PM End of Week Market Commentary - 4/10/2015

davefairtex
By davefairtex on Sat, Apr 11, 2015 - 5:37am

On Friday, gold rose +14.10 to 1208.10 on moderate volume, while silver climbed +0.34 to 16.49 on moderately heavy volume.  PM started its rise Friday after 0419 EST - for reasons I have not been able to determine.  It wasn't currency related.

On the week, gold ended up +5.60 [+0.47%], silver fell -0.26 [-1.58%], GDX rose +2.42% and GDXJ climbed +2.70%.

The Nonfarm Payrolls miss from last week was definitely gold-positive.  I would expect further poor US economic news to also be positive for gold - and negative for the USD.

On the weekly charts, gold appears to be slowly chugging higher.  It has managed to climb above its weekly 9 EMA, with the next step the 50 MA at 1242.  The key level is the prior high at 1306.  If gold can close above that level, it will confirm the "double bottom" pattern which may be forming.  If confirmed, this would be a bullish event - it would likely lead to a significant move higher in gold.  [Until confirmed, gold remains in a downtrend.]

The USD

The buck had a bad start to the week, but ended up big, closing +1.92 [+1.97%] to 99.60.  On Monday the hangover from the bearish Nonfarm Payrolls report caused the buck to test the 50 MA at 96.50, but from then on the buck just rallied, finally testing 100 on Friday before retreating.

The dollar seems primed to drop on any bad economic news.  However, in the absence of such news, it appears that the dollar wants to rally.  I conclude that the bias then is probably up.

Last week we saw USD print a gravestone doji candle, but this week the dollar's strong rally completely wiped out the effects of that candle print - bullish engulfing beats gravestone doji.  If the dollar can close above that previous high, it is probably off to the races once again.  Euro is down at 105.76.  Its chart looks just as horrid as the dollar's chart looks strong.

Greece managed to scrape together enough cash to pay the IMF this past week.  How they did it was a mystery.  Of course, there is always the next payment - and the next.  At some point, the seat cushions will have no more quarters left.  I have to think the dollar is perhaps sniffing out this relatively near term denouement.

Miners

Miners had a big headwind this week from the strong dollar, but managed to crawl higher anyway.  On the weekly chart, everything still looks quite bearish.  A close above 20 will help GDX start to look slightly better, but it really needs a close above 23 before the pattern of lower highs is broken.

If anything, the junior miners look worse.

The GDX:$GOLD ratio is starting to show some small signs of recovery, but the emphasis should be on the word small, not on the word recovery.  GDXJ:GDX has been chopping sideways with a lower bias for two months now.  Miners as a group are not looking particularly positive.

US Equities/SPX

SPX had a great week, climbing +35.10 [+1.70%] to 2102.60.  SPX started the week in a hole from the bearish Nonfarm Payrolls report last Friday, but climbed out with the aid of some soothing dovish words from one of the Fed Governors before market open on Monday.  That broke the bearish-looking chart pattern, and from then on it was a steady move higher.

SPX still needs to clear the previous (lower) high at about 2113 to break its lower highs pattern; if it does, we will most likely end up with yet another new all time high.  My guess: this will depend on no bearish economic news appearing.  What's coming up?  Econoday says: http://mam.econoday.com/byweek.asp?day=13&month=4&year=2015&cust=mam&lid=0

  • Retail sales: 0830 Tuesday
  • Industrial Production: 0915 Wednesday
  • Housing Starts: 0830 Thursday

Of these, Industrial Production is probably the most important.

VIX closed down on the week -2.09 to 12.58.  Puts priced below 12 have recently been a relatively safe bet.

My NN still shows a correction, anywhere from 3-10% within the next month or two.  Magnitude has declined, but I've been refining the model, so that could be a cause too.  Paint is still drying.  The update from the INDPRO release will help refine direction further.

Gold in Other Currencies

This week gold rallied especially strongly in Euro terms - largely because the Euro had a very bad week vs the buck.  Ruble was quite strong again this week, so gold measured in Rubles dropped big time.

Over at King World News, they have realized that gold is now rallying in many other currencies, yet they persist in imagining that "paper gold" is responsible for smashing gold in dollars.  Somehow, we are to believe that paper gold smashes are responsible for gold declines in dollars, but virtuous Chinese and Indian physical buying is causing the price of gold to rise over in Europe.  Its as if there is no "international price" for gold.  The strain from cognitive dissonance in holding these two unreconciliable viewpoints doesn't appear to affect their enthusiasm, however.

My conclusion is, gold's struggles in USD have everything to do with dollar strength, and not with "paper gold smashing."

But just to be different - as a tribute to the good folks at KWN:  in Russia this week: "paper gold smash."  In Europe: "physical buying caused price to rise."  In Brazil: "paper gold smash".  But in Japan: "physical buying caused price to rise."

Sometimes I feel like Jon Stewart watching Fox News.

Rates & Commodities

Bonds (TLT) fell this week, dropping -0.85%.  On the weekly chart TLT still looks strong - it is consolidating above its 9 EMA - but on the daily chart it appears to be nosing over into a correction.  This hints to me of a continued (short term) rally in SPX.  At least until some more bad economic news appears anyway.

Junk bonds (JNK) rose +0.64%, and is looking like they are ready to break out to the upside once again.  This lends support to the risk-on sentiment in SPX.

The CRB (commodity index) was up this week, climbing +0.48% and briefly rising above the 9 EMA.  However CRB struggled against a strong dollar, and although we have a few technical indicators which suggest the low may be in (weekly chart: bullish RSI divergence, plus MACD crossover) it still looks like it is an uphill battle at the moment.

WTIC continued moving higher, up +2.24 [+4.52%] to 51.79.  This is the second week above the weekly 9 EMA, and although oil sold off hard after Wednesday's Petroleum Status report, it still managed to turn in a gain for the week.  Oil equities did quite well, with services turning in a 6% gain.  WTIC still needs a close of about 55 to confirm the double bottom.  Until that happens, the longer term downtrend remains in place.

Rig counts dropped more rapidly this week - total US land rigs are down -42 rigs to 951, or -4.23%.  Big drops were seen in the Permian [-21] and EagleFord [-12] regions.  We are well below break-even for EagleFord and Bakken.  More information on production will be available next week from the ND DMR Director's Cut report.

Physical Supply Indicators

* Shanghai premiums - the large premium last week was an error.  It was actually +7.47 over COMEX.  This week, premiums dropped -5.69 to +1.78 over COMEX.  Still a premium, but not as exciting.

* The GLD ETF was down -2.95 tons, with 734.29 tons remaining.

* GC futures moved deeper into backwardation on Friday; the spread on the first two month contracts is -0.20.

* ETF Premium/Discount to NAV; gold closing (15:59 close price on April 10th) of 1208.30 and silver 16.46:

 PHYS 9.98 -0.37% to NAV [down]
 PSLV 6.43 +1.01% to NAV [up]
 CEF 12.07 -7.73% to NAV [down]
 GTU 40.89 -8.31% to NAV [down]

ETF premiums were mostly down, with the non-delivery ETFs losing most.

Futures Positioning

The COT report covered trading through April 7th, when gold closed at 1210.60 and silver 16.82.  During the coverage period, gold had two big spikes higher - last Wednesday, and this past Monday.

Managed Money covered -10.7k short positions, a big drop and likely a result of the spikes higher in gold.  You can see that managed money continues to drop short positions, but has yet to re-acquire any significant long exposure.  It still feels like there is plenty room to run for gold.  Checking the commercial positioning: their short interest remains relatively low, which confirms this.  COT for gold looks good.

In silver, Managed Money closed -1.8k short contracts, and sold -2.6k of longs.  Managed Money appears a bit confused; the relatively heavy long exposure would tend to suggest a correction in silver may be upon us (and indeed that's what happened this week), and the Commercials also had a relatively large short interest.  Likely, a bunch of Managed Money longs were washed out by the two large price drops this week which happened after the coverage period.  Once we see next week's report, we'll have a better sense.

Moving Average Trends [9 EMA, 50 MA, 200 MA]

The moving average picture has changed a bit - silver is now completly bearish, while gold has moved into a medium term bullish position.  PM continues to be entirely bearish over the longer term.

Name Chart Change 52w ch EMA9 MA50 MA200 50/200 Last Crossing last
Junior Miners GDXJ 3.05% -34.71% rising falling falling rising ema9 on 2015-04-10 2015-04-10
Senior Miners GDX 2.86% -20.32% rising falling falling falling ema9 on 2015-04-10 2015-04-10
Silver Miners SIL 1.75% -33.03% rising falling falling falling ema9 on 2015-04-10 2015-04-10
Silver COMEX.Silver 1.27% -18.47% falling falling falling falling ema9 on 2015-04-08 2015-04-10
Platinum COMEX.Platinum 1.18% -19.78% rising falling falling falling ema9 on 2015-04-10 2015-04-10
Gold COMEX.Gold 0.92% -8.75% rising falling falling falling ema9 on 2015-04-10 2015-04-10

Summary

Nonfarm Payrolls from last week did lead to a rally in PM, which was cut short by a Fed Governor's speech and the subsequent strong dollar rally that followed.  Still, PM managed to eek out some gains, which is actually a good performance considering the headwinds from currency effects.

The gold/silver ratio jumped higher again, up +1.49 to 73.28; the ratio is now back in bearish territory. GDX:$GOLD continues to recover, and is now slightly bullish in the very near term, but still long term bearish.  GDXJ:GDX ratio remains short term neutral, long term bearish.  Gold is outperforming silver, and the miners remain mostly bearish with some small signs of improvement.

The COT report shows continued short covering by Managed Money on the spikes higher in gold this week and last.  One wonders why Managed Money even plays in this snakepit.  Commercials still have a low short interest, which is bullish for gold.  For silver, the COT picture looks more bearish.  Perhaps that's why silver sold off this week.

Physical demand is neutral - perhaps slightly positive; in the west, ETF premiums changes were mostly bearish, but the slight backwardation in COMEX gold is positive.  Premiums in Shanghai dropped this week, but remain slightly positive.

Commodities continue to crawl higher.  Oil closed above its weekly 9 EMA for the second week in a row.  Things are slowly looking up - in a two steps forward, one step back sort of way.

If I were just focused on the buck, I'd be worried about gold.  But that COT report is actually looking reasonably bullish, and the price action this week in the face of the big dollar rally looked strong to me.  It might be a safe haven move, or it might be something else - but there does seem to be a bid underneath gold right now.  The miners confirm that, at least to a degree.

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25 Comments

Mark Cochrane's picture
Mark Cochrane
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Gold in other currencies

Dave,

I find your discussions relating gold prices in other currencies compelling but wonder if you couldn't normalize the other currency valuations to the dollar and then look at gold prices in relation to those normalized values. That would strip out the relative currency appreciation/depreciation effect and show if there was actually any non currency-related move up/down in gold valuation from any country. I wonder, for example, if the price for Euroland is rising more than would be expected simply from the falling Euro?

Incredible work you do here regardless!

Mark

davefairtex's picture
davefairtex
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gold prices in different places

Mark-

Finding a price for gold in a particular location isn't as easy as it sounds.  Gold has many prices depending on when you want to receive delivery, and where.

First, there are two prices, set by LBMA twice per day.  They are valid only at specific times, twice per day, for delivery of big LBMA bars in London.

Then there's the COMEX.  It shows the price of gold for future delivery - between 1-3 months from now.  That price is good 23 hours/day, but only for delivery out of a US vault.  Most prices track COMEX.

Then there's the Shanghai gold exchange, which has some strange hours, and its gold is good for delivery within China.  There are a number of different gold contracts in Shanghai - some spot, some futures.

Then there are various bullion dealers who are able to see local spot gold prices: "gold-location-London" or "gold-location-Tokyo" or "gold-location-Singapore."  These prices often diverge from COMEX, from LBMA, and from each other as the supply and demand of gold for immediate delivery at each location changes.

I don't have access to that last group of prices.  I wish I did.

Most of the world tracks COMEX, especially in retail.  I have been in a gold shop in asia during a large move in gold.  Everyone watches the COMEX price on their tablets, and the gold shop updates its prices accordingly.  (I expect in China, they'd be watching the SGE).

I report on "premiums in Shanghai" once per week.  Its a moderately painful calculation, since I don't have access to live SGE data, only the closing price at 1530 China time, which I then need to square with the COMEX price at that moment in the day.  Mostly its a premium of between $1-$10 over COMEX, and sometimes it goes higher or lower depending on conditions in China.  (Some places erroneously calculate the premium using the current COMEX price vs the close price from Shanghai - that gets out of alignment on a day when the current COMEX price of gold rises or drops after the close in Shanghai).

India also has premiums - they have an import tax on gold, so their prices in country are higher than they are outside India.  I don't calculate this premium.

If the spot prices diverge too far from one another (let's say there's a shortage of gold-location-Japan) then that spot price will rise to the point where it is profitable for a trader to buy gold somewhere else where it is plentiful, and arrange shipment of gold to Japan, and so the prices will eventually converge.  Same thing in Shanghai.  After the 2013 gold smash, premiums in Shanghai rose to $30-$40 over COMEX.  A bunch of gold was bought elsewhere and then shipped in to cash in on that premium, and it eventually vanished.

Unless something exciting happens, spot prices generally don't get too far out of alignment with one another.

This is all true up and until a serious worldwide shortage develops.  Of course, that's what the whole gold community is waiting for with bated breath.  The Big Shortage.  The COMEX default.

Spot gold goes through the roof, and everyone with COMEX contracts gets cash-settled instead, so they don't get to collect on their arbitrage, and then all hell breaks loose!

Sounds exciting, doesn't it?  :-)

Its so exciting, goldbug writers have predicted it weekly if not monthly, for decades now.

So since most places follow COMEX, which is the de facto international price for gold, when gold rises or falls in a place that sets its prices off COMEX, gold price moves are all currency effects by definition.  If I had a data feed that could track gold-in-location prices, I'd use those, but I don't have them.  India and China are the two places that do their own thing.  But since gold can flow freely between countries, shortages tend to be short lived - however long it takes for a plane with a few tons of gold in it to fly from one city to another to cash in on the price differential.

davefairtex's picture
davefairtex
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addendum: gold price in locations

This is why I love being here.  People ask questions, and after I respond, I start thinking.  And thinking.  And then I think - "there's gotta be a way" - and after some research pretty soon I find out something new.  All because someone asked a question.

Bullion Vault is one indication of what prices are like in different locations.  They have vaults in five different major gold trading centers.  Here's the link to their order board - a combination of their customers (who are either buying, selling, or both) and their own in-house robot market maker.

Spread is pretty wide (at least compared to COMEX) when the market is closed - but you will notice the prices are only a few dollars different from location to location.  At least when I viewed it anyway that was true!

https://www.bullionvault.com/gold_market.do#!/orderboard

And not to be left out: Hard Assets Alliance.

http://www.hardassetsalliance.com/metals/pricing-gold/

HAA premium: 2.3% (or about $28) for buying a kilo bar.

BV premium: 0.8% (or about $10) either buying or selling.

Perhaps I could report on BV week closing prices (and apparent premiums/discounts vs COMEX) every week too.  Might be interesting.  Maybe we can spot that COMEX default before it happens!

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KennethPollinger
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Dave, BRILLIANT

Thanks for such good thinking--keep it up!!  And for the information on diversifying.  Weekly would be GREAT!!   Ken

Mark Cochrane's picture
Mark Cochrane
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Gold in different locations (2)

Dave,

That's why we love you being here too!

Thanks for explaining in detail the complexities involved with trying to find a common measuring stick for gold pricing. It sounds like you might have something new to evaluate with the BV indicator. Hopefully it won't be another rabbit hole. As someone who deals with other sources of complexity I can truly appreciate the value you bring to the table in all these discussions by cutting through the sea of numbers to provide the essence of what is going on for those of us (like me) who feel overwhelmed by what appears to be a hodgepodge of financial mumbo jumbo.

Interesting to think what a default or at least a serious run on gold would look like. I can see what you mean about any significant regional premium arising leading to someone capitalizing on it by shipping gold there before long. A few thoughts arise however. One is, that countries with chronically higher pricing (not necessarily astronomically so) might indicate areas where confidence in the currency is being progressively lost before it collapses entirely. Second would be when such price increases that exceed simple USD currency valuations become systemic across most if not all of the world, the financial world would really have a problem. Perhaps it would appear as a contagion spreading from country to country, region to region. Once it all blows up (assuming it finally does) anyone can say aha, see I was right but the real trick is to having a bit of forewarning on the potential timing.

I suppose the ultimate systemic fear metric would be if the large players in the markets started opting for physical over financial gold instruments even as those premiums rise in consequence. Usually that seems to be the 'gold bug' sign of doom. I wonder if it couldn't be used more or less like a gold bug version of a VIX fear metric (or at least what VIX was supposed to be) tracking sentiment before a meltdown. I have no doubt that looking at NAV or other indications of premium value mean something immediately to you but it is 'Greek' to me since I don't track such things day-today. Just an idea in any case.

Well, some more 'out of the box' thoughts from someone who does not know enough to not ask the questions. Here at PP is a great place to get other viewpoints that are not prevalent within a profession. I know that it works that way for me with all of the diverse questions that I field about climate.

Cheers,

Mark

davefairtex's picture
davefairtex
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shortages

Mark-

Yes, shortages in one region are an invitation for quick-reacting people to arbitrage them.  To do this, you "go short" gold at the place where there is a shortage - you owe gold to someone there - and then you buy gold in the spot market where there is plenty of gold.  (You execute this trade at substantially the same moment in time).  You need to take delivery on your spot purchase, and then you need to transport the gold to the place where the shortage exists.  Once there, you "deliver" the gold on your short contract, and you are even again.  This makes you money if the "shortage premium" is larger than your transaction + shipping costs.  There is no risk of losing money from the market: your short sale locks in your sale price, much as it does with farmers who "go short" wheat and then plant the crop and sell it 3 months later.

Its critical for you to actually be able to take delivery of actual physical gold on your spot purchase.   Otherwise, the whole thing goes haywire.

And I agree, shortages are certainly a good fear gauge - I think the best one.  If the arbs can't (or don't want to) get rid of the shortage, that says something funny is going on.  It is real money giving you the clearest signal imaginable.

There are several others the goldbugs like to use; I'm less sure of those.  There were GOFO rates going negative (that condition was worth about a dump-truck-load of spilled ink in goldbug-land and weekly predictions of imminent COMEX default) and of course the ever-popular "backwardation" in the futures markets.

Me, I'll stick with premiums.  That's real money - an easy opportunity for money to be made.  If it is large, and it is being ignored, its pretty much of a smoking gun.

At that point, an easy (and relatively low-risk) trade would be "long PHYS short COMEX gold."  This is my favorite "COMEX Default" trade.  In a real default situation, premiums on PHYS should blow sky high since PHYS is a good source for physical gold, and you remain price-neutral and wait for the earth-shattering Kaboom.  Or you could just close out the trade and take the cash once the premium gets high enough to satisfy.

More mumbo-jumbo.  Paired trades like this have zero price risk (i.e. if gold rises or falls, you neither make nor lose money) but instead are bets on some kind of a divergence between the two items.  In this case, you are betting that PHYS (a source of physical gold) will be worth more than a nominally-equal sized COMEX "paper gold" contract - which will be very true in the event of a COMEX default.

davefairtex's picture
davefairtex
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importance of Shanghai

Nifty article written by Koos Jansen with particularly good snippets quoted from the Chairman of the Shanghai Gold Exchange.

https://www.bullionstar.com/blogs/koos-jansen/shanghai-international-gold-exchange-comes-to-life/

The Chinese gold market is an important force, a positive energy in the international gold market but its influence does not correspond to its mass and scale. Last year China’s domestic gold mines produced 428 tonnes; at the same time China imported 1540 tonnes of gold, adding up to nearly 2000 tonnes. China’s import volume is significant but China’s influence on the price of gold is very small. Real influence still lies in the West. Data such as Non-farm payroll, or even a speech could impact the gold market in a big way. In this sense, the mass and scale of China’s gold market and its influence in the international gold market does not match. Through the SGE international board Chinese pricing power will increase.

In my researches, I have definitely noticed this effect.  When I try to explain the workings of the gold market, I can almost completely ignore Chinese macroeconomic timeseries.  They help, but not much.

It will be interesting to see how things change as time passes.  If China can project its money flow onto the international gold market, it would be a big deal indeed.

Watching the dollar-equivalent volume in the new international gold instruments will be my key metric.

Mark Cochrane's picture
Mark Cochrane
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How can this not be broken?

Dave,

If global annual production of gold is on the order of 2,500 tons of gold and China consumes/acquires 2,000 tons (80%) of it, how in the heck is it that China doesn't influence the price of gold in the market? They are the market, everyone else are just bit players!

Confused...

Mark

Jim H's picture
Jim H
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To Mark's question..

And as posted elsewhere today - one view of China Gold demand dynamics;

 

davefairtex's picture
davefairtex
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COMEX, paper gold, and fractional reserve systems

Mark-

First, gold production is on the order of 2.5k tons/year.  There is still 160k tons floating around out there.  Mine supply is - almost - irrelevant vs the amount of gold that is available for purchase.

Secondly, the dollar volume of "exposure to the price of gold" (what the goldbugs call, "paper gold") are the sum total of all the leveraged bets on gold both bullish and bearish by the players in the West.  Daily dollar volume on COMEX dwarfs the daily dollar-equivalent volume on the SGE - not for physical delivery, but in terms of sheer size of total dollar-volume bets being thrown around.

See, what moves price is the total dollar volume of bets on each side - bullish and bearish.  As long as all the players are content just having "exposure to the price of gold" rather than owning the underlying metal, this all works.  And as long as confidence remains in the system, it will continue working.

Its the same as any fractional reserve system.  As long as we're all confident we can get cash money out of the bank when we want it, we're relaxed and we're comfortable checking our balances on the computer.  We all have "exposure to the value of our bank balance" without having to actually deal with the underlying cash it represents.  Downside is, of course, counterparty risk.

"Owning" the dollar means having an FRN in your hot little hand; the vast majority of people are comfortable with "exposure" to their cash rather than "taking delivery" of the FRNs they are entitled to.

Goldbugs imagine that the only honest market involves people who either are going to drop off a gold bar at the COMEX, or who will take a gold bar in delivery.  That's kind of like saying, "the only honest bank deals all in cash, where people must withdraw their entire balance of their paycheck when it arrives - in cash - and then they must pay their bills - once again, all in cash."  There is a certain truth to the statement, but if people are happier with digital balances than they are with cash, why not oblige them?

Any fractional reserve system exists largely out of convenience, which history shows that people will opt for time and again.

Of course, here at PP we talk all the time when our systems will break down in a big way, when the vast number of promises have to be met with a much smaller number of actual underlying items.  At COMEX, that's about 1 bar for every 70 claims.  Eventually, I believe, the COMEX will default, when confidence snaps in some major way.  But until that happens, until the concept of fractional reserve everything is called into question by some event, leveraged COMEX dollar volume paper gold will continue to set prices.

That's just how the system works.  It hasn't broken, because confidence remains.

But once confidence snaps, I suspect fractional reserve gold systems will become distinctly less popular.

Bottom line: the amount of money slopping around COMEX dwarfs the amount of money at the SGE.  That's why COMEX drives price.

Let the goldbug shelling commence!

Jim H's picture
Jim H
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Davefairtex has his, "Jeffrey Christian" moment on PP.com

In other words... a whole lot of truthiness regarding how the Gold market works.  Yes, Gold is fractionally reserved  in the system we have today.. Jeff Christian of CPM group famously mentioned this in testimony to the CTFC, and Dave talks about it above.  

The big scam here is to think that this is natural.. and OK.. that something like Gold becomes fractionally reserved to the extent that the paper market wags the dog.  The big scam here is to think that fractionally reserved Gold banking is just like fractionally reserved dollar banking.  There are legitimate reasons why futures markets exist, and one should exist for Gold and Silver so that miners, and metal dealers, and coin dealers, can hedge risk.  But beyond that.. beyond hedging by entities that actually have the metal... there should really not be a huge overhang of contracts in play. 

Today, the Gold price has no discernible tie to physical demand.  It is up to each investor to gather their own data to determine how far out of sync the paper price has become vs. where a true physical supply vs. demand balancing price might lie.  Dave has done a wonderful job of exposing the machinery of the precious metals price management scheme..  this same machinery is applied to every PM that is coined by sovereigns;  Gold, Silver, Platinum, and Palladium... and the reason that Gold is NOT the most shorted is that, as Dave says, so much exists in vaults, and a good chunk of it remains accessible to the banking cabal via their control over the fractional reserve system.  Now that you know how the system works, you are better equipped to determine where value lies in today's distorted markets.  I voted for another roll of Silver Eagles at a local coin show this weekend.   

 

 

In his exposition above, Dave is straightforward in his assessment of how the markets work.  Where I differ in the most strong fashion is in how one attributes (or does not attribute) the true motivations to these workings   For instance, Dave says, 

Any fractional reserve system exists largely out of convenience, which history shows that people will opt for time and again.

See.. it's not the bankers trying to control the price of Gold (and therefore maintain confidence in their infinitely printable fiat currencies) that underlies these ponzi markets.. in fact it's our desire for the simple convenience of ponzi markets!  Viva la GLD!  Viva la Comex. 

 

      http://www.zerohedge.com/article/jeffrey-christian-and-nick-barisheff-bu...

Jeffrey then proceeds to once again ignore the underlying issue, and highlights other massively diluted ponzi construct markets in which there is a discrepancy between physical and derivatives. "If you look at fishes and loaves of bread, the ratio of derivatives transactions to physical underlying it's 5 to 1; if you look at aluminum or copper it is about 15 to 1." And for the prize: "if you look at currencies or treasury bills or notes, you find that the ratio of derivatives trading to underlying physical is about 100 to 1." Congratulations gold holders - the derivatives market has applied fractional reserve psychology to your holdings, and thrown in a pinch of Exter's pyramid, and made your claims about as valid as those of fiat pieces of paper printed every single day! Of course, just like in corporate CDS (where applying Christian's approach, the ratio of total notional CDS to outstanding debt is about 10 to 1, or a joke compared to the gold market's underlying to outstanding derivative gross notional), when Lehman blew up and a zero recovery on the Lehman bonds was virtually guaranteed (the Lehman CDS auction closed just over 8%), the gross instantaneously became net, and the scramble to cover derivative hedges seemed like it would end the world as the netting merely accelerated the bank run. In other words, Christian once again completely misses the point that should there be a run, and every contract shifts to a net notional position once the credibility of the derivative market is refuted (via counterparty risk or otherwise), you still would have at best a 1% collateral backing of your claim. In other words, the forced conversion of the futures market into physical precipitated by a bank run would result in a 99% loss of what investors had previously considered bookable assets. Christian's conclusion is that this is all fine and good - "the market is much larger than the underlying market, and there shouldn't be anything unusual about that because quite frankly that's how most markets work." Actually, that's how most derivative markets work. And when the asset being "derived" is that which is located at the bottom of Exter's pyramid, the whole premise of its value collapses, as gold only has worth due to the fact that unlike the aforementioned "currencies and treasury securities" it can not be diluted into oblivion by mad Federal Reserve economists, be it by printing presses, nor by speculative derivatives traders.

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davefairtex
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choices exist

JimH-

See.. it's not the bankers trying to control the price of Gold (and therefore maintain confidence in their infinitely printable fiat currencies) that underlies these ponzi markets.. in fact it's our desire for the simple convenience of ponzi markets!  Viva la GLD!  Viva la Comex.

Eh, Jim, if traders wanted exposure to the price of gold using a vehicle other than COMEX GC contracts, they'd use it.  Its one of those free market things.  Nobody's arm is being twisted to use COMEX GC contracts.

GLD is more popular than PHYS.  I don't know why, that's just how it is.  And COMEX gold contracts are more popular than GLD.  Not by much: GLD: 734 tons, COMEX open interest: 313k contracts = 973 tons.  Did you realize that?  COMEX gold total open interest is only slightly larger than that of GLD.

Is this the result of some sneaky, underhanded something-or-other?  I can't possibly see how.  How do you run around convincing every single hedge fund they are required to use COMEX gold futures rather than, say, PHYS for their gold positions?  Or GLD?

I'm guessing it probably has to do with leverage and trading cost.  Futures contracts are cheap, and its easy to get a large amount of exposure with just one contract.  1 COMEX future = 1050 shares of GLD, approximately.  You'd have to pay full price for the GLD; $115 x 1050 = $120k, but with a futures contract, you get the same exposure for about $4400.  (God help you if the market goes against you and you're fully margined - but the idea is, big leverage is there for those that want it).

And - Jim.  It appears that is what many longs want.  Not all, but many.  You do realize, for every short - for every evil, evil, evil naked paper short trying to drag down civilization through fraud, there is a long at some hedge fund taking the other side of the trade.

Perhaps you should go and tell the longs they are being mind-controlled by the Fed, or the evil banksters, or some other nefarious group.  "STOP USING THE COMEX FOR THE SAKE OF YOUR CHILDREN!!"

Yep, that'll work.

Perhaps you can explain to me why some percentage of hedge funds prefer COMEX over GLD, and GLD over PHYS?

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Mark Cochrane
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Sorry for the shelling

Thanks Dave and Jim H for some insights into how the game is played.

I see how the gold/silver (everything?) markets have become captured by fractional reserve systems. I'm not sure that this has a useful place in anything but futures contracts for legitimate dealers in the physical metals as Jim listed. The system is what it is at this point though, I guess.

However, things don't seem to be working as a market if new production has been around 2,500 tons per year (>1% of existing stocks) with a relatively new major buyer (China) suddenly absorbing and not circulating 80% of that new source. That increased demand should drive prices up, not down unless the relative leveraging of the fractional reserves is rising. Given the relative conservative nature of the gold stocks though I can see how this might still be working.

What doesn't make sense to me is silver though since it is an industrial metal and the stocks have been dropping dramatically over the last several decades as it is consumed and effectively lost to the system. How can there be increasing consumption, decreased stocks, few if any actual dedicated silver mines (since my understanding is it is a co-product for gold or copper mines), lower ore qualities, but still have prices falling for years? Shouldn't dropping stocks effectively be 'deflationary' for the number of leverage bets that should be placeable on something like silver? If not, shouldn't the market become increasingly unstable as more and more is being bet on less and less? Wouldn't 'rational' betting be more heavily on longer term price rises?

I don't know if I am a 'gold bug' but I am a reality bug. What I see is no end of financial systems from car loans to derivatives, commodities markets to sovereign debt, that are increasingly divorced from any sense or reason. I cannot see it as anything other than an unstable system with no resiliency built in. High frequency traders have effectively exploited maximum efficiency but at the expense of making the whole system increasingly fragile. I can't see this ending well.

That said, I do like Dave's "long PHYS short COMEX gold" Comex default trade though I don't know how to execute it. Having money that was insensitive to gold's pricing vagaries and out of a savings account sounds ideal (assuming everything doesn't completely blow to hell), especially with the added pay off of winning the lottery if the COMEX ever does default.

Thanks for the education.

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davefairtex
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all else being equal

Mark-

If everything else was held constant, you would be correct.  Namely, if the only thing that had changed since 2011 was that China started buying more physical gold, the price would definitely rise.

But that's not what happened.

We have been in a 4 year commodity bear market.  Turns out, commodity prices and gold (and silver) prices are all relatively well correlated.

In other words, the high price for gold and silver that was set in 2011 isn't something that was written in stone tablets handed down from God to Moses.  Gold was actually bid up exceptionally high based on the commodity bull market that peaked and ended in 2011.

Here are some things that correlate with silver.  (I ran a 50-point correlation across a whole lot of different monthly timeseries I have):

  -0.35: TWEXM (Inst-TWEXMMa3(506))
  -0.23: 10Y-FF (Inst-10Y-FF(729))
   0.02: M2V (Inst-M2VMa3(668))
   0.04: China.M1 (Inst-China.M1Pctchange,ma12(266))
   0.18: Crude (Inst-GEM.Crude(663))
   0.21: MPRIME (Inst-MPRIMEMa3(793))
   0.42: Tin (Inst-GEM.Tin(663))
   0.43: Copper (Inst-GEM.Copper(663))
   0.47: EXUSEU (Inst-EXUSEUMa3(194))
   0.56: Gold (Inst-GEM.Gold(663))
   1.00: Silver (Inst-GEM.Silver(663))

Many of these are FRED timeseries: TWEXM is the USD, 10Y-FF is the 10 year treasury yield minus Fed Funds rate, M2V is "M2 money velocity" - you can see there is almost no correlation, while gold, copper, and tin are relatively well correlated as is the US/EU exchange rate.  The numeric value is simply the average correlation value for all the points.

The correlation was run starting in 1960 - that was my first silver price quote.  Some of the other timeseries aren't quite that old, but many do date back that far.  In other words, these correlations aren't just a recent phenomenon, many have been around for more than 5 decades.  I didn't cherry-pick here.

So why did silver's price drop from 2011 to today?  Look at copper, and tin.  What did they do?  And what did the Euro do too?

As far as I can tell, PP goldbugs don't believe in correlations.  When you start your search for truth already knowing what the answer must be, you really aren't open to examining evidence that might contradict said answer.

Check out Silver-Tin.  Is it perfect?  No.  But they aren't so different either.  Silver/gold, silver/copper, and to a lesser extent silver/crude move together too. 

If you are approaching the whole situation tabula rasa, you will find lots of evidence pointing towards commodity and currency correlations.

Now then, given the downward pressure that the commodity bear market has put on all things that tend to trade alongside the commodity index, perhaps the drop in silver makes more sense.

From what I understand, there's more than a year's supply (30k tons) of easily accessible silver floating around.  If you want to gather up all the silverware and other silver items and melt them down, its more like two decades of supply (777k tons).

http://demonocracy.info/infographics/world/silver/silver.html

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Jim H
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Dave and Mark and Jim talk Gold and Silver trading

Thank you for the stimulating conversation.  I think the crux of things comes here... it's in the answer to this point Dave makes;

And - Jim.  It appears that is what many longs want.  Not all, but many.  You do realize, for every short - for every evil, evil, evil naked paper short trying to drag down civilization through fraud, there is a long at some hedge fund taking the other side of the trade.

This is true.. and on the surface it may cause some to think that somehow the market is balancing supply vs. demand.  When a speculator goes into the market to buy a Comex contract... one of two things can happen;

1)  They can buy it out of the existing pool of contracts.   Result is a small price uptick. 

2)  The bankers who run the system can create a synthetic (short) contract, adding to the OI (open interest), adding to the supply of contracts.   Result is no uptick, OR a downtick if the banks decide to create more supply than there is demand at any particular point in time.  

And there it is.. the power is in the hands of the banks to create synthetic "short" contracts any time they want to meet demand.  Simply stated, the banks can move price down (almost) any time they want.  Were the available pool of contracts somehow limited to some multiple of the ounces of Gold or Silver available for delivery, say 10X... then the power to create these synthetic shorts would be taken away from the banks (once max. leverage was reached) and more buying of contracts would = price going up.  That ain't how it works though.  

This is so important to understand.  Craig from TFMetals report just wrote a piece outlining how the bankers used their contract creation power to guide a several months long wash/rinse cycle of price, and he shows through the available data how this was done.  This is behind the paywall for TFMetals, so I won't show you the whole report, and do please consider Turd's $10/month subscription if you want to really understand how these markets work today;

 

http://www.tfmetalsreport.com/blog/6759/bank-participation-report-update

For the purpose of this post, let's examine just three recent Bank Participation Reports....the report from January 5 with price at $1219, the report from February 3 with price at $1260 and last Friday's report based upon data submitted last Tuesday with price at $1210. Data from the three reports is laid out below:

January 5                    GROSS LONG                   GROSS SHORT                     TOTAL

U.S. Banks                             11,728                                         37,321                                 -25,593

Non U.S. Banks                    32,985                                        80,227                                -47,242

TOTAL                                  44,713                                       117,548                                 -72,835

February 3                  GROSS LONG                   GROSS SHORT                     TOTAL

U.S. Banks                               9,163                                        65,901                                 -56,738    

Non U.S. Banks                     20,009                                      96,264                                -76,255

TOTAL                                    29,172                                      162,165                               -132,993

April 7                             GROSS LONG                   GROSS SHORT                     TOTAL

U.S. Banks                               11,404                                      40,999                                 -29,595   

Non U.S. Banks                      23,222                                      67,814                                 -44,592

TOTAL                                   34,626                                      108,813                                -74,187

So, what stands out to you in this data? Here's what I see:

  • To manage price and sentiment, The Banks moved to cap the January rally through the issuance of nearly 45,000 naked short contracts between January 5 and February 3. That's the paper equivalent of nearly 140 metric tonnes of gold, conjured up from thin air to meet speculative trading demand.
  • The Banks also managed this buying pressure by selling more than 15,000 contracts of their existing long positions. This total move of just over 60,000 contracts served to absorb buying interest, dampen sentiment, cap price and reverse momentum.
  • In February and March, recently revised BLSBS data was used as cover to break technical indicators and chart patterns in order to send prices tumbling back lower.
  • Into this Spec selling, The Banks actively bought back almost all of the naked short positions they had created earlier in the year.
  • As of last Tuesday, the combined NET position of the 24 banks is now back to nearly the exact same level seen on January 5, before the January surge in price.

Wash. Rinse. Repeat.

 

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davefairtex
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buying low, selling high: COT Commercials

JimH-

I see exactly the same data in the COT reports I watch.  That is, someone out there is buying low, and selling (shorting) high.  Just because they are able to buy low and sell high doesn't mean they control the market.  All you've done is pointed out that someone is really good at figuring out when the cycles are, and trades them appropriately.

Jim, you and Turd are imagining that the surfer is the one making the waves - your evidence being that they do a good job of riding them.  "My goodness, how else could that man possibly ride that wave so well?  I certainly can't do that.  The only explanation possible is that he is controlling the ocean and making the waves himself!"

Yeah, that's it.  Surfers make the waves, and that explains why they can surf so well.

Either that, or both you and Turd are terrible surfers, and you are just saying this to make yourselves feel better about your inability to surf.  "I don't control the waves, and that explains why I can't surf very well."

The guys you are talking about are the commercials.  They go short at the tops, and they go long at the bottoms.  Its a useful technique - we've talked about this before - to watch what they're doing as a clue to where prices will be going.

If you are a careful observer, you will also have seen that they don't always win.  They too make mistakes.  During the long gold bull market from 2009-2011, they got hosed as they did not anticipate the strength of the gold bull market.  Same thing with oil - they covered short too soon during the 2014 oil crash.  They aren't geniuses, they don't control things, but they do a better than average job of picking the highs and the lows.

Last point.  I take it that you concur:

  • nobody is twisting the arms of the COMEX participants to play in the minefield.  They have other options, they just choose futures contracts because they want to.
  • commodities really are closely correlated with gold and silver over the long sweep of history.  the two sets of prices move in similar directions most of the time.

 

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Jim H
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Buying and selling, vs. the ability to create "shares"

Dave,  We have to be careful how we depict things, lest we give folks the wrong impression about how the market works.  This is my deepest objection to the nature of your commentary here - your language always reads to me.. and maybe I am just a paranoid, cynical pain in the ass.. but your language always reads as apologetics for the markets being fair and normal, vs. exposing the deeper truths.  

You said,

   I see exactly the same data in the COT reports I watch.  That is, someone out there is buying low, and selling (shorting) high.  Just because they are able to buy low and sell high doesn't mean they control the market.  All you've done is pointed out that someone is really good at figuring out when the cycles are, and trades them appropriately.  

Were the commercials just buying and selling from an existing pool of contracts, I would agree with you.  But as I stated, the Bullion banks have all the advantages;  They can see where the stops are, they can see the entire contract structure, AND they can create new contracts at will in order to blunt the short term effects of high demand.  This distorts the market, since market participants react to price... the signaling mechanism of markets to participants is PRICE...  The bullion banks work to blunt any excitement that may enter the market short term.  This kills sentiment.  This is chart painting price propaganda, by a banking cartel whose power is based on your confidence in their fiat product.  Their product looks better when Gold and Silver look bad.     

I really don't know why the Hedge funds are willing to play in this pool.. but they do seem to keep coming back for more.  China is setting up (potentially) to give traders a more fair shake... and although they do not have as much volume as Comex, there has been a strong recent uptick in SGEI activity as shown on the chart from Koos Jansen below;

Weekly volume SGE SGEI contracts

  

If China trading volumes continue to increase, Comex will lose relevance over time.

On your final point,

commodities really are closely correlated with gold and silver over the long sweep of history.  the two sets of prices move in similar directions most of the time.

I believe you rely too much on historical correlations given that we are in uncharted waters today with all the QE money floating around, the ZIRP --> NIRP.. the growing insolvency of most Governments, and the growing probability of (fiat money) debt defaults.  I believe that what is happening today, with the four PM's, Gold, Silver, Palladium, and Platinum, is that they are being artificially manipulated in order to paint the charts and make it seem like they are being eschewed by investors (and consumers) along with the real commodities like Copper, Iron, Lumber, and Oil are.  All of these are in the crapper price wise.  But the fact is demand for the precious metals has not receded like demand has for the others... hence the need for price management through futures manipulation in order to paint the picture that TPTB want the markets to see and react to.  I will show my proof once again, for the third time in recent days - look at Copper and crude compared to our metals;

      

 

 

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davefairtex
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partial agreement, goldbug writers, model failure

JimH-

... Bullion banks have all the advantages;  They can see where the stops are, they can see the entire contract structure, AND they can create new contracts at will in order to blunt the short term effects of high demand.  This distorts the market, since market participants react to price... the signaling mechanism of markets to participants is PRICE...  The bullion banks work to blunt any excitement that may enter the market short term.  This kills sentiment.  This is chart painting price propaganda, by a banking cartel whose power is based on your confidence in their fiat product.  Their product looks better when Gold and Silver look bad.     

I really don't know why the Hedge funds are willing to play in this pool.. but they do seem to keep coming back for more.  China is setting up (potentially) to give traders a more fair shake... and although they do not have as much volume as Comex, there has been a strong recent uptick in SGEI activity as shown on the chart from Koos Jansen below...

I partially agree - about the information that the banks have most especially, and their willingness to hose their own clients in order to make a quick buck.  That's where we differ - on motivation.  I believe its all about making quick bucks by stabbing their clients in the back to pump up their own bonuses.  Look at all the manipulation uncovered to date: it has all been short term hose-the-clients stuff.  All low risk, high reward intraday-only activity.  Banksters are all about short term theft, not some grand 40 year plan to keep the price of gold suppressed just to confound the dreams/economic models of the goldbugs.

I also think the commercials play in this arena to maximize their income for their mining operations.  Market rallies, they lock in the higher prices and worst case just have to deliver via mine operations.  Market drops, they cover short and collect short term trading profit.  Rinse, repeat.

Like you, I also wonder why the funds play here too.  They always seem to get hosed, at least that's what the COT report seems to show.  If I were them, I'd lobby for position limits at the very least, to put a halt to the constant stop-gunning.

I believe that what is happening today, with the four PM's, Gold, Silver, Palladium, and Platinum, is that they are being artificially manipulated in order to paint the charts and make it seem like they are being eschewed by investors (and consumers) along with the real commodities like Copper, Iron, Lumber, and Oil are...

All the commodities are indeed in the crapper.  Historically - and this dates back to the 1920s - when commodities drop, so does silver.

Now this is where we part ways.

Commodities have been dropping for four years, and so has silver.  Jim, if it walks like a duck, and quacks like a duck, its most probably a correlation-driven event, not some grand multi-decade plot to make your silver purchase look bad - or to paint the tape to make all those goldbug-writers into fools.

The fact is, this manipulation storyline provides a fantastic dog-ate-my-homework excuse for the goldbug newsletter-writers as to why they totally missed the call on the top in gold at the same time as all the other commodities topped out too.

"I wasn't wrong - my model wasn't wrong - it's manipulation.  And by the way, please keep giving me your subscription fee.  Thanks so much!"

To my mind, goldbug writers are just as bad as the central bankers in terms of their inability to admit they were wrong, for exactly the same reasons.  They've believed their own storyline for way too long, and their paycheck demands on them maintaining they have the correct view of the world.

Krugman writes, "we just have to print more."  That's just plain stupid - more of what hasn't worked.  To me, so are the constant cries of "it couldn't possibly be commodity correlation, it must be manipulation" by the goldbug writers who simply can't understand (or don't want to admit to their fee-paying readership) that their model of the world just didn't properly predict what would happen after a debt bubble pop.

I didn't predict it, neither did they.  They say "it's manipulation."  I say, "my model needs fixing."

How many writers predicted hyperinflation 4 years ago?  All of them.  How has that worked out?  It hasn't.  Instead, we got deflation.  Automatic Earth was right.  And yet in their world, "manipulation" is to blame for the drop in the price of gold, while "deflation" is to blame for all the rest of the commodities?

Really?  Sniff test fail.

Unfortunately, with the faithful, this dog-ate-my-homework approach actually works.  People still pay these guys.  Did Turd call the top in gold?  I bet he blamed manipulation after-the-fact.  Has he even mentioned deflation?  I'm curious.

And of course since you are still paying Turd, you are invested emotionally in him being right.  So you have to bash me whenever I suggest anything that calls into question the grand goldbug dog-ate-my-homework excuse.

Did he mention how deflation treated silver back in the Great Depression?  Or does he believe that silver during the 29 crash was manipulated lower by the sneaky bullion banks way back then too?

I was right there with the goldbug writers.  I thought we'd have inflation/hyperinflation too.  I was wrong.  But since I don't have a flock of paying customers, I have no issue admitting my mistake.  And after a fair amount of research, I believe my updated model explains how the world works better than it did before.

I don't think our friendly goldbug writers have updated anything.  Neither have our central banker friends.

Interesting parallel.

Last thing.  Like with you, there is "a little" background emotional content to my writing, especially about these writers.  I feel tricked by these goldbug writers and their dead-bang certainty they were right.  They weren't right.  And they keep on not-being-right and not updating their view of the world, and instead they present this lame-ass excuse that wouldn't past muster for a fifth-grader who missed a homework assignment.

So what should I do?  I should just get over it and relax and enjoy my chats with you rather than getting all excited over this old news.  :-)

A friend of mine once said something tongue-in-cheeck yet very applicable:

"But I can't possibly leave now!  Someone on the Internet said something wrong..."

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Luke Moffat
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Posts: 384
Pretty muh how i see it too

Dave,

Pretty much how i see it too. I bought into the hyperinflation scenario about 2 years ago when i started my venture into the world of alternative media. I mentioned the book, 'When Money Dies," when i first joined here and how it influenced my thinking. The main difference was that the Weimar Republic was acting in isolation in direct contrast with the Central Bankers today who continually compete against one another to devalue their respective currencies to boost exports on the magical merry-go-round. Hyperinflation seems to occur when a country is left to rot - Zimbabwe, Post-war Germany. Contrast that with Japan today, and then with England, America and Europe. You print today, we'll print tomorrow.

Going back to the initial point about gold, i imagine it's viewed as insurance by brokers. The more risky things get the higher the premiums. The less risky, the lower the premiums. No one is interested in holding the stuff until it really gets nasty. I kind of think i've been sold my own fears. What's the term, "If you can't spot the patsy, then it's you..."

The question we really ought to be asking ourselves is where do we go from here? Is it all a matter of interpretation, and what future do we want to live in?

Recently I've turned to gardening, that's where i get decent growth and the opportunity to see green shoots. I'm gonna wait out the cycle. Turn up in six months and see what September brings. Until then i'm just gonna watch and learn.

Stay frosty.

All the best,

Luke

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Luke Moffat
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Posts: 384
Accuracy in Correspondance

Further to the post above i guess what really bewildered me was QE. It was always referred to as money printing which made me think 'oh dear, here we go again'. Even in my post above i referred to it as money printing which i'm going to stop doing from now on.

Now that I sit back and look at the cycle it was all so obvious, the economy isn't growing through production so we must boost it by some other means - the benefit of hindsight!

From September 1981 US interest rates on 10-year treasuries peaked at 15%. From there it's been a steady decline. What happens when you get to 0%? Find another way to goose the markets. QE! Central banks issue currency in exchange for private bonds. More money available for lending. Not quite the same as printing money to meet wage demands for the world's populace. Hence no hyper inflation. Where do we go from here? Negative interest rates. How low? Well who knows

 

All the best,

Luke

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Mark Cochrane
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Ok, but...

Dave,

Thanks for the reply. Point taken, gold and silver could have been at inflated prices before the multiyear drop. Correlation is not causation, as they say, but if you have one for decades there is a good chance that they are linked!

I have a quibble with your take on silver though. If there is 1 year of available silver but copper and gold prices are way down, shouldn't that drop production of silver since it is tied to production of gold and silver? Of course that is only if the miners don't simply produce even more at cheaper prices to try to make up the difference but I am not sure there is any profit at these prices.

The quibble comes with your statement:

If you want to gather up all the silverware and other silver items and melt them down, its more like two decades of supply (777k tons).

It's certainly not available at <$17 oz and apparently wasn't available at even $37 oz. Therefore some of grandma's silver might come on the market at >$37 oz but much of the silver in older coins and artifacts isn't likely to be melted down at any foreseeable price. This is analogous to oil reserves existing in the ground compared to those that can actually be extracted at a profit.

Does this make silver a major candidate to be a the canary in the coal mine for a potential COMEX default?

Mark

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davefairtex
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metals production

Mark-

You are right about grandma's silver: scrap silver supply has dropped off significantly as price has fallen.  Check this out:

https://www.silverinstitute.org/site/supply-demand/

You are also right about a big chunk of silver production being a side effect of other metals production.  That's good and bad.

Take copper.  Even though copper prices are lower, copper production is not dropping.  Neither is iron ore production.  Its similar to oil.  As a group they should all cut back, but individually all the producers have an incentive to produce like crazy in order to "make up for the lower prices" so they can individually survive.

They've already dumped the capex into the mine - they may not make back the all-in costs, but they can certainly cover the cash costs, at least for now.  And in the meantime, the people running the mines keep getting paid, which from their perspective is a very good thing.

Check out the "monthly press release" at the International Copper Study Group (who knew such a thing even existed!) which details production:

http://icsg.org/

Eventually the high cost miners will go BK and other companies will close down less efficient mines, but that hasn't happened so much just yet.  It will, eventually, but just not yet.  Same with the shale drillers.  I believe there are a lot of "dead men walking" (and the shale industry has a much more rapid development/depletion cycle than copper mining) but even in shale, it takes time for them to run out of capital and lenders and people willing to buy shares in a secondary offering.

That's why the commodity cycles tend to be long, I guess.  This dynamic of demand ramp, followed by commodity production ramp, followed by overproduction, mine closings, BKs, and then the whole things starts all over again.  Mine life is in decades, up-front capex cost is huge, and once opened, ongoing cash costs are smaller than total cost (maybe half?), so the excess production only drops off gradually.

If solar cell production continues to rise, that's a longer term trend for silver which may eventually prove quite significant.  At least, I think it will, but that's in the multi-year timeframe.  Right now, perhaps its just offsetting the loss every year from declining photography consumption.

At what point will the market decide that "there isn't enough supply" for silver?  Clearly, 1 year of supply seems to be ok.  Why is that?  Let's compare.  For copper, annually: 18 Mton mine supply, 23 Mton total supply, 23 Mton use, 1.3 Mton stock or less than one month.  Crude has maybe 90 days of above-ground stock.  Given that, 1 year seems to be a relatively good cushion.

This suggests the "monetary" component of silver is significant, although not as large as with gold.  People find value in hoarding silver over and above the industrial use.  That's not true with copper.

I'd guess the monetary demand for silver would really pop if there was a commodity rally.  Retail silver coin & bar production isn't enough to impact total supply (not enough machines to convert big bars into coins & small bars) in a hurry - so even if your coin store runs out of coins, it doesn't mean the solar panel makers run out of silver.  It would be silver investment demand (ETFs, etc) that I suspect would cause the default, because they compete for the same supply of large silver bars.

So - watch PSLV premiums as one predictor for a COMEX default, perhaps?

Mark Cochrane's picture
Mark Cochrane
Status: Diamond Member (Offline)
Joined: May 24 2011
Posts: 1227
Makes sense

Dave,

Ok, although it is irrational behavior on an industrial level, I can see how individual mines could keep producing even at a loss just to keep the doors open and paychecks coming as long as possible. I imagine that proper hedging also buffers them for a time. Not sure how far out they can hedge prices.

I like your analogy of the mining commodity cycles basically being low frequency due to the type of operation and large up front costs. Does that mean that other commodities are faster to respond to demand booms and crashes (e.g. cocoa)?

For silver it would seem that the duel monetary/commodity demands would tend to smooth out volatility but if anything it has been the opposite. It correlates with gold so I can see it following the monetary cycle. But is is also strongly correlated with the copper production and used as a commodity. I guess that the drop in photography demand has been putting a hurt on silver even as solar takes off. The real surprise to me though was the massive uptick in coins and bars even as the silver price has dropped. If anything, it looks like that has offset the photography demand crash.

In any case, thanks for taking the time to demistify a lot of this.

Cheers,

Mark

davefairtex's picture
davefairtex
Status: Diamond Member (Online)
Joined: Sep 3 2008
Posts: 5682
crops, copper

Mark-

I believe some other commodities (the ag commodities) are definitely faster to respond.  Glut in soybeans: farmers just decide not to plant soybeans, and instead they plant wheat or corn.   Don't know if cocoa plants are one-shot or if they last for years.

But also, many crops are sensitive to oil prices, so while farmers can plant something different, higher oil prices result in higher crop prices.

But copper is actually pretty interesting.  Take a look at copper since 1960.  In real terms, price for copper has been declining over the decades, up until China appeared on the scene and peak oil hit in 2005.  Industry took 6 years, but finally responded by building a whole bunch of new mines.  Now China has slowed down building dramatically - that is, rate of increase has dropped off and so of course copper price has plummeted.  Its hardly fair to the poor miners, but there you go.

 

Mark Cochrane's picture
Mark Cochrane
Status: Diamond Member (Offline)
Joined: May 24 2011
Posts: 1227
Look out below?

Dave,

Interesting info on copper. With a lot of new production on line, and unlikely to be idled given the previously discussed reasons, there seems to be a lot of room for copper to fall if China's demand continues to slow. Producers better hop for continued low fuel prices to hold costs lower.

Mark

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