that my child ate my chocolate, even in the face of the sad fact that I don't have a video showing my child eating each and every chocolate nor do I have a dozen witnesses testifying that they watched my child eat said chocolate.

Circumstantial evidence 1

There is testimony by actual gold fiduciaries that there is unprecedented levels of refining by major Swiss refiners.  [bolding mine]

"Koos Jansen: What was the purpose of your trip to Switzerland?

Alex Stanczyk [Chief Market Strategist for Anglo Far-East]: The purpose was two fold. We go to Switzerland once a year as part of our governance, we’re required to have an annual inspection of the gold, that was the main purpose of the trip. But in addition to that we also liked to talk to the refineries. It was myself, it was the managing director of Anglo Far-East mister Philip Judge, and Jim Rickards went with us, he sits on our advisory board.

We met with the managing director of the largest refinery in Switzerland and spend about two hours talking to him, we learned some very interesting things. What’s going on in the gold market as far as the price, is I think very counter intuitive. Everybody understands, knows and believes the price should be higher than it is, but it isn’t. There’s confusion in the marketplace, and there are two reactions; the reaction in the west is fear, confusion and uncertainty; the reaction in the east is buying. Now, this gentleman we were talking to probably has a better idea of physical gold flow than anybody else globally. He sees what is coming from the mines, he sees what is coming from the UK, and all over the world, as well as where its going. He indicated the price didn’t make sense because he has got so much fabrication demand. They put on three shifts, they’re working 24 hours a day, and originally he thought that would wind down at some point. Well, they’ve been doing it all year. Every time he thinks its going to slow down, he gets more orders, more orders, more orders. They have expanded the plant to where it almost doubles their capacity. 70% of their kilo bar fabrication is going to China, at apace of 10 tons a week. That’s from one refinery, now remember there are 4 of these big ones [refineries] in Switzerland.

Mr. Stanczyk also noted that bars marked from the 1960s were showing up to be recast into higher purity kilo bars destined for China — just as SD and Alasdair Macleod reported back in October. The refinery source indicated that in his 37 years working the trade, he had never seen problems sourcing gold. But several times this year, his refinery was not able to source gold"

http://www.ingoldwetrust.ch/alex-stanczyk-physical-supply-never-been-tighter

Please proceed to label this manager 'hyperbolic'.  Sounds to me like a guy that works as a manager in one of the world's largest refineries that says there is unprecedented gold supply tightness.

So we're melting down 50 year old bars and sending them to China.  I apologize, I should have used 49.9999 years supply in strong hands as opposed to 36.9999.

Circumstantial Evidence 2

 Gold is in historic backwardation

I admit the whole backwardation / contango thing is a difficult concept to understand

That said, apparently we are in a 40-decade historic period of gold backwardation.

Described by one writer [bold mine again]: (July 28th, 2013)

"So while commodity backwardation is not a unique event, gold backwardation is rare. Even though gold backwardation cannot happen in theory, it does occur when government intervention loses its desired effect, meaning that market forces are overpowering government attempts at manipulation.

Until now gold backwardation has only happened two times since this bull market in gold began back in 1999, and each prior occurrence lasted only a few days. In both instances market forces briefly overpowered government interventions aimed at manipulating interest rates. So gold backwardation does occasionally occur in spite of government intervention because central banks cannot ‘print’ physical gold to alleviate demand pressures.

Amazingly, gold has remained in backwardation against the dollar since my KWN interview [on July 8th, 2013]. The duration of this backwardation is unprecedented in the 4+ decades that I have been following the gold market. Clearly, something noteworthy is happening, which I believe in turn is signalling that something significant may yet happen. An indication of what that event may be can be discerned from the definition of backwardation on the LBMA website:

Backwardation - A market situation where prices for future delivery are lower than the spot price, caused by shortage or tightness of supply.

Clearly, the LBMA is defining commodity backwardation, and not the backwardation that occurs between different monies as a result of interest rate differentials. But their definition can be applied to physical gold, which is both money and like commodities, a tangible asset. A “shortage or tightness of supply” means that unless demand slackens or supply increases, the price must rise. "

http://fgmr.com/gold-backwardation-explained.html

 In fact, gold 1 month forward rate has been in backwardation for 75 days of the last 6 months of 2013 and all 11 business days of January of 2014 so far.  This is an unprecedented amount of backwardation in history.  I need to understand why as price is pushed down, "signalling" lack of interest, a boring and out of favor investment, we have historic interest in physical gold.

http://www.lbma.org.uk/pages/index.cfm?page_id=55&title=gold_forwards&show=2013

While we're on the London and AM and PM fixes, you may be interested in news from Bloomberg regarding the London Fix

Metals, Currency Rigging Worse Than Libor, Bafin’s Koenig Says

Germany’s top financial regulator said possible manipulation of currency rates and prices for precious metals is worse than the Libor-rigging scandal, which has already led to fines of about $6 billion.

The allegations about the currency and precious metals markets are “particularly serious, because such reference values are based -- unlike Libor and Euribor -- typically on transactions in liquid markets and not on estimates of the banks,” Elke Koenig, the president of Bafin, said in a speech in Frankfurt yesterday.

Bafin interviewed employees of Deutsche Bank AG as part of a probe of potential manipulation of gold and silver prices, a person with knowledge of the matter has said in December. The U.K. finance regulator, the Financial Conduct Authority, is also reviewing gold benchmarks as part of its wider investigation into how rates are set.

http://www.bloomberg.com/news/2014-01-16/metals-currency-rigging-worse-than-libor-bafin-s-koenig-says.html

I know, I know, you don't care about what some "guy in Germany" says.

I did not even bring up discontinuing of gold coin minting in UK this month (I'm still not sure how a government mint runs out of money).

I did not bring up the fact that the U.S. Fed gold vaulting "guys" said it would take 7 years to send back a partial fraction of Germany's sovereign gold, which is an amount that could be easily and comfortably be shipped by planes in 2 months. 

I'm glad you are long gold, and look forward to more of your analysis on the daily PM conversation.  Maybe even a conspiracy theorist can pick up a few honest signals.

H

 

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5456
premiums are my guide

Hrunner-

I appreciate you want to label me as histrionic, promoting crazy theories with no evidence, like a Mel Gibson in "Conspiracy Theory"

Hey if the shoe fits...and just because you are acting like Mel Gibson doesn't prove you are just as correct as he was in that movie.  It doesn't even suggest that.  In fact, it just says you're acting crazy.  :-)

And world investors you may be aware have a perhaps understandable reluctance to tell the public exactly how much gold we have, in exactly which building.

That's exactly why I would never make such a claim such as the one you made - that "all gold is in strong hands except for Aunt Mabel's necklace."  I choose not to damage my own credibility by coming up with unbelievable stories quoting numbers that are clearly made up to support my opinion.  Instead I say, "hey, I think..." or "its my opinion that..." which makes it clear that I don't have solid backup for my opinion, and that the reader should take it with a grain of salt.

Please proceed to label this manager 'hyperbolic'.  Sounds to me like a guy that works as a manager in one of the world's largest refineries that says there is unprecedented gold supply tightness.

So let's examine the numbers of the swiss refinery anecdote.  I too found it fascinating to read.  I'd like to poll the guy weekly to see if the situation is still happening.

At 10 tons per week, that's 520 tons per year from that refinery.  Let's say there are 4 big refineries, which means that's about 2080 tons of gold gone to China.  Lets see, that's 1.2% of the above-ground supply of gold transiting through Switzerland in one year.  Not bad.  Quite a bit in fact.  Mine supply for the year.  But not the end of the world.  I know we as humans tend to project the present infinitely into the future, even the gang here at PP that should know better - but you know, its possible China's massive bubble might actually pop someday.  In the meantime, it certainly seems to be the case that gold is going to China, and that now and then, gold is becoming harder for that refinery to source, and that this is a rare occurrance.  And that some of the bars he received were old.

I have to say, that's not the same thing as "all gold being in strong hands except for Aunt Mabel's necklace."  There appears to be occasional tightness in supply, and this is rare.  That's as far as the evidence in this story will go.  Interesting, perhaps a sign of something to come, but that's it.

When that refinery starts being routinely unable to source gold, then we move to the next level of interest.  Presumably, that should be supported by visible hikes in premiums at the physical exchanges, and an expansion of premiums in PHYS - you know, the usual places.  Nothing like confirmation of our stories with price-based evidence that helps quantify how serious the problem is, and whether it is just a spike high, or something ongoing.

As far as labeling him hyperbolic - he didn't claim that all gold was in strong hands.  You did.  And clearly, since that refinery is still sending gold off to China every week, that actually contradicts your claim.  Gold is still being sourced.  So no, I won't say he's acting hyperbolic.  Why would I?  He seems to be quite level-headed.

Described by one writer [bold mine again]: (July 28th, 2013)

"So while commodity backwardation is not a unique event, gold backwardation is rare. Even though gold backwardation cannot happen in theory, it does occur when government intervention loses its desired effect, meaning that market forces are overpowering government attempts at manipulation.

So this one writer (at KWN?) says there's gold backwardation, and that this somehow proves that "government intervention loses its desired effect."  Trader Dan says that's nonsense - backwardation isn't happening.  I believe Trader Dan.  This is the whole negative GOFO thing again.  We could go into all that, but I don't have the energy.  Negative GOFO led to exactly zip last year so I remain unimpressed.

Bafin interviewed employees of Deutsche Bank AG as part of a probe of potential manipulation of gold and silver prices, a person with knowledge of the matter has said in December. The U.K. finance regulator, the Financial Conduct Authority, is also reviewing gold benchmarks as part of its wider investigation into how rates are set.

I know, I know, you don't care about what some "guy in Germany" says.

I think you must have a reading disability.  In my response to you, I already said that I found what I consider to be conclusive evidence of manipulation in the London AM/PM Fix.  Did you just not read that part of my response?  If you did read it, you certainly didn't acknowledge it.  Again, why must you continue to put words in my mouth?  I know the case you make is better if somehow I deny everything - but unfortunately, when evidence exists, I not only accept it, I enthusiastically support the claim.  As I do in this case.

I also found evidence overall that prices decline in London and NY, while they tend to rise in asia.  This bias is true over the long haul, and is hard to miss when you look at the data.  Again, its not enough to make money from, but it is very clear from the evidence that something is going on, on a systematic basis.

And I also believe that there is LIBOR-style manipulation going on with the GOFO rates, because they are constructed in a similar method to LIBOR, and if history is any judge, if there's a way for the banks to mis-report information and make a buck from it without risking a penny, they'll do it in a heartbeat.  [These are the same GOFO rates that all the goldbugs base their claims of "backwardation" on - but I digress.]

But the phenomenon we are talking about are both intraday manipulations, not trend manipulations.  Those two types of manipulations are not the same at all.  Apples & oranges.  I enthusiastically support the claim of "apples manipulation", and I do not support the claim for "oranges manipulation."  The difference is evidence, and the level of effort and risk involved in execution.

I did not bring up the fact that the U.S. Fed gold vaulting "guys" said it would take 7 years to send back a partial fraction of Germany's sovereign gold, which is an amount that could be easily and comfortably be shipped by planes in 2 months.

Agreed, this one is interesting too.  And the fact they only got 37 tons, that's interesting as well.

But ultimately, I use premiums as my guide.  If all these stories are true, if gold was in strong hands except for Poor Aunt Mabel, then anywhere there is physical gold, premiums should be blowing out.  I don't see that happening, at least not right now.  So will I base a trade on any of these awesome stories?  No, I won't.

But I'm watching premiums.  And you can be sure if I see them start to expand in a way that tends to support the outcome that you project, I'll report on it.

bronsuchecki's picture
bronsuchecki
Status: Bronze Member (Offline)
Joined: Apr 22 2012
Posts: 73
Sorry for the late response,

Sorry for the late response, I have this annoying thing called a job. FYI, while I don't comment here, I was involved in this April 2012 http://www.peakprosperity.com/comment/134236#comment-134236 372 comments post, which inbetween the snarky stuff, is a lot of good info.

Jim H wrote:

That being said, as with the cop, I question his (your) allegiance to the State.. you get your Gold at the pleasure of, and you have your charter from the State ... So I have to question whether you are really here to support me, the common man, or the State, who ultimately holds the key to your paycheck.  Anyway.. who wants to talk about such complications.. right?

Firstly, I would note that the Perth Mint is owned by a state government, not a federal government. State governments are not involved in central banking or money printing. Western Australia is similar to Texas in its relationship with the federal government, having voted to secede from the federation in the great depression, see here for some discussion around this http://goldchat.blogspot.com/2008/11/australian-gold-confiscation.html

I therefore think that your view that somehow I, via my boss the CEO, via the Premier of the State, via our federal Prime Minister via the US Govt, has been told to push X meme as part of some conspiracy as farfetched. I'd like to think I have that much influence but I don't. Perth Mint has never been instructed by anyone to push negative agendas re gold, indeed, the state government continues to own us for the specific purpose of supporting the local gold mining industry, which employs a lot of voters.

Secondly, if you read my blog you will see many times statements which counter any claim of being part of a Cartel. My integrity is not for sale and if the Perth Mint engaged in any financially risky behaviour or was being influenced, I would resign. You can believe that because becoming a whistleblower would mean I would get a lot of coverage by the gold blogosphere and be able to start my own subscription service and probably make more money than I earn now.

Jim H wrote:

but the fact is, Gold is currently in shortage at all levels.. at all points in the supply chain (and I am a materials supply chain guy in the semiconductor industry, so I understand this stuff pretty well).  I stand by all that I said in the previous post, and you have said nothing of substance to convince me that there is not in fact a raw materials shortage.  What say you about the story that has been passed along by both Alex Stanczyk AND Jim Rickards about lack of supply?

A shortage at all levels is a big claim and not true, you only provide evidence from one source. As my recent blog post says, there are other sources saying there is no problem and indeed the FastMarkets article said the shortage was intermittent. That is certainly an interesting event, but there has not been an ongoing shortage of 400oz bars in the past. I will reiterate what I said in my post, if GoldMoney is not reporting any problems selling its 400oz bar backed product, how can you claim gold is currently in shortage at all levels?

Jim H wrote:

Lots of paper to be had... and we must keep the common folk believing that paper = phys, right?  I like the blanks bottleneck story because I agree that it's true (or will be true in the end).. only it's not the real story at all, is it Bron?  The real story is  that there has never been more demand, in bulk, ever.  Negative GOFO.  The real story is that the price has never been more disconnected from the physical supply limitation, ever.  I believe you could tell the real story if you wanted, but I very much understand if you don't.

I have no agenda to keep the common folk believing paper = physical and you will find many times in my blog where I discuss and warn people against paper, eg http://goldchat.blogspot.com.au/2010/04/london-unallocated-fractional-fu.... The real story is there has never been more demand, but so is the supply, eg scrap has increased along with price as cash for gold shops show. Negative GOFO has been small (un abitragable, which is why it occurs) and infrequent, not much proof there, you need more than just negative GOFO http://goldchat.blogspot.com.au/2010/07/degrees-of-distrust.html

bronsuchecki's picture
bronsuchecki
Status: Bronze Member (Offline)
Joined: Apr 22 2012
Posts: 73
davefairtex wrote:I'm curious
davefairtex wrote:

I'm curious about the cost structure for making the various gold products: coins, bars of varying sizes. How much does it actually cost to make a coin?  A 1-oz bar?  A kilo bar?  Labor + some fraction of the capital investment in the machinery is what I'm looking for.  And what's the profit margin on the resulting product?  Is coin-making (or blank-making) a high margin business?

Minting is a competitive business so costs and margins can't be revealed, but just let me say this, where have you seen the investment in the industry? Distribution, eg GoldMoney, BullionVault, Gold Bullion International. Easy businesses as mostly IT web stuff. Do you see any money going into opening large scale minting? Nope, probably because it is not a huge margin business and needs a lot of capex and funding.

davefairtex wrote:

I can see what you are saying about the cost of maintaining a large inventory of blanks - those carry costs will eat up your profit, and if you scale up blank-making machinery in advance of demand, you sink capital into something that's not providing you any ROI until that demand appears - if it ever appears.

And when it does appear, you have to guess if that demand is just a spike, or if it will be steady enough to justify the investment in more machinery over time.

When I consider this as a business decision, seeing if I can justify buying more coin-making machines vs risks of demand falling off and my machines going idle, coin shortages make a lot more sense.

That capacity utilisation issue is the big what if. That is why few are willing to spend $50 million, as the Perth Mint has done since 2007, on building a factory when you run the risk that if the gold bull market dies, you do your investment.

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bronsuchecki
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Posts: 73
6w3hy davefairtex wrote:is

6w3hy

davefairtex wrote:

is he seeing any difficulty in sourcing gold for the mint right now?  Rather than telling him, I mean, which might be seen as possibly arrogant, coming from someone who doesn't work for a mint.  And the Shanghai premiums right now are around $6 or so, and delivery volumes are pretty strong, so I'm not seeing massive supply shortages showing up at the moment at least in the places that I can measure it.

Perhaps the mint gets its gold from Australian mining companies, and maybe they have long term supply contracts priced at spot, so they aren't exposed to the worldwide gold supply chain.  Bron?

We aren't having any problem sourcing gold, but then we do refine around 300-400 tonnes a year, so it is not really ever going to be an issue. But our contacts into London are not saying there is any problem sourcing gold.

We do enter into refining agreements with miners for a period, but we don't lock them into us as they are free to sell the gold to us or swap it into London and trade it with anyone they choose. Refining is a globally competitive business and one with overcapacity, so quite tough.

In 2008 when markets were going nuts, we were shipping in 20 tonnes of silver from London for 20 weeks straight. If we need additional, we go into the pro market and source it, which has never been a problem to date.

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bronsuchecki
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Posts: 73
davefairtex wrote:I've always
davefairtex wrote:

I've always wondered if they do that, hedging cost swings I mean.

However, the cost I was referring to was the cost of carrying the inventory.  A lot of money sunk into inventory is money that either has to be borrowed (at an interest rate) from somewhere else, or its capital that is sunk into inventory not providing any ROI which is an opportunity cost.

Presumably, this opportunity cost is made up by profits from the premiums over spot gold charged on the coins, but the larger the inventory, the higher the cost structure for the mint.

In some sense, if the cost of short term money in AUD is about 3%, then the cost of maintaining a billion-dollar pile of gold is about $2.5 million per month - either in borrowing costs, or opportunity costs for the capital that paid to buy that pile.  And that's a cost that can't be hedged away at COMEX.

We have never traded futures markets, in the past prior to our Depository business, we hedged by leasing gold, see here http://goldchat.blogspot.com.au/2008/06/gold-value-chain-part-iii-manufa... for an explanation.

The point of our unallocated Depository business is that we cut out the bullion bank and it is our unallocated clients who are effectively funding our working inventory. They get free storage, backed 100%, and we get free funding. Win win deal. No fractional crap. Also, because the gold in the Mint is effectively owned by the clients, they are ones that are taking the price risk. So unallocated give us free funding and zero price risk, it is a great business model.

FYI, I have two posts held up in moderation due to inclusion of links, I have responded to you Jim.

Tycer's picture
Tycer
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Joined: Apr 26 2009
Posts: 610
I am never bored on the PM threads. Thanks!!

Love it, love it, love it.

 

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5456
thanks bron

Your responses (and the posts at your site) were quite helpful for me in understanding how and why leasing happens, and how companies (and the mint, in the past) use it to hedge their exposure to gold market fluctuations and/or fund mine development.

Also the depository/unallocated gold thing makes sense.  Someone else takes price risk, and no need for the mint to be out the capital.  And the clients either reap the rewards or take the losses, as the case may be.  As you say, win-win.

You really have written a lot about the industry and all of its moving parts.  It is really fascinating stuff.  Thanks for the link.  I ended up reading a lot more than just that one page.

And Jim, before you jump all over Bron, you might consider taking a look at some of the stuff he's written.  It is information I haven't seen anywhere else, presented clearly and understandably.

Here I'll shill for your site once more:

http://goldchat.blogspot.com/

Jim H's picture
Jim H
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Joined: Jun 8 2009
Posts: 2387
Bron's site and other thoughts

Thank you Dave,  I hope you noticed that I correctly answered your question about how the Perth mint handles the carrying cost of their inventory (by selling unallocated) before Bron did... regardless of my fractional reserve quip - I may seem to be shooting from the hip, but I am usually not.  I am well aware of Bron's blog, thank you. 

You should know Dave that my quip about being fractionally reserved was based on some analysis done by James Turk some years ago... because, as I am sure you know, I would never just be blanket pejorative toward something as solid and well accepted as unallocated Gold... no, I was kinda thinking about this when I said that;

https://www.igolder.com/glossary/perth-mint/

Year Perth Mint Leverage Ratio Gold Available for Redemption Paper Gold
2000 3.65 27.4% 72.6%
2001 4.83 20.7% 79.3%
2002 4.61 21.7% 78.3%
2003 8.85 11.3% 88.7%
2004 10.36 9.7% 90.3%
2005 11.38 8.8% 91.2%
2006 18.18 5.5% 94.5%

I will assume that Bron is correct and that these kind of practices (i.e. 18x fractional reserve in 2006) are no longer the case.  

I am sure there are interesting things to be learned from his blog about how the various markets operate.. but in a macro sense, he strikes me as a guy who has never found a signal for physical Gold scarcity that he cannot debunk.  Some Gold positive articles that get promoted may indeed be overblown, not completely true, or subject to mis-interpretation.. it just seems to me that, for a guy whose business is selling beautiful stuff made of Gold and Silver, he tries really hard to convince us all that the raw materials are not as scarce as some of us think they are.  I could pull up details and debate them, like his posts arguing that Jesse's owners/ounce Comex charts are, "one eyed".. but what's the point?  I believe that Gold is more scarce than the price says, and Bron seems not to.  Everyone must make up their own mind about these things... do their own due diligence.  I have nothing against Bron, and if my pp.com brethren think I was overaggressive in my tone, which I would tend to justify (even as the new, more evolved Jim H) based on the fact that Bron presents himself as a public person... not a private one, then we can reassess.

Shouldn't we be talking about the miners though?  That was quite a day for my AAU and TGD, for starters.... seems miners are leading the metals, no? 

Jim H's picture
Jim H
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Posts: 2387
Is this something?

Does anyone remember the recurring skit David Letterman used to have where he had some whacky stage act come on, often a woman in a metal outfit chainsawing herself, with sparks flying.. and he would ask, is this something? 

Well.. being who I am, I cannot help but actually bring to life one of the apparent signals of Gold scarcity that our new friend Bron has rebutted in his blog.  I bring this to light because... well.. it's a pretty visual signal.  Here it is;

link:  http://jessescrossroadscafe.blogspot.com/2014/01/comex-warehouse-potenti...

    pretty cool, eh?  And the chart goes back to 2001.  Now some folks, like Jesse, interpret this as being, well, something.  Bron, on the other hand, works hard to convince you that it is not something;

http://goldchat.blogspot.com/2014/01/in-land-of-goldbugs-who-choose-to-b...

Look... something has changed.  This is something.  Most pro-scarcity bloggers that I respect are not willing to say if/when the Comex will default.  I don't buy any of Bron's reasoning.  My own reasoning is this;  2013 is the year when the JPMorg flipped from being net short, to net long the Comex.  The shorts are now the Hedge funds and managed money.. not the Bullion Banks (as per analysis by TF Metals).  The picture above then makes sense... and the shorts, who do not own bullion (thus the lack of ready stock for deliveries) will eventually be getting a religious experience much like Copper shorts got at the end of December, when they had to scramble to settle contracts for phys.      

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davefairtex
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its something

JimH-

Definitely I agree with you that Producers (and apparently JPM too) are now net long, first time in history, etc.   The medium-to-long-term trade setup is to the long side in gold, I'm totally on board with that.

I'm not certain that the signals given by the COMEX are necessarily valid, however, since the guys in charge could well be just showing scarcity in order to help the market move in the direction they want it to.

But at some level, this is just a nit.  True signal or not, I think its generally bullish.  I just wouldn't bank on a default.

My sense is, the big banks try to orchestrate overall activity so that all the participants are pulling in the direction they want them to go.  They have a position already, and they want everyone else to do the buying alongside them so that the price will go up (or down) more easily.  Apparent shortages at the COMEX registered would certainly create the sense of scarcity, and would presumably bring people on board the "long train."  The goldbug press (including me I suppose) have been breathlessly analyzing each move in COMEX registered now for six months.  This isn't exactly fresh news or anything.

I have a lot more faith in the indicators of shortage in Shanghai.  That's because they move a lot more physical gold, the signals are generated every single day, and what happens there will end up rippling through the rest of the world in time.

For me, I'm looking to see signs of shortages that last longer than just a week or two.  If I start to see sustained indications - as Bron said, signs of premiums that are not being collected upon/arbitraged away by other participants, that's when I will start to get really excited.

Again, you don't have to believe his opinions on shortage/no-shortage, but I do think his methodology for analyzing the market is sound.

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Hrunner
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Proud Wearer of the Tin Foil Hat

First, I want to say it's been a great, robust discussion.  It's not often that one gets to witness orbe part of, a spirited dialectic, and I think this discussion is doing exactly what a dialectic issupposed to do:  present two sides of a controversial issue, and see if some clear facts or logic emerge that push a participant toward one reality or the another.

It seems that we are all seeing the same data and just connecting the dots very differently. 

Dave, I certainly may have a reading disability, but you seem to have a comprehending disability.  You take the same facts, the same posts and say you are agreeing with me.  You are not in agreement with me.  As best I can read, and don't try to say I am wrong because I didn't get your point precisely correct with 99.9999% accuracy, you believe that there is manipulation in price in so much as there are daily (multi-day, weekly, whatever) tweaks in spot due to bullion bank pushing price around, using the knowledge of the future direction price to make correct bets and make profits (by the way, at the expense of the suckers, another case of wealth transfer per the theme of Off the Cuff podcast this week).

While I believe that is indeed the "thermostatic" technique used by commercial banks, I believe the real problematic manipulation is the Federal Reserve keeping prices of precious metals suppressed, and in a managed ascent trading range to keep the perception of the U.S. Dollar sound, and interest rates and global borrowing costs low.

Without this manipulation, I believe the price of gold would be multiples higher, not $5 or $10 per ounce higher.  Just like I believe, without hard evidence, because the experiment has not been done due to the Fed's QE, that the 10 year rate would be double or triple it's current rate, not 10 or 20 basis points higher.

The thermostatic technique is simply the method of choice to execute the Federal Reserve's policy.  Just like the UST and MBS POMO is the method of choice to keep rates low.

For the record, I join Chris and many others in saying I am shocked that, per the Mish and Chris podcast this week, it has "worked" as long as it has, but I believe the age of "working" is coming to an end, sooner that we think.  The trigger is unknowable (MENA war, China-Japan war, BRICs announce alternate global trade settlement, Deutche Bank Failure).  I just know the more unstable things become, the smaller the trigger needs to be, thus, there become more and more possible triggers available.

By all accounts, you are not saying that, please correct me if I am wrong.

I say that refiners are having historic trouble sourcing gold, you agree, and say, see we agree.  But I think the fact that the sourcing is historically tight and that the bars have 1960's stamps on them is very important and signaling the end of the "no worries" sourcing that the Western central banks want the optics to portray, and you don't believe the type of bars is significant. 

I may be very, very wrong. Or we both may be in that there is a surprising third reality that none have thought of.

But don't say we agree.

I believe we fundamentally disagree, and I'm okay with that.  I proudly wear the tin-foil hat.  But don't demean me as not being able to read and in next sentence say you agree with me when fundamentally you do not.

I do want to say I much appreciate your responses, Dave, and Bron's view from a mint, all very well-backed by data and obviously a very highfund of knowledge. 

I acknowledge that there is a finite probability (I don't know how to handicap it- 10%, 20%, more?) that we are looking at a more ho-hum next several years of "gold up a little, gold down a little, gold closes at 1380 at the end of 2014, gold closes at 1510 the end of 2015" type of 'managed ascent' that I believe the Fed and the bullion banks would absolutely love to have if they can prolong it.  It's been the pattern for 10+ years, only recently disrupted by an (inexplicable by fundamentals, at least to me) downturn. 

Folks such as myself, Chris, perhaps Jim H., naturally tend to look at things through a lens that includes national policies and aspirations, general technological trends, human behavior and tendencies, historical scenarios of national debt and default, and responses by autocrats and dictators in power.

To say another way, if we didn't live in a world that just had an actual financial collapse that was stick-saved by the Fed with 17 trillion of freshly printed USD, that didn't have a China and Russia weary of USD and U.S. domination and led by highly narcissistic rulers, that wasn't bumping up against resource limits as never before with resultant chronic high energy costs, exacerbated by population growth, then I would look at the exact same data and likely be on Dave's side.

The problem, for me at least, is that all the above and more is true.

I agree there is a certain probability that we can extend the 3+ year trading range that we have been in since the financial crisis, unsupported by fundamentals of money supply, central bank policy and actions,  and inflation and currency destruction threats as it is.

The problem for the manipulators (U.S. and Western banking system) is that the folks on the other side of the manipulation (Rest of World, led by China and Russia, plus, ironically, libertarians and Austrian economics/ free market proponents) get tired of the manipulation, and the opposition can grow in power, and identify strategies that will checkmate the manipulation. 

No manipulation goes on forever.  It simply cannot.  If for no other reason than manipulation is parasitic, and parasitism kills the host or the host gets so weak that it dies of other causes.

In this era of corruption, lying by our government, regulators and business leaders, understandable high distrust of our leaders and generally the planet bumping up against some very hard financial limits and physical limits, we should acknowledge that it is hard to trust any data, be it Comex inventories, LBMA fixes, or Fed gold inventory numbers. 

With a scientific background, that has been the most frustrating thing, since my instinct is to throw out data that is not completely reliable in it's accuracy and precision.

The important thing is that Dave, Hrunner, Jim, Chris, Adam, Hugh, Bron, we are all going down the same river of history, in the same raft, and no matter what we individually believe, there is one reality around that bend in the river up ahead- another five mile stretch of calm waters, or Class 5 rapids and a raft-flipping waterfall.  No matter our opinions, it is sobering and worthwhile pondering that the future will reveal herself as surely as the sun will rise tomorrow.

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Hrunner
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In First Place?

I believe we may be close to overtaking the "Climate Change/ Global Warming" thread as the hottest place on PP.

Well, at least we've got that going for us.

H

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Oliveoilguy
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Hrunner

The evidence overwhelmingly supports your argument.  

I'm not an economist, or technical analyst,  just a home builder and farmer watching this unfold from a distant perspective. And the same common sense that I use every day to survive in my world points to PM price manipulation. Any investment dollars that are not going into my new greenhouse and farm are going toward silver. 

I pity the guys glued to their computer monitors trying to make sense of this stuff on a trade by trade basis. When a system is clearly manipulated it seems like it would be prudent to take a step back and study the manipulators.  

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Jim H
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More light shed on India's Gold Capital controls

Great thread all!  HRunner, Olive, Dave.. and yes, Bron too. 

Hey, I just read something in the newest Eric Sprott piece, picked up by Zerohedge, that I think is worthy of getting more press coverage.  One of the big moves the manipulators made in 2013 was to squelch Indian Gold demand by imposing capital controls in the form of import restrictions and heavy taxes.  The Indian central bank did this under the pretense of fixing the balance of trade... that was, in my view, their plausible deniability.  Eric has just blown them out of the water and exposed the manipulators intentions in my view;      

http://www.zerohedge.com/news/2014-01-17/sprott-manipulation-gold-centra...

The overall picture has not changed much since our last article, with the exception of Indian imports. As of the second quarter of 2013, India had cumulative net gold imports of 551 tonnes, which annualizes to 1,102 tonnes.6 However, Q3 data shows net imports of only 31 tonnes (for a total of 582 tonnes YTD), which annualizes to 776 tonnes. 

This incredible loss of momentum for “official” gold imports was the result of concerted actions by the Reserve Bank of India and the Indian Government. While the “official” justification for those restrictions is the large Indian current account deficit, this argument makes little sense. According to government officials, Indian’s taste for gold and the corresponding imports worsens the country’s trade balance, worsens its current account deficit and puts downward pressure on their currency, the Rupee. 

But, without going into too many details, the classification of gold as a “good” in the trade balance is at best misleading. Since gold is more of an investment vehicle and is not “consumable” per se, it should instead be accounted for in the capital account of the balance of payments instead of the current account. Indeed, Switzerland, which is a large net importer of gold, reports its trade balance “without precious metals, precious stones and gems as well as art and antiques” to reflect fact that those are “investments” rather than consumption goods.9 In this case, why should India be any different and report their trade data excluding gold? To us, all the fuss about gold imports by the Indian Government is a red herring.

So, without the intervention in the Indian gold market, the shortage of gold would have wreaked havoc in the market, a situation that Western Central Banks could not tolerate.

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cmartenson
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COMEX is (Almost Entirely) Irrelevant
davefairtex wrote:

JimH-

Definitely I agree with you that Producers (and apparently JPM too) are now net long, first time in history, etc.   The medium-to-long-term trade setup is to the long side in gold, I'm totally on board with that.

I'm not certain that the signals given by the COMEX are necessarily valid, however, since the guys in charge could well be just showing scarcity in order to help the market move in the direction they want it to.

(...)

Having researched this some and by having talked directly to people in the business of buying and selling large amounts of gold, I truly believe COMEX is mainly a distraction.

If you want to buy a large amount of physical gold you go to the London OTC market.  If you want to fool around with paper contracts, you go to COMEX.

But the real volume of actual, physical gold, the very thing we are trying assess if it in accumulating scarcity or not, is handled on the OTC market.

Unfortunately, that market is even more opaque than any other.  No consolidated data exists for stocks and flows.  No trade volume data, nor even pricing data.  

But if you wanted, say, 20 tons there are OTC brokers you can call who can get that for you, delivered, pretty darned quickly.  At least that's what I've been told.

And so I gather news snippets like this one to help me grope about the edges for what the flows of gold might actually be....

UK gold exports to Switzerland surge as investors sell ETFs

LONDON, Oct 18 (Reuters) - A surge in gold exports from the United Kingdom to Switzerland this year may largely be the result of metal sold out of exchange-traded funds being shipped for re-refining before making its way to Asia, according to Australian bank Macquarie.

UK gold exports to Switzerland, Europe's major bullion refining hub, jumped to 1,016.3 tonnes in the first eight months of this year, data from European Union statistics agency Eurostat shows, from 85.1 tonnes in the same period of 2012.

Investor withdrawals from gold ETFs, which issue securities backed by physical bullion, have totalled nearly 670 tonnes so far this year, according to Reuters data, a sharp reversal from average inflows of 332.3 tonnes over the previous five years.

The world's largest gold ETF, New York-listed SPDR Gold Shares, stores its gold holdings in HSBC's London vault, as do other leading ETF operators such as ETF Securities.

Just this one export zone, SWI, accounted for more than a thousand tonnes in the first eight months of 2013 from London.

That's more than 32,000,000 ounces of gold, and that dwarfs COMEX inventories.  Again this is just one data point.  How many other exports were there?  And were they all recorded properly in the trade data?  I doubt it because if there's one thing I've learned is that gold data is the most notoriously secret data there is.

So my main point is, a COMEX default seems to be what a lot of people are waiting for but even if that happens, it may only persist for a few days as the necessary physical is sourced from London and brought over.

What we need to understand is the OTC market and I confess to being no closer today than I was a year ago.  Nobody seems to know...or I am not in the club that does know.  Which frustrates me because it is hugely important and tradable information.

 

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davefairtex
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seeing the same data

Hrunner-

It seems that we are all seeing the same data and just connecting the dots very differently.

From the long term perspective, I think we'd be in 100% agreement, and we'd connect the dots in exactly the same ways.

I definitely support this concept from the Peak Prosperity 6-20 year time frame - the whole "future will be quite a bit different from the past" point of view.  I'm completely on board.  Its why I'm here.  It is mainly because the collection of data that proves this out is something that I have proved to my own satisfaction.  And I'm big on data.

We also agree that "real stuff" is better than "paper stuff" because if things do go bad, some significant amount of the paper stuff will (likely) just go away.  Gold is some real stuff, and thus is insurance against such an event.

As for the differences - we differ in three ways.

1) Said with zero humility, I have a much better grasp of the macro data than you do.  Its pretty much what I do.  I sit in my little office and correlate things.  As far as I can tell, I'm one of the very few people that does this.  John Hussman is a kindred soul.  I love to read his stuff because it is so intellectually honest.  As a result, I'm not easily convinced by storylines that suggest "Fed printing will do thus and so" - since if the data doesn't match up with that story, I simply don't believe it.  I verify almost every story I read, and many don't have any basis in fact.  They sure sound good when looked at in isolation, but they don't bear up under any rigorous scrutiny.  I feel like throwing tomatoes at the purveyors of all that cherry-picked data.  But I can't transfer my knowledge to you, or even really present it in a compelling way because there's just too much background you'd have to have.  And to be frank, you (and indeed most people) don't seem to be interested in receiving information that contradicts your belief system, so there's that as well.

2) I'm better at reading markets than you are.  I can tell this from the way you write.  You are where I used to be.  That's fine, most people are where you are too.  Without some real a-ha moments, an open mind, and a whole lot of study & training, most people never leave there.  Most people also have real lives and more important things to do, and so that's to be expected.  But its another place where we differ.  Where you (and many others) see undeniable signs of manipulation, I just see normal market activity.  I know for a fact that there IS manipulation, its just not where you think it is.

3) After being burned - many times - in the past, I'm a skeptic when it comes to goldbug end-o-the-world storylines.  Over time, I have noticed that the goldbug community is fantastic at coming up with storylines that sound really good, predict the end of the known world as we know it, but these stories never, ever seem to pan out.  And the response from the goldbug story-spinners?  Come up with another storyline!  And you can bet, it will sound really good.

So my reaction now is to take them all with a grain of salt.  Or a pound.  Or a ton.  Old bars from 1968?  I'm going to go with the (historical) odds and guess that this particular bit of information won't signify the end of the world.  Just like all the others didn't signify the end of the world.

Having been tricked so many times, at this point I want confirmation of the 100th scary goldbug storyline with actual market signals.

Naturally you are welcome to believe as many of these storylines as you like.  This latest storyline might even be true, and if so, you can take your well-deserved victory lap when the gold world blows up (like it hasn't for the past 8 years) but I'm going to wait for price (premium) signals to confirm so I don't fall (yet again) for one more great-sounding goldbug storyline that turns out to be just hot air.

Its called "going with the odds."

However, having said that:

If premiums DO start to blow out, I'm going to be the first one to shout it from the rooftops that "we have a shortage."  FWIW right now Shanghai has some decent premiums, around $12 or so.  It hasn't happened long enough for my alarm bells to go off, but I'm watching them every day.  I may be a skeptic, but I don't ignore the stories - I just don't trade on them.

In this era of corruption, lying by our government, regulators and business leaders, understandable high distrust of our leaders and generally the planet bumping up against some very hard financial limits and physical limits, we should acknowledge that it is hard to trust any data, be it Comex inventories, LBMA fixes, or Fed gold inventory numbers.

Amen, especially on the corruption.  Its everywhere, and overwhelming.  That's why I trust premiums.  Signs of people, paying real money, over and above "list price" to get something says "scarcity" in a way nothing else can.  As a result, I trust premiums.   Everything else - including the seemingly never-ending flow of well-constructed goldbug storylines - I view with my hand on my wallet.

I believe the age of "working" is coming to an end, sooner that we think.  The trigger is unknowable (MENA war, China-Japan war, BRICs announce alternate global trade settlement, Deutche Bank Failure).  I just know the more unstable things become, the smaller the trigger needs to be, thus, there become more and more possible triggers available.

By all accounts, you are not saying that, please correct me if I am wrong.

Then consider yourself corrected.  Lots of triggers are out there, stuff is weaker than it was in 2008, and who knows what will set it off.  I'm in total agreement.  I watch my indicators in the eurozone with astonishment at how low the bond spreads are between the periphery and the core.  This can't possibly last, something is going to blow up spectacularly - there will be a trigger, but I don't know what it will be.

Now the big question: will gold benefit?  That's an unknown.  I can go either way there.  LIkely, that's another place we differ, because the goldbug storyline is that "gold is awesome no matter what happens" and you seem to be on board with the mainstream goldbug thinking.  Unfortunately, I read history and I look at historical data, and my read of non-gold-standard historical data suggests a that a deflationary accident will - most likely - end up initially smashing the price of gold through deleveraging.  I wish it weren't true, because my portfolio will suffer if that is the outcome, but I'm too driven by the data to say otherwise.

Well that's all the energy I have for tonight.  Go read my week summary and be happy if you own junior miners.  I am going to go celebrate, it has been an awesome start to the new year for me!

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davefairtex
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india and gold import restrictions

JimH-

The India story is one of the stories that sounds really good - almost good enough for me to believe in.

And FWIW I do agree with "billionaire Eric Sprott" (Eric King's standard introduction line) and his point about Switzerland stating that gold isn't on the trade balance because its an asset rather than a consumable.  That makes sense.

You know, if I were a banker, and I had influence, I might get India to shut off gold imports for a time so I could load up long.  Then once I had all the miners and gold contracts I could reasonably accumulate, I'd drop a dime (tells you how old I am) and get India to turn on the spigots again and watch my massive position turn violently green.

See, that's a manipulation scenario I can get behind.  If it involves a scenario where the bankers arrange a no-risk trade for themselves to make incredible amounts of money by moving the levers of power and influence - I'm a believer.

And the guy in India who did this for me - he'd have a nice, cushy job at my bank pulling in $5M/year for the rest of his life.  After he retires, of course.

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Hrunner
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Better Grasp of Humanity

Dave,

I truly believe we share the same outlook as fellow PPers and I am glad to call you a colleague, and, said with less than zero humility, the reason I debate with you is simply because I believe the stakes are very high.

If any person with reasonable amounts of assets gets lulled to sleep because they think the markets are simply in a trading range, and they will have copious amounts of time to get in and get out of owning physical gold and silver, because they will get some super-duper trading signal from an RSI or golden cross, this is a very dangerous path to go down, in my opinion.  So I believe folks need a strong alternative voice to the "this is just normal trading range activity" meme. 

As I said, I respect the fact that you put an alternative view, this is the dialectic.  We discuss, you decide.

As for as your dissection,

1)  Check.  You have likely studied macro-economics longer and deeper than I have.  Point granted.  So have Ben Bernanke and Janet Yellen.  I don't think that makes their analysis and actions better or more moral than mine.  I respect the fact that you research stories carefully, that's good journalism. 

Unfortunately, you may not take into account the fact that all this glorious macro economic data that you rely so heavily on is either of poor quality or intentionally corrupted (my bias based on my life experiences) and distorted (BLS labor statistics in October before the 2012 election, the deeply flawed GDP deflator used to calculate inflation, the unemployment rate that assumes that everyone who has been looking for a job for 12 months magically has found a job, rather than has given up looking).

I realize the irony that I make some fundamental arguments using the same flawed data.  We do live in interesting times.

2)  If you are so good at reading markets, why are you posting on blog in the middle of the night?  Why haven't you retired to your island retreats, or started a series of gold investment funds to make even more money from your highly superior market knowledge?

Though partially a good-natured jab, I ask the same question of anyone who claims to have a great trading secret or superior knowledge.  Why do you bother telling (and selling) me on it- just go out and make billions of dollars.  The sad truth is one I have come to- markets are both highly irrational and highly unpredictable.

Markets are human creations and are not bound by laws of nature.  And more confusing, the rules that sort of kind of govern the markets are changing- you are trying to drive the car by looking out the rear window.  There were never HFTs before recent history.   There was never the internet before, with an incalculable effect on markets when everyone has access to truckloads of economic data and market watching and charting software.

Andy MacGuire sells a similar idea to yours, that he has a tool to make lots of money in the PM markets as a trader.  And indeed he publishes that he has given subscribers a positive return over the last year.  You may be interested to know that he claims his tool is so useful because markets are manipulated.  But I believe that, if only a modest number of people start using Andy's method, their profits will quickly plateau and vanish as the opponents create a strategy that sidesteps his approach.

It seems the people that make large, generational amounts wealth (not the "I am a JPM and can take controlling positions to make profits" kind of wealth) have been people who take the fundamentalist view of things and are shown to be correct.  Kyle Bass comes to mind when in 2006 he analyzed the housing market and analyzed the divergence of incomes and housing prices and came to the conclusion that it could not be sustained much longer.  Even he admitted that he wasn't able to predict a precise time for collapse, just a reasonable window of time.  And I don't think he predicted the financial crisis that ensued, which brings us to another inconvenient truth- it's almost impossible to predict responses and especially chains of responses, to inflection-causing events.  So I don't /wouldn't waste time trying.  It's better, in my humble opinion, to get situated fundamentally correct, and mount your best response when the time comes.

3)  With zero humility, I have a much better grasp of human nature than you.  Through my career, I've known thousands of people on all ends of life's socio-economic and moral spectrum, and actually read and analyzed thousands of documents and books written by historians, scientists, psychologists and spiritual leaders who have also had the benefit of knowing thousands of their fellow citizens.  Your writing suggests you have a very limited understanding and 'gut-feel' for the depths and extent of human pathology, and the depths and extent of human capability and greatness.

I believe it is important to have that grasp of human nature and behavior to accurately assess the likelihood of outlier events such as a revaluing of the dollar over a weekend, or the confiscation of half the country's savings "for the national good", and the subsequent likely responses by special interest groups in the nation.

And I perceive that you underestimate the speed at which events can occur.  Weimar Germans had a couple of years, minimum one year, to react to the obvious currency collapse around them.  In 2008, Americans had about two weeks to react to events that unfolded around the Lehman collapse.  We will be very lucky if the next inflection point resulting in the new "New Normal" will be anywhere nearly that long.  The corollary is that, in my opinion, one will not have time to 'reposition', and that is crucial point to my argument.  With all sobriety and focus, position yourself as close to "right now" as possible and do not worry about trying to time purchases of precious metals, or anything of lasting value that you intend to purchase.  This includes investments family and community relationships, for what it's worth.

I still support holding physical precious metals, as one among many options in a carefully considered family plan of where to invest savings.  Even in the face of severe deflation and gold price collapse.  Such an event would mean that the end of the current currency regime is arrived.  And your other resources should be used to get through it.  But that gold and silver will hold their value at the end of the transition.  If I may suggest you study what actual survivors of recent currency collapses, especially in Argentina, say about precious metals and start with that as a model (a USD collapse will be a lot more consequential, granted).

Regarding the corrections, you are more slippery than a White House Press Secretary. 

The point was not that you and I agree that there are more and more triggers to a major transitions.

The point was that the PM markets are intentionally controlled by the Fed and Western central banks to stabilize the dollar, through a bullion bank thermostatic mechanism.   You apparently seem to say that there is garden-variety manipulation of markets by big banks, because they have the means to do it and make profits, but those are the main players and no governmental entity is controlling the pricing of precious metals.

Do you, Mr. Slippery Man, agree that the U.S. government is involved in controlling precious metals spot prices or not?

Good weekend,

H

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davefairtex
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i love this place

Hrunner-

Can't chat right now - I'm not in the same timezone you are and have stuff to go do - but I have to say, you're an awesome guy.  That's likely due to your superior grasp of humanity.  :-)

Wait for about ten hours and I'll get back to you.

Ok, I will say this.  My intraday analysis software has suggested to me that there have been a few times in the market where it looks like extraordinary things have taken place.  One of those times was the April crash.  A pattern of activity happened there that was unlike most patterns I've seen. 

Could Bernanke have said, "JPM, I have 1000 tons of gold to lease you.  I'd like the price of gold lower by a few hundred bucks, so we can give Germany her gold back.  Can you do it?  And give me that gold back when you are done."

Yes, I think they could have done such a thing.

Do I think they try to control the spot price day by day - or even week by week?  No, I don't think they do.   I don't think they care that much.  I think they pay far, far more attention to bond rates - 3 trillion dollars worth - and the SPX.  They let the banks play in the gold playpen - they lease them the gold, and let the banks go and do their thing.

That direct enough for you?

I would dearly love to audit the bastards though, to verify my sense.  My question to Yellen would be, "I want to see a record of your gold leasing transactions over the past 20 years, along with the current amount of gold currently leased into the market."

Only then will we know for sure.

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Jim H
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A must read on Gold manipulation

New from Dr. Paul Craig Roberts and Dave Kranzler (ex-Wall Street, Chicago MBA);

http://www.paulcraigroberts.org/2014/01/17/hows-whys-gold-price-manipula...

Co-posting and extra comments on Dave's site;

http://truthingold.blogspot.com/2014/01/the-hows-and-whys-of-gold-manipu...

Very thorough stuff from very credible people. 

 

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Oliveoilguy
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Fantastic Discourse

Thanks to all for your thoughtfully considered positions and discussion. Especially DaveFairtex, Hrunner, and JimH. I'm totally tuned in to what you guys are saying, and learning a lot.

OK ...back to laying cinder block.

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Where does it end?

What if the Fed (and other entities that can print money at will) get the bullion banks to slam the price of gold by secretly covering their losses when doing so with freshly "printed" money? What would cause such a scandalous, nefarious "market operation" to ever stop? Why couldn't it go on forever? A shortage causing an inability to deliver would do it  if the buyer insisted on delivery and went public internationally to complain and plead their case. Germany could be the one, but for 12 months they have not made a fuss publicly probably because they believe it is in their own interest to remain quiet. (I'd love to know how and why Germany concluded that!) it seems to me that any player big enough to bring the system down this way also knows how to keep making money on the current system for as many days it can be kept afloat. The bullion banks are making money by doing the Fed's bidding and the big players (FOFOA calls them The Giants) are making money by exchanging fiat for massive amounts of physical gold, while being very careful not to grab so much that they crash the ultra-fragile system before they get as much they possibly can. I'm copying The Giants by stockpiling as much physical as I can though because I'm just a microscopic organism in the gold market I don't have worry about crashing the system with my piddly little accumulations! :) I've also wondered if the same dynamic in the silver market could bring the gold market down it. A shortage in the silver market (which is much smaller than gold's) might be more likely because industrial users of silver might get spooked first leading them to stockpile and crash the market with an explosion in price and then a complete inability to acquire physical silver.

"Welcome to the Hunger Games. May the odds be ever in your favor."

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too agreeable

Hrunner-

If any person with reasonable amounts of assets gets lulled to sleep because they think the markets are simply in a trading range, and they will have copious amounts of time to get in and get out of owning physical gold and silver, because they will get some super-duper trading signal from an RSI or golden cross, this is a very dangerous path to go down, in my opinion.  So I believe folks need a strong alternative voice to the "this is just normal trading range activity" meme.

Sure.  We agree again.  (I apologise in advance for agreeing so much, and for agreeing in such a slippery way, or being agreeable about (apparently) the wrong things, or in the wrong way.)  Get basic insurance now.  I have insurance, so do you.  If you don't have some, now is a decent time/price to buy, I believe.  But not because of some goldbug storyline about ancient dusty bars being fished from the back of the warehouse, but rather because it appears that there's a reasonable chance we have hit at least an intermediate low.  [It could go lower still, especially if there's a deflationary accident, so don't bet the house & farm hoping to get rich on gold.  Its insurance, not your ticket to an easy retirement.  Just my opinion.]

Unfortunately, you may not take into account the fact that all this glorious macro economic data that you rely so heavily on is either of poor quality or intentionally corrupted (my bias based on my life experiences) and distorted (BLS labor statistics in October before the 2012 election, the deeply flawed GDP deflator used to calculate inflation, the unemployment rate that assumes that everyone who has been looking for a job for 12 months magically has found a job, rather than has given up looking).

Uh, lets see how to say this politely?

Duh!!  When I look at GDP, I use the GDP timeseries rather than GDPC1, and then I divide it by whatever monetary or commodity value I'm interested in viewing.  I always use nominal rather than "inflation-cooked" timeseries for exactly that reason.  Of course I don't trust GDPC1.  Nor do I use UNRATE, except as an example of what the mainstream is looking at.  Instead, I construct my own series based on full time employment / POP as well as NILF / POP.   FWIW these series look appropriately horrible.  You imagine someone with an understanding of why the crash course is valid would make basic errors like the ones you mention?  There are lots of gloriously great timeseries out there, lots of good data.  I choose them.  So does Chris, I notice.

And I also believe that GDP has its own serious weaknesses, since it doesn't take debt into account.  But that's another entire discussion.  I have some timeseries on that one too

If you are so good at reading markets, why are you posting on blog in the middle of the night?  Why haven't you retired to your island retreats, or started a series of gold investment funds to make even more money from your highly superior market knowledge?

There's that story about two guys running away from the bear.  "You can't possibly run faster than the bear", the one guy says.  "No, but I can run faster than you."

I never claimed to have "highly superior market knowledge", but I did claim mine is better than yours - my only goal being to make the point I'm better able to differentiate on my own (vs reading articles written by others) as to what manipulation looks like vs more normal market activity.  Unfortunately soon after writing this dreadfully ego-filled claim, I realized it wouldn't be a compelling line of argument...my mistake!   But I can't pretend I didn't write it, so now I have to live with the consequences.  And I stand by my ability to assess manipulation on my own.

And how do you know I'm not retired on an island somewhere?

Would I like to manage money professionally?  No thanks.  It wouldn't be fun.

My only claim to fame is that I avoided losing my shirt and my pants while being invested in mining shares (some of them juniors!) over the past year or two.  It's not much of a claim, I know.  NOT being invested in mining shares would have been much better.  And I'm still looking for my shirt.  And I too made money by trading gold futures last year.  Not much, mind, and mostly because I avoided going long during the dreadfully long downtrends.  That's a strategy I highly recommend, by the way: avoid going long during downtrends.  True market genius speaking.

As to why I'm writing this on the middle of the night?  Its fun!  And who says it's the middle of the night?  I'm not in your timezone, my friend!  :-)

I have a much better grasp of human nature than you.  Through my career, I've known thousands of people on all ends of life's socio-economic and moral spectrum, and actually read and analyzed thousands of documents and books written by historians, scientists, psychologists and spiritual leaders who have also had the benefit of knowing thousands of their fellow citizens.  Your writing suggests you have a very limited understanding and 'gut-feel' for the depths and extent of human pathology, and the depths and extent of human capability and greatness.

Neener neener!  Ok, I deserved that one.  Take your victory lap, you earned it!  I promise, I'll be more humble next time.  That was the old Dave talking, the new more humble one won't go there anymore.

I believe it is important to have that grasp of human nature and behavior to accurately assess the likelihood of outlier events such as a revaluing of the dollar over a weekend, or the confiscation of half the country's savings "for the national good", and the subsequent likely responses by special interest groups in the nation.

A reading of history would reveal that as well.  I believe I've mentioned both of these eventualities myself in posts I've made.  I find myself in danger of agreeing with you again.  What should I do?  Heaven knows I don't want to be called slippery again...or be too agreeable, or being agreeable about The Wrong Sorts of Things...

Weimar Germans had a couple of years, minimum one year, to react to the obvious currency collapse around them.  In 2008, Americans had about two weeks to react to events that unfolded around the Lehman collapse.

The signs of the collapse in 2008 were visible in the timeseries long before Lehman.  Lehman was just the denouement right there at the end.  From all my research, there are usually a large number of rumblings prior to the start of the avalanche.  We had at least a year of warning before Lehman occurred.  I'm quite confident I'm able to fight the last war effectively.  :-)

Could there be a black swan - an EMP attack by some rogue nation, a digital war that takes out some number of SCADA systems for  the power grid, a Carrington Event, or something else we haven't thought of?  You bet.  That's why we have insurance, and why the emphasis on a core position in real things.

Once insurance is in place, my goal is to figure out how best to deploy my reserves based on what's happening now.  If there's a bolt from the blue, I'm out of luck, and I'll have to rely on my insurance already in place.  But if its a more normal 2008-like event, I will most likely be able to see it coming.  And those death-cross signals might actually be useful....although I have to say, with everyone and their brother thinking they'll be able to bail out of equities before the market tanks, it does seem like a setup for a really abrupt move down.

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bronsuchecki
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Jim H wrote:You should know
Jim H wrote:

You should know Dave that my quip about being fractionally reserved was based on some analysis done by James Turk some years ago... because, as I am sure you know, I would never just be blanket pejorative toward something as solid and well accepted as unallocated Gold... no, I was kinda thinking about this when I said that;https://www.igolder.com/glossary/perth-mint/

I will assume that Bron is correct and that these kind of practices (i.e. 18x fractional reserve in 2006) are no longer the case.

Those kind of practices were never the case and James Turk completely misinterpreted our financial statements and did not look further into our balance sheet to see the offsetting asset.

The flawed James Turk analysis was picked up by another site and I responded to it in 2009 here in a comment on my blog, text I will reproduce below as sometimes links to blogspot comments don't work:

Thanks for drawing my attention to that article. It is a bit of a rehash of a flawed analysis done by James Turk (competitor of the Mint with his GoldMoney) on our annual report.

Actually, some of the comments do a fair job of refuting the article, but I'll address the 5% backed issues below and will republish on that site as well.

First statement is that in our 2002 annual report (wow, that is current) "$96.2 million of gold on hand against $234 million of liabilities". Now this statement assumes that the $96.2 and $234 are all gold. Well, unlike the analyst who wrote this, lets look to the notes to the accounts.

Note 8 says clearly that of the $96.2, only $88.2 was precious metals, the rest being normal inventory items (eg like packaging). Not a major mistake but shows how much work was put into this analysis.

But why is this analysis only looking at one item in the current assets but comparing it to the total current liabilities? If one looks at the other big current assets of $134.9 and then to note 7 one finds that $133.2 of it is a precious metal loan to a related entity AGR Matthey, which at that time the Mint had 50% ownership. This "receiable" represents physical metal used in AGR Matthey's operations. So it is a bit unfair to not include this in the precious metal assets backing the Depository client liabilities.

The Mint on its website is very clear that unallocated metal is used/backed by metal in its operations and those of AGR Matthey.

If we look at the liabilities, we see that it is composed of things like Provisions, which are clearly not gold denominated liabilities. Anyway, looking at the two major components of $111.8 and $110.6 and again to the notes it says that these are precious metal borrowings. But the $111.8 is interest bearing and the $110.6 does not attract interest. Now Depository has never paid interest on it unallocated liabilities, so we can conclude that the $110.6 must represent the unallocated "borrowed" from Depository clients. What is the $111.8? It is actual metal borrowed from bullion banks, and they aren't going to do so for nothing, hence that attracts interest charges.

This means that in 2002, the Mint had $88.2 + $133.2 in precious metal assets against $110.6 in Depository client liabilities. No problem here, fully covered. The excess assets of $110.8 being funded by borrowings of $111.8 by bullion banks.

Now this balance sheet and notes to the accounts type analysis is not obvious to non-precious metal people. We recognised that it was not clear so we added an additional note to the accounts to make it clear. Interestingly, this note was in the 2006 accounts that the article refers to and calculates as a 5.5% "coverage".

Again, if they had bothered to look at the notes to the accounts, on page 78, note 23(d) you will find a table that very clearly states:

"The $886 million of precious metals deposited by Perth Mint Depository clients (note 16) was used in operations by Gold Corporation as inventory ($507 million - Note 7b) with the balance in the refining operations of AGR Matthey (Note 7a)."

I should note that the amount under Note 7a is $590 million. Again, $886m backed by  507m at the Mint and $590 at AGR Matthey. I don't see where one gets 5.5% backing from, looks more like 123%.

I would note in early 2010 the other partners in AGR Matthey sold their interests in AGR Matthey back to the Perth Mint, so all gold assets are under our full control (although with our 50% interest in AGR Matthey we technically had and did exercise control over the gold assets).

Jim H wrote:

he strikes me as a guy who has never found a signal for physical Gold scarcity that he cannot debunk.  Some Gold positive articles that get promoted may indeed be overblown, not completely true, or subject to mis-interpretation.. it just seems to me that, for a guy whose business is selling beautiful stuff made of Gold and Silver, he tries really hard to convince us all that the raw materials are not as scarce as some of us think they are.  I could pull up details and debate them, like his posts arguing that Jesse's owners/ounce Comex charts are, "one eyed".. but what's the point?  I believe that Gold is more scarce than the price says, and Bron seems not to.

The reason there is never a signal I cannot debunk is because, except for the Anglo Far East link you provide, there never has been a shortage of raw gold. The Anglo link is interesting and the first time I've seen a credible report, but given what the Perth Mint's sources tells us, as well as the Reuters journalist, as well as the fact that neither GoldMoney nor Bullion Vault (who deal in 400oz bars) are not reporting similar problems, I would take it as a temporary issue. Meaningful, yes, and maybe the first indicator of a problem.

However, you provide no evidence of any scarcity of 400oz bars since 2008 up until that Anglo link and  have avoided addressing my GoldMoney point and others, yet you continue to imply that my previous debunks are completely non factual and thus I have no integrity and must be working for the Cartel. Since GoldMoney has also never said they could not get 400oz bars (consider as recently as May 2013 James Turk noted retail form shortage but said this did not affect GoldMoney, or try Oct 2008), thus agreeing with me that there is no shortage of wholesale bars, then I suppose you must logically also conclude that James Turk must be part of the Cartel as you know for a fact that since 2008 there have been and are currently shortages of 400oz bars.

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bronsuchecki
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Hrunner wrote:The important
Hrunner wrote:

The important thing is that Dave, Hrunner, Jim, Chris, Adam, Hugh, Bron, we are all going down the same river of history, in the same raft, and no matter what we individually believe, there is one reality around that bend in the river up ahead- another five mile stretch of calm waters, or Class 5 rapids and a raft-flipping waterfall.  No matter our opinions, it is sobering and worthwhile pondering that the future will reveal herself as surely as the sun will rise tomorrow.

I don't know how this will play out but I suspect it will take a lot longer than many goldbugs think, which is why I own some gold in my (govt forced savings which I cannot get until I'm 65) pension fund. The reason I think it will take time to play out is because from my side of the fence inside a mint and dealing with bullion banks, I've seen the reality behind a lot of gold pumper BS that the world will collapse tomorrow (which Jim doesn't seem to see the pumpers' conflict of interest in how the shortage meme helps sell coins and newsletters). They are going to drag out this debt cleansing as long as possible.

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opacity of OTC gold market
cmartenson wrote:

How many other exports were there?  And were they all recorded properly in the trade data?  I doubt it because if there's one thing I've learned is that gold data is the most notoriously secret data there is.

So my main point is, a COMEX default seems to be what a lot of people are waiting for but even if that happens, it may only persist for a few days as the necessary physical is sourced from London and brought over.

What we need to understand is the OTC market and I confess to being no closer today than I was a year ago.  Nobody seems to know...or I am not in the club that does know.  Which frustrates me because it is hugely important and tradable information.

Chris,

I agree that the OTC market is where the action is but yes it is very opaque, even to us at the Perth Mint. Unfortunately the bullion banks, having counterparties across the industry, have a better handle on the real level of physical demand and supply as they deal with all sides.

I think it is important to also always ask where the self interest lies. For example, refiners have an interest in promoting high premiums (ie shortages), as it means they can charge bullion banks more for their bars. Likewise, bullion banks and other importers into large markets like India and China, have an interest in playing down demand levels for physical, so they can pay as little premium as possible.

The Perth Mint's dealers, for example, are looking to sell 5-6 tonnes of kilobars every week. Premiums for these are negotiated and change day to day. There is a constant tussle between refiners and buyers as to this premium and the quotes you see in Reuters and Bloomberg articles about "$x premium in China" or "demand is high" etc etc is often part of this game in an attempt to influence the other side.

Most goldbugs are highly naive that this occurs and take any statement as complete fact and don't look further to self interest behind it. Thus when I see someone like Andrew Maguire says that his source says XYZ about what is going on in the market (and he has indicated that one of these is from Goldman), I wonder if these commentators realise they may be being played as part of this game.

Nassin Taleb says in Antifragile that you views worth paying more attention to are when the statement is counter to the self interest of the person making the statement. The problem with a lot of goldbugs is they don't even ask what the self interest is, if the message is what they want to hear.

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Thank you for the confirmation...
bronsuchecki wrote:

Chris,

I agree that the OTC market is where the action is but yes it is very opaque, even to us at the Perth Mint. Unfortunately the bullion banks, having counterparties across the industry, have a better handle on the real level of physical demand and supply as they deal with all sides.

I think it is important to also always ask where the self interest lies. For example, refiners have an interest in promoting high premiums (ie shortages), as it means they can charge bullion banks more for their bars. Likewise, bullion banks and other importers into large markets like India and China, have an interest in playing down demand levels for physical, so they can pay as little premium as possible.

(...)

Bron,

First, thank you for the additional confirmation, from someone close to the situation, that the OTC market makers keep their cards close to the vest.  And of course they do...that information is valuable and they prefer to keep that value for themselves.  That makes sense.

Second, I agree that we need to view the financial world through the lens of self-interest.  

However, this cuts a couple of ways for me.  The primary direction is that of market participants making as much money as they can at all moments.  That's a beast that never sleeps, never changes through time, and is always alert.  So much of the gold market, like the oil market, like the equity options market, like every market can be assessed and understood this way.

The secondary direction is that of the non-economic players which usually just refers to the central banks - hey, who cares about money and returns when you own the printing press? - but it has to include government interests as well.  For example, the Treasury department has interests in currency pair valuations that might cause it to eat economic losses on a trade to effect a specific outcome for reasons that go beyond immediate financial gains or losses.

Similarly, I have zero doubts that central banks have 'an interest' in the valuations of the bond, equity  and gold markets.  We know they intervene directly in bond markets as they publish their trades and hint at their goals (e.g. "lower long term interest rates").

They hint at their interest in equity markets in things like WaPo editorials.  Here we know they have an indirect impact at a minimum because they telegraph their desires to market participants through coordinated PR.  Of course several of the most important market participants such as Jamie Dimon sit directly on the NY Fed board so they don't have to read newspaper articles to get the message as I am sure they are part of developing the message.

And of course central banks have a quite compelling interest in the price of gold because it too, like bond and equity prices, has powerful and important 'signaling' effects to the world.  That and it tends to be a significant component of central bank reserves.

Do central banks directly intervene or indirectly intervene in the prices of equities and gold?  Well in the case of Japan we know that the BoJ directly intervenes in their equity market, so there's that.  In the US and Europe we don't know for sure but a full audit of the central banks books would reveal much.

Instead we go for indirect evidence such as the fact that the vast majority of the US stock markets gains happened on days when the Fed injected money into the system over the past two years.

All in all, Occam's razor applied, I am heavily tilted towards the explanation that gold's price represents a blended mixture of legitimate market responses to non-economic nudges, tweaks and shoves applied at key moments now and then.

Of course, like all things decided by committee, this means the price of gold is out of equilibrium and I have every confidence that its true equilibrium price will someday be discovered.   The 'but' in that prior statement is along the lines of ...but that make take a while.

At any rate, thanks for your insiders view to the business of gold which, wouldn't you know it, sounds like any other competitive business.

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Jim H
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Jim H worldview

To those readers trying to digest and understand the gist of what is going on in this thread.. I want to point out that all of Bron's comments are limited to the world of Gold.. i.e. if Bron is a student of what is going on in the world of Keynesian, debt-based fiat money and Gov't deficit spending... he does not let on.  He purports to be a fellow seeker of truth, and for the good of this ongoing dialogue, I will simply accept this.  In the end, nothing that he says, or I say, is going to change the way this all plays out.      

One small nit before I stop aiming my constructive criticism at Bron;  I was surprised that, given his broad knowledge of the Gold market, Bron did not correct his fellow blogger Kid Dynamite when he (Kid) made this comment recently relating to the Blog post that featured links to my earlier posts here;

http://goldchat.blogspot.com/2014/01/how-to-know-when-there-is-real-phys...

Kid Dynamite said... 1) PROOF that there is no "shortage" of 400 oz bars: PHYS trading below NAV. Q.E.D.

Now, the fact is, at the time of this writing a few days ago, PHYS was in fact (and still is) trading at a slight discount to NAV.. meaning you can buy Gold shares, representing real Gold, below the internationally recognized spot price.  Notice I said, shares.  It has been trading at around 0.25 % discount, which, at $1250 Gold, is about $3.13/oz.  Now, multiplying this out to the std. 400 oz. London Good Delivery Bar, which is what Sprott's PHYS is made up of, sitting in the Canadian Mint vault.... it comes to $1250/bar.. which sounds pretty good.  Kid's point is, why is someone not taking advantage of this arbitrage that is sitting right there out in the open?  This must mean demand for these 400 oz. LGD bars is not so great (anti-scarcity meme)... and he can even add some smart sounding latin acronym to prove how smart he is for good measure.  Sounds true to almost anyone who reads it, I would suspect.  

Kid is wrong.  Even though Kid has blogged about PHYS in the past... he displays a fundamental misunderstanding of what it means to have a London Good Delivery bar outside of the banking system (in a non-Bank vault - similar to the Perth Mint holding a bar) and the costs associated with getting it to somewhere else, where it can be used to satisfy demand within the LBMA system, while maintaining it's LGD-ness.  A London Good Delivery bar starts it's life at an approved refinery, and maintains it's certification only as long as it's chain-of-custody is pristine.. i.e. all handing, transport, etc., is by those certified within the system, i.e. Brinks. See page 20 here;

      http://www.lbma.org.uk/assets/GD_Rules_12.pdf

Now, one of the very positive features of the Sprott PHYS fund is that it does allow for you, if you are a big enough holder... to redeem your shares for Gold.  You need to take at least one full bar to do this.  The question is this;  Is a 0.25% discount to NAV enough to arbitrage?  The answer is no;

http://sprottphysicalbullion.com/media/1341/SprottPhysicalGoldTrustProsp...

from pg. 48

A unitholder redeeming units for gold will be responsible for expenses in connection with effecting the redemption and applicable delivery expenses, including the handling of the notice of redemption, the delivery of the physical gold bullion for units that are being redeemed and the applicable gold storage in-and-out fees. For delivery in the continental U.S. and Canada, delivery expenses are currently estimated to be $5 per troy ounce at current rates. Current gold storage in-and-out fees are approximately $5 per bar with a minimum charge of $50.
 

So there you have it... a $3 discount per oz does not make up for the $5 per oz. cost of just getting it out the door with it's LGD bona fides intact (see how I can use Latin just like Kid?).

Now, back to looking at the forest;   l didn't come to my desire to own some of the finite supply of Gold because of anything going on in the Gold market.. I came to want it because of what was going on world of (potentially) infinite fiat currency.  My simple contention is this;  If you don't understand what is going on with fiat money... you will never fully comprehend what is happening, and going to happen, with Gold.

The story is really, really simple;  We all know how easy it is to spend money on the credit card... future money, yeah!  You can even build up a pretty giant balance and yet continue to make the payments, as long as you can keep it at a low, low, teaser introductory interest rate.  If though the credit card company loses faith in you, and suddenly uses some obscure rule that was in the fine print to all along (say a bill you were fighting with a contractor went to collection) to switch you over to a more punative rate... suddenly life changes dramatically.  We can all relate to this, right?  We can all understand it. 

Why then is it so hard to understand that this is exactly what is playing out with the US today?  Mostly I think it's blind faith in our leadership... they simply can't be dumb enough, collectively, to get us into the analogous situation at the national level, right?  There must be something Jim H doesn't understand that they do.  Sorry... but no.  They are in a box of their own making, and there is no way out that leaves confidence in the system (think Cyprus), and/or the money itself (think high inflation).

Mish did us all a great service recently when he published some curves showing what happens to our debt servicing costs as interest rates begin to normalize over the next few years;

                         

What you see above are some projections of the interest servicing costs in 2020 under different scenarios of the debt stack (which currently totals $17.3 T) resetting to the increasing interest rates... and these are not crazy high interest rates... they are not even fully mean reverted to a more normal 6%.  If the 10-year is at 5% by 2020, then the costs of servicing this debt would be > $1T yearly.  That blows a HUGE hole in the budget.  

Now, Remember how Volcker got inflation under control at the end of the 1970's?  He set interest rates.. the short term interest rate, ABOVE the rate of inflation and he tamed it successfully.  He tamed it, and he restored confidence in the dollar as a store of value, because he made damn sure that it gave a positive return when saved.  All of these dynamics are visible in this wonderful chart by Doug Short;

          

link:  http://advisorperspectives.com/dshort/charts/yields/perspective.html?yie...

This chart is worth well more than 1000 words.  It helps define the box the FED is in... because we know from Mish's projections that the FED has a very limited interest rate space that it must keep us in, across the debt duration curve, if we have any chance of continuing to make our payments.  What you quickly realize is that the FED does not have this tool in their pouch anymore.. if and when inflation starts.. they will not have any tools, other than brutal capital controls, to (try to) stop it.

Volcker stopped inflation in a way that actually benefited savers.  That is no longer even possible.  The only thing that the FED can do is to continue kicking the can, using printed money to suppress interest rates to whatever degree is necessary.  The printing will never stop, because it cannot stop.  Inflation will come.  What is most amazing to me is that, in this game of poker, the FED is playing with their cards turned up.  It's all obvious to anyone who chooses to look and exercise their own critical thinking skills.

Volcker did voice one regret, in retrospect, regarding the US approach to monetary policy in the wake of ending the Gold standard;

http://www.gata.org/node/8209

         "That day the U.S. announced that the dollar would be devalued by 10 percent. By switching the yen to a floating exchange rate, the Japanese currency appreciated, and a sufficient realignment in exchange rates was realized. Joint intervention in gold sales to prevent a steep rise in the price of gold, however, was not undertaken. That was a mistake."

Inflation will come.  Q.E.D. 

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missing link-age

JimH-

So in your article, I didn't see you mention how inflation would start.  Once it does, everything breaks in a predictable way as you lay out, but after a massive debt bubble pop, inflation would seem to be the difficult hurdle.  Japan couldn't do it and they've tried since 1992, Europe certainly hasn't, and neither have we here in the US - not through lack of trying.

So what are our inflation scenarios?

1) Dollar-crash confidence loss.  Dollar drops by 50% and so everyone in the world looks to spend their dollars before they turn valueless, so although no extra borrowing takes place, velocity skyrockets - and thus inflation occurs.

2) Willing borrowers return.  Dollar is steady, but more borrowed money = inflation.

3) Fed prints really absurd amounts of money (minimum 5-10 trillion) and - perhaps - hands it to real people.  (the current $3.2 trillion over 5 years silliness doesn't move the needle, especially with TCMDO well north of 50 trillion).  Only Shock & Awe would work, I think; the market is too used to the current IV drip.

If we get any one of these, then we're off to the races.  Until we get one of these, we will (I believe) see deflation.

#1 - likely won't happen until europe & japan deal with their issues.  Core fails last; we're the core

#2 - likely won't happen [c.f. Japan]

#3 - TBD - open question, but so far, we've only done 3.2 trillion and they're realizing its not moving the inflation-needle.

Are there inflation scenarios I've missed?

Oh and regarding PHYS, I like Bron's Theorem of Gold Shortage: if a significant arbitrage remains in play for a substantial period of time, and nobody is taking advantage of it, then that's when the alarm bells should go off.  Certainly, a $5/oz premium (minimum required to make a PHYS withdrawal worthwhile) does not sound all that exciting.  It might not even pay for the re-casting (for Asia) & shipping costs.  Bron would know for sure.  And as Bron has mentioned, premiums crop up in particular locations all the time, its SOP for the industry, and the profit motive eventually erases them.  At least it has to date, anyway.

Here's the thing.  PHYS is a big pot of gold.  If greedy bankers can swipe gold from there and make money, they're going to do it.  That's my model of the world anyway.  So if premiums on PHYS are still not so great, then its likely the Great Gold Shortage is more hope than reality.

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