PM End of Week Market Commentary – 8/24/2013
Gold finished Friday up $25.50 on above average volume to 1396.40, with silver up $1.01 to 24.05 on heavy volume. The gold/silver ratio dropped to 58.08, a level last seen in April prior to the gold crash. A poor new new home sales report was the catalyst for the week's big move; bad news in housing means (presumably) a lower chance of tapering at the next Fed meeting. PM prices closed the week at or near their highs, which is a good sign.
Over the week gold is up $21.30 [+1.55%] while silver is up $0.86 [+3.71%].
The dollar this week was largely neutral again, up 0.06 [0.07%] to 81.41. The dollar remains in a medium term downtrend, although momentum appears to be slowing as the dollar seemed to find some support at 80.75. While this week the buck was not a factor for PM, moves down in the buck are generally supportive of PM prices, while moves up will provide headwinds.
The gold/silver ratio has descended from its peak at 67 on July 28th to its current level of 58 in only a month. It is right at the 200 day MA for the ratio. A falling GSR is a bullish sign.
Mining shares were up on the rally in PM Friday; GDX +2.62%, and GDXJ +5.43%, with the juniors outperforming. Volume was heavy in GDX, but the price action was a bit lackluster. While gold has clearly broken out setting a new cycle high, GDX has not done so. For the most part, miners have traded sideways this week – with GDX up only +1.17%, and GDXJ +4.93% overall this week. As of now, the miners have not confirmed the breakout in PM, which I interpret as a bit bearish.
Here are the two charts: you can see that gold had a breakout, while GDX did not.
Physical Supply Indicators
* Gold premiums in Shanghai dropped $3.88, closing the week at a premium of $4.39.
* The GLD ETF gained +4.81 tons of gold this week.
* The COMEX lost -0.90 tons of registered gold this week, the losses coming largely on Friday.
* LBMA GOFO and Gold Lease Rates were virtually unchanged.
* Premium/Discount to NAV: Based on 16:00 EST Friday prices, gold 1396.30 and silver 23.99, CEF 16.33 -2.25%, PHYS 11.65 -0.08%, PSLV 9.64 +2.89%. Compared with last week, Sprott's fund premiums dropped somewhat, while CEF's discount improved.
The physical ETF premiums are more or less even, Shanghai premiums are disappearing, and GLD ETF has put in two straight weeks of increasing gold holdings. COMEX registered gold is still dropping, however, so I'll label the supply situation as mixed. Overall, rising prices appear to continue helping the gold physical supply situation, but let's call the supply situation mildly gold-price positive.
I have an explanation for negative GOFO rates later on in the report.
The COT report for gold shows the Producer category reduced both long and short exposures this week, with long exposures dropping more than the shorts, netting out to a drop of 5,000 contracts or about 5%. Managed money more than made up for this by dropping shorts and increasing longs by a net of 10,000 contracts, a big move. Smart money is taking some profits and managed money are both covering shorts and increasing long exposure. Positioning is still bullish.
Moving Average Trends [20 EMA, 50 MA, 200 MA]
Gold: short term UP, medium term NEUTRAL, long term DOWN
Silver: short term UP, medium term UP, long term DOWN
Gold this week moved from medium-term down to neutral, and silver moved from medium-term neutral to up. Things continue to look good for PM from the trend perspective; even if PM were to track sideways, the moving averages would continue to move up.
GOFO, LIBOR, and Gold Lease Rates
Negative GOFO rates have been considered by some to be the harbinger of an imminent default at the LBMA. In some sense, the question to be asked is, how on earth could Gold Tomorrow be worth less than Gold Today except as an indication of a potential default in the offing. But is an impending default the only reasonable explanation?
Looking at history, I've concluded that negative GOFO rates are not a sign of a coming gold-supply-apocalypse, but rather an artifact of an increasing Gold Lease Rate (GLR) combined with a very low LIBOR rate. Viewing charts of GOFO without understanding LIBOR's movements are potentially deceiving. Since GOFO = LIBOR – GLR, as LIBOR moves closer and closer to zero, GOFO = -GLR. And, the 6 Month LIBOR is at its all time low of 0.39% – it has never been lower than this in the history of the timeseries. This simple math means, if the GLR moves above LIBOR [and historically the GLR was often > 1% from 1990 – 2002], GOFO goes negative. If LIBOR had been 0.39% during the 1990s, GOFO would have been negative for all of that time.
My conclusion: negative GOFO rates are all about an all-time-low LIBOR, combined with a mildly increasing Gold Lease Rate. A GLR over 0.40% is nothing historic; therefore the "historic" negative GOFO rates are all about LIBOR's historic lows along with some mild moves in the GLR.
I'm not saying a supply shortage does not exist. All I'm saying is, negative GOFO rates aren't "smoking gun" evidence of this with LIBOR at 0.39%.
Why Did Gold Lease Rates Increase?
So half the story is about historically low LIBOR rates, and the other half is about an increase in the Gold Lease Rate. The next question is, what made the GLR rise? Perhaps its an impending default at the LBMA?
This article describes gold leasing and its associated mechanisms. http://www.silveraxis.com/commentary/gold_silver_leasing.pdf. One excerpt I found possibly explanatory is the following section:
3) Gold mining companies can upset the gold swap market and create conditions that make it lucrative for banks to engage in gold "leases" and other transactions as a result of mining company hedging activities that create an artificial short supply of futures and forward contracts, thus depressing the Gold Forward Offered rate.
Translated, that means when mining companies in aggregate start to hedge more, they dump a bunch of short futures contracts onto the market further out in time than the front month contract, depressing the price of "gold tomorrow" vs "gold today" – exactly what we are seeing right now in negative GOFO. I believe that mining company hedging is causing GLR to slowly rise.
How does this work mechanically? One futures contract instance exists for each month in the future. You can't have a futures contract without an expiration date: December 2013 Gold is the current front month. So presumably, a mining company that wants to lock in gold prices (and thus assure themselves of a profit) would sell a number of contracts at different dates further into the future than the current month.
Imagine a company completely hedging a 1 million ounce annual production: it would have to sell 833 (100-oz) contracts for each future month; 833 Jan 2014, 833 Feb 2014, 833 March 2014, approximating the expected production rate of the mine. This additional "supply" of futures contracts would depress future prices relative to current prices. If enough companies did this, "gold tomorrow" would eventually end up being worth less than "gold today" especially with the absurdly low LIBOR rate. Perhaps a month ago, Dan Norcini at http://traderdannorcini.blogspot.com/ talked often about miners increasing their hedging as a result of the gold crash, using evidence he found in the gold COT reports at the time.
From a business perspective, this sort of activity makes sense. If you ran a gold mining company, perhaps you too would find it worthwhile to lock in a slightly lower price that guarantees you a profit, rather than gambling your job and your company's life on an uncertain future price of gold which might well end up with you and your friends on the street if the price of gold were to tumble further. Hedging is all about risk reduction, and that's not a surprising reaction after a 30% downside move.
There may be other things going on besides mining company hedging, but I believe it is a reasonable explanation for the mild increase in the GLR.
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Your discussion of the GLR/GOFO/GLR is not correct. It is not a two way math equation. GLR (gold lease rate) is the artifact of GOFO and it can never be the other way around. GLR is not the rate at which you lease gold. It is a measure of profitability for the arbitrage of LIBOR vs GOFO. It is not a two way math equation. GOFO Is a market set rate. LIBOR is a set rate. GLR is a meaningless abstraction of value only to derivative traders and arbitragers. It is not the rate at which you lease gold. GOFO is the only important number for gold and it stands alone. You can construct "what if" scenerios based on the GLR and LIBOR all day and all night but they will never give you any insight into the the actual rate of interest you will recieve, or would have been given, loaning your gold out.
If you want to say GOFO is complete horsepoo. Ok. I cannot argue with that. But to use GLR in the way you are using it is like saying you have to drive 300 miles on one tank of gasoline, but there is only one gallon in the tank. Therefore 1 gallon goes 300 miles.
I also want to add that backwardation means nothing compared to GOFO. If I thought the market was trading freely and the backwardation was bigger, I'd rethink it. BUt the futures market is a joke. What matters is that I get an interest rate paid to me for taking a loan is fiat and using gold as collateral, instead of paying interest on taking loan where gold is collateral. And that is what negative GOFO is.
Thank you thank you thank you. I was reading the latest davef propaganda piece this morning and thinking exactly the same thoughts as you but was on the way to the beach I am so glad to see someone else in here fighting the good fight for truth. Few can stand up to the subtle manipulations of our resident banker mouthpiece davef. Even our beloved proprietors don't see it.
ikoch, Jim –
I find that when a line of reasoning runs counter to the long-held biases of certain individuals, they call it propaganda or engage in name-calling, etc. Argumentum ad homenim clearly is convincing for the choir, but I do not find it compelling. And my portfolio really isn't impressed.
I think I'd have an easier time with a trader such as Dan Norcini, who would be able to follow the argument I made without resorting to arguments like "hey, you can't use math that way", "the futures markets are a joke", or "you're such the banker mouthpiece." Dan understands the futures markets cold, you can see that in every line he writes. If he disagreed with what I said, he'd do it on the merits, and thats the kind of discussion I love having, because it can only lead to the truth coming out.
I would dearly love to find a smoking gun that I can prove to my satisfaction. That woud give me an advantage. Morever, it would be really fun to write about! Lastly, my core position would be really happy if we did have an LBMA default, so I really am predisposed to believing such things. Unfortunately over the years I have grown allergic to seeing red in my portfolio, so I can no longer simply believe things without proving them true or false on my own.
Its why I calculate the NAV myself, rather than trusting the website. Why I calculate the premiums in Shanghai myself. Why I validate trading strategies such as "buy in NY, sell in London" (it works, but unfortunately not well enough). I've found about 30-40% of the stuff out there is just faith-based Cargo Cult bunk. That is why when someone comes up with a claim, I have to prove it to my own satisfaction before I actually put real money on a trade based on that claim. It takes more work, I have to write a lot of code to do it, but – the truth can set you free. Or in my case, possibly make me money. Or at the very least, avoid actually losing me money.
Ikoch, Jim – you want a discussion on the merits?
Naturally if you think "the futures markets are a joke" that short-circuits any sort of dialog and obivates any need to understand how they work. But if we notice that the futures markets set the price of gold these days, and the price of gold is something of interest to you – perhaps such a discussion becomes more worthwhile.
Things you might consider: how do short term interest rates affect cost of carry? Where are short term rates now? How does cost of carry affect the likelihood of backwardation? What the heck IS cost of carry anyway? How does futures supply affect futures prices? How does all that stuff fit together anyway?
DaveF.. you got caught treating the relationship between GOFO and GLR as if it is a two way chemical equilibrium… it is not. And you did it as a means of brushing of the consequence of negative GOFO, as if it really didn't represent the scarcity of Gold available for immediate delivery. If someone here, usually myself, is not constantly on you, you always seem to revert back to any kind of reasoning that will obscure the truth of Gold's scarcity, rather than face it.
From Dave Kranzler, who posts as Dave from Denver and also on Seeking Alpha;
First, I want clarify some confusion about the GOFO and the gold leasing rate. Most analysts are incorrectly referring to the GOFO as the gold leasing rate [GLR]. In fact, there is a subtle but distinct difference between a dollar/gold swap and a gold lease transaction. Technically, the GLR = LIBOR – GOFO. GOFO is the rate paid on a dollar/gold swap. In other words, someone with gold needs to borrow dollars short term and uses the gold to collateralize the loan, thereby achieving a lower interest rate on the dollar loan. The market sets the rate for that swap and the LBMA publishes the rate (link above).
A gold lease transaction, on the other hand, is one in which a Central Bank leases out its gold to a bank, the bank pays the lease rate to the Central Bank and takes the gold and sells it in the market. The bank then gets use of the cash from the sale proceeds. In general, gold lease transactions are much longer in duration than dollar/gold swaps. The gold lease transaction was started as a "carry trade" of sorts when gold was in its 20 year bear market that started in 1980. The lessee leased the gold from a Central Bank, paid a small rate of interest then sold the gold and used the cash for higher yielding investments. When the lease term expired, the bank could repurchase the gold at a lower price, making money on the sale/buyback plus "carry" on the cash, and return the gold to the Central Bank.
A dollar/gold swap might appear to look like a lease transaction when the GOFO is negative, because the entity with the gold is swapping out its gold in exchange for cash collateral up front and is being paid a rate of interest on the gold for the swap. But a dollar/gold swap is not a lease. In a lease transaction, the entity with the gold does not receive any cash up front, but must bear the market risk of the gold being returned when the lease expires. As you can see, a lease transaction, because there is no collateralization of the gold loan, involves counterparty risk that is not embedded in a dollar/gold swap. In fact, in a bull market for gold, the lessee will lose money on the back-end of the lease transaction, as it will have to buy the gold back at a higher price. If the lessee defaults on the lease, the lessor does not have the benefit of cash collateral. In a dollar/gold swap, the both sides of the transaction have collateral.
The fact is, the future's market for Gold has become a joke. It has devolved into a big circle jerk where the bullion banks deliver to other bullion banks… mostly at this point JPM is the one taking the deliveries into its house account. As well, since DaveF likes charts so much, I will repost a chart that I saw on Jesse's site that is the best single representation of the joke that Comex has become (look down at the bottom to see the dramatic degrade in the Comex' ability to actually deliver Gold should holders of futures contracts want it delivered… worst situation by far in the last 10 years). There it is, in black and white… and it says, "THE COMEX IS A JOKE". I don't know if the Comex will default or not.. it does not really matter.. it's relevance is waning as can be seen by the decreasing open interest.. which kinda makes sense based on the obvious lack of ability to deliver in size.
So DaveF… Don't make it out like I am trying to get points here (the choir and all).. I don't really care if anyone here at PP.com likes me or not. I am here for me and I have evolved past the point where I care what others think of me … this is where I have landed, and if you say stuff that is wrong, expect that you will hear about it from me, or that I will pile on when some other intrepid seeker of truth inserts him or herself.
The truth, and the direction your portfolio will move Monday are not necessarily the same thing. I have nothing against technical analysis. The truth is hard to devine because the powers that be are so hard at work to obfuscate it in their pursuit of perception management. In their pursuit of centrally managed markets. Let's close with a quote from David Stockman's recent book, "The Great Deformation", Chapter 33, which was my beach reading today;
Alas, none of these solutions are even remotely possible within our now fully corrupted constitutional framework. The latter is no longer a system of democratic choice and governance; it is a tyranny of incumbancy and money politics. As such, it has set in motion a financial doomsday machine that is inexorably speeding toward national fiscal insolvency and monetary collapse
Got Gold and Silver?
Hey, happy to see all the charts. You're right, I love them because they provide context. Picture = 1000 words, etc.
Your quote from Dave didn't address my central point: namely that gold backwardation could be caused by increased mining hedging combined with extremely low interest rates. I'm puzzled why you thought it did – perhaps you didn't understand the case I was making?
Regarding why you think COMEX is a joke, as I understand it, your issues are threefold: 1) JPM is now taking delivery of gold and has been for the past month or so, 2) COMEX registered gold is dropping – to the lowest level since before 2003, and 3) open interest in gold futures has declined from a high of 60M oz to its present level of around 40M oz.
JPM has been taking delivery of gold. They're also net long. This is a curious matter, and I suggest, a bullish sign. I don't interpret it as COMEX being a joke, I think its gold-price positive. Same with COMEX registered gold dropping: its gold price positive. Someone has to go out there in the market and refill the COMEX. I hope it goes to zero, but I think JPM & crowd will take delivery from all the hedged miners and the gold will return. They'll find some way out of the trap, it is in their interest to do so, so I'm betting on them to figure out the details. They've managed to completely escape prosecution for all their fraudulent acts before, during, and after the crash. I think they'll manage COMEX. But if they don't, I'll get well anyway. Core position and all.
I do think its curious timing that COMEX registered is so dangerously low at the same time JPM is net long. I wonder why that happened? Think JPM's position benefits from this? I do. I think when those guys are concerned, I don't believe in coincidences.
The drop in open interest? Sure, I can see that as good evidence that COMEX is losing influence, that overall argument makes perhaps the most sense to me. One of those long term things that will play out in the fullness of time, and something to keep an eye on. I'd like to see the same chart for LBMA, and see how they're doing. If they are declining too, that would be interesting to know as well. Maybe I'll add that chart to my longer term meta watchlist.
But at the end of the day, the rubber meets the road in prices. And right now, gold prices worldwide really are guided by COMEX prices, regardless of all the evidence you provided. As we saw after the crash, the worldwide gold arbitrage brings them closer together. All that gold moving out of GLD and off to Shanghai to collect on that $30 premium: that's the market doing its thing. Gold doesn't have to come from COMEX registered for it all to play out properly. COMEX prices affect GLD and the LBMA, and almost certainly vice versa – and physical gold gets sucked out of wherever it can be obtained and sent off to Shanghai, problem solved. And that flow stops happening when prices rise. Perhaps GLD gold and LBMA gold should be included in COMEX registered gold, because its all linked together. That seems to be how it works in reality anyway.
So while this state of affairs continues, I'm going to acknowledge reality and that is that worldwide gold prices are currently set by COMEX interacting with LBMA interacting with GLD. Once they start to meaningfully diverge, my core position is there to make sure I'm laughing at the COMEX joke right alongside you. But not until then. And if that never happens? That's ok with me too, I will take what comes.
In the meantime, I'm looking for those divergences. And I certainly hope if you notice them, you'll post about it.
As for obfuscation in markets – truth in markets is always tough to discern. Every market is trying to deceive you, all the time, 24/7. Not just gold, not just equities. Its just how they work. Think about it. If reading the markets were a simple matter, it would be called "collecting money and getting rich" rather than trading. Most think all you need is to be smart and understand "the real story" and doing well in the markets is a simple matter. [In actuality and in aggregate, that's just the definition of dumb money] Turns out, there's real skill involved that takes time and focus to learn. The emotional manipulation bit is the worst part, and its been designed in by the big guys at the start. All markets do this to their participants. If we imagine that gold is some special case here…really, its not.
And to make matters worse, our friends at the Fed have been frantically manipulating stuff all over the place for the past…well it seems like forever, but its gotten worse over the past 5 years. Jawboning, printing money, buying stuff, wanging rates around – all of it, distortionary and manipulative. And these days, if its not a Fed meeting, its a Fed president speaking, or Fed minutes being released. I'm sick to death of this worshipping at the Fed Altar, and I hope someday it will stop.
But in spite of it all, trend-based trading really does still seem to work more often than not. And I'm all about going with what works.
One last point. As far as the big money goes, guys who know, don't talk about it, or if they do, its entirely self-serving in order to benefit their own position. They are operating under the poker-player's motto: "don't tap the glass." The market needs dumb money so that smart money can continue to get rich. So every time I read about how JPM can't possibly get out of some pickle they're in, and all the while JPM is net long, I imagine their trading desk is laughing after work, reading selected passages from various websites, talking about dumb money, and making darned sure that nobody on the desk taps the glass.
I really enjoy hearing facts presented by intrepid seekers of truth, like you did here. Thank you.
The Obama administration is reportedly proposing Cass Sunstein as a member of a panel to review the surveillance practices of the National Security Agency (NSA), among other former White House and intelligence staffers. Sunstein was the head of the White House’s Office of Information and Regulatory Affairs until last year, when he returned to teaching at Harvard Law School.
While at Harvard in 2008, Sunstein co-authored a working paper that suggests government agents or their allies “cognitively infiltrate” conspiracy theorist groups by joining ”chat rooms, online social networks or even real-space groups” and influencing the conversation.
The paper also suggests that the government “formally hire credible private parties to engage in counterspeech.” That sounds an awful lot like the 50 Cent Party of online commentators who are paid per comment by the Chinese communist party to sway public opinion.
We can seek the truth together if you want to. It's up to you.
Well I'm relieved to know I seem real! I was worried there for a bit.
I totally believe that the government and other organizations have hired credible private parties to engage in counterspeech. But it does not therefore follow that all credible private parties that happen to disagree with some aspect of your belief system are government-employed counterspeechers!
I can't possibly prove my innocence to your satisfaction. All those accused Communists ran into the same thing during the McCarthy witch hunts in the 50s. Ever tried proving innocence? It's not possible. Someone thoroughly wedded to their worldview will assume that any evidence presented is simply proof of a really excellent set of cover stories. Think about it. How could I possibly convince you to your satisfaction that I am who I say I am? Seriously. What's your list? I lived in the the bay area for a couple of decades, I have lots of friends, lots of places I've worked, a friend of mine is the Vice Mayor of Sunnyvale (!) – but then again, it might all be just an incredibly thorough cover story concocted just to convince Jim H (indefatigable defender of truth and freedom) that this Dave guy (likely evil banker mouthpiece) really is a real person.
Furthermore, it does not appear to be in your interest to believe that I'm real. If I am real, then you have to consider the possibilty that someone intelligent doesn't believe in exactly the same thing that you do. We really do seem to agree on most things – but this issue of my "reality" always comes up when I challenge one of your belief systems. The possibility that I enjoy challenging belief systems in my search for the truth – nah that couldn't be it. Better to assume I'm just some clever and subtle agent provocateur, since it allows you to instantly dismiss what I say without seriously engaging in discussion.
Its all very curious to me, knowing the truth of my own life's story as I do, and yet knowing that it is impossible to prove. It is a constant reminder to me of why we have that 5th Amendment to the Constitution. Those Founding Fathers were smart guys.
I will say this though. Inside, I am definitely flattered that you think I'm some well-paid government COINTELPRO agent. The truth is far more mundane…ultimately disappointing…perhaps I should just let it all rest…Of course, that's exactly what a real counterspy would say!