By Bron Suchecki, on September 16th, 2009
The article Scotiabank and the Real Silver prompted me to have a closer look at their 2008 Annual Report. Two interesting quotes (note all dollars are Canadian):
“In Scotia Capital, revenue declined by 25%, due mainly to charges relating to the Lehman Brothers bankruptcy, valuation adjustments and generally weak capital markets. These were partially offset by record foreign exchange and precious metals trading revenues, and strong growth in corporate lending.” (p28)
and
“Precious metals trading revenue was a record $160 million, an increase of $44 million or 38% over last year, with higher revenues recorded in each of our major centres.” (p30).
Not surprising to see strong precious metal results from Oct 2007 to Oct 2008 (Scotiabank’s reporting year). What I did find interesting is the observation by ispeakofpeak that Scotia’s gold and silver certificates declined from $5,986m to $5,619m (p122), a 6.1% drop. This drop would reflect both changes in precious metal prices as well as changes in ounces held.
Unforunately, Scotia do not provide a breakdown of how many gold or silver ounces made up the certificate dollar total. But we do know that Canadian dollar gold prices were up 18% from 1 Nov 07 to 31 Oct 08 and that silver was down 14%.
If you think about it, assuming all the certificates were gold, then if the price was up 18% but Scotia’s value dropped 6.1%, they must have lost a lot of ounces. On the other hand, if it was all silver, then as the silver price dropped 14% yet Scotia’s value dropped only 6.1%, then they must have had an increase in ounces of silver.
Either of these would not be correct – there must be a mix of gold and silver. For sake of example and to put some numbers to it, lets assume for every $1000, $500 was gold and the other $500 silver. This is not unreasonable, I have seen many clients make this sort of “portfolio allocation” when buying precious metals. A 50:50 split by value works out as:
Gold Oz 2007: 3,996,336
Gold Oz 2008: 3,179,160
Change: -817,176
Silver Oz 2007: 220,173,903
Silver Oz 2008: 240,380,913
Change: 20,207,010
First off, some pretty impressive ounce totals, that would put them up there in my gold and silver league tables, if they were prepared to publish their actual ounce numbers.
What I do find interesting is that they lost gold at a time when everyone else (ETFs, GoldMoney, etc) were gaining. And it does not matter what you assume the split at. If you chose 75:25 gold:silver, or 25:75 it may change the amounts of gold and silver, but it still results in a loss of gold and a gain of silver.
Another interesting observation is that on their balance sheet they list Precious Metals at only $2,426m ($4,046m for 2007, p106). So dollar value precious metal liabilities only down $365m, but precious metal assets down $1,620m. This means that in 2007 they had 68% of their liabilities covered by physical but in 2008 only 43% cover.
If we look to their derivatives, p150 shows that “Foreign exchange and gold contracts, futures” with 1 year or less maturity were $2,602m out of a total of $4,239m. Gap between 2008 precious metal liabilities and physical assets was $3,193m. Conclusion: remaining 57% covered by COMEX futures and/or over-the-counter forwards. 
By Bron Suchecki, on September 15th, 2009
Steve Keen is an Australian Post-Keynesian economist credited as having “seen it coming” in this survey of research by economists or financial market commentators. Keen was one of only eleven researchers who qualified, which included Schiff, Roubini, and Shiller.
Steve Keen is a follower of Hyman Minsky’s “Financial Instability Hypothesis”, which he summarises as:
1) Capitalist economies periodically experience financial crises;
2) These are caused by debt-financed speculation on asset prices leading to bubbles in asset prices;
3) These bubbles must eventually burst because they add nothing to productive capacity while increasing the debt-servicing burden;
4) When they burst, asset prices collapse but the debt remains;
5) The attempts by both borrowers and lenders to reduce leverage reduces demand and causes a recession;
6) If the economy survives such a crisis it goes through the same process again, with another boom driving debt up even higher, followed by yet another crash; but
7) This leads to a level of debt that is so great that another revival becomes impossible since no-one is willing to take on any more debt;
 Then a Depression ensues.
A plausible but dismal explanation. Consider this comment on Steve’s latest blog post:
“This is one of the great questions for all of history, how to get out of this. For one thing, one persons debt is another persons asset or in many cases their money. … It is clear that everyone that has something is going to take a haircut on it. Either by a systematic bankruptcy or by a natural one.”
As Steve Keen says:
Some form of price chaos has to be expected though, whatever is done. One side-effect of the bubble has been an enormous dislocation in prices, not just with overvalued financial assets, but also with drastically overinflated incomes for the financial class, and concomitant price distortions all the way through commodities.
How do you protect yourself from this economic World War III? Simply swallow the red pill and step outside the Financial Matrix: bail out of your “has something”s into precious metals and sit by and watch the annihilation as everyone else takes “a haircut”.
By Eldon Mast, on September 15th, 2009
Last week General Motors (GM) announced their new program that further attempts to boost consumer confidence in their vehicles. The money-back guarantee states that you can return the vehicle for any reason, no questions asked, up to 60 days after purchase.
A quote from GM’s press release reads like this:
General Motors announced today that it will offer a Satisfaction Guarantee to eligible buyers of new Chevrolet, Buick, GMC and Cadillac vehicles. The guarantee allows customers to return their vehicle to their dealer between 31 and 60 days of purchase and receive a refund of the purchase price for the vehicle.
GM’s idea is that the program will prove that their vehicles are just as good as their competition. That might be, but there is likely even better consumer news just around the corner and that just might translated to further good news for the auto industry.
As most entrepreneurs will attest it is almost always a good idea to offer a money back guarantee. And so it is extremely likely that several other major car makers will follow suit quickly offering very similar programs for their 2009 and 2010 models. The result? More hesitant consumers will see this as just one more reason to move from a very conservative fiscal stance to one that takes a bit more risk on a big ticket purchase. Why not? There will be nothing financially to lose for up to 60 days.
For GM, there is no guarantee that the program will only boost interest in their vehicles, but it does seem clear that if other automakers follow suit, the auto industry (and the economy as a whole), will likely benefit by this increased second half activity.
By Winton Bates, on September 15th, 2009
In his comments in “The Australian” (8 Sept. ’09) on Paul Kelly’s new book, “The March of Patriots”, Kevin Rudd attempts to make a distinction between the economic reforms of the Hawke-Keating Labor governments and those of the Howard conservative government. Rudd describes the Hawke-Keating reforms as “modernising our economy to make it more competitive in a rapidly globalizing world”. He describes the Howard reforms as “neo-liberalism” or “a form of free market fundamentalism that has little in common with the philosophy and policy of the reforming centre of Australian politics to which we belong”.
This attempt to associate the Howard government with free market fundamentalism is typical Rudd-speak. This time, however, Rudd seems to have spun himself into a corner by also claiming that the Howard government was lazy. Rudd states: “we would describe our opponents as indolent: perhaps not always opposing the great transformational reforms engineered by Labor during its 13 years in office but hardly adding to that reform agenda during their 12 years in office”. Can an indolent conservative government be guilty of excessive zeal in promoting market-oriented reforms?
Peter van Onselen noted this apparent contradiction (in an article in “The Australian” on 9 Sept. ’09). He also updated a table in a book by Andrew Charlton (senior economic advisor to the PM) to enable the economic reform records of the Hawke-Keating, Howard and Rudd governments to be compared. The table suggests that the Howard government made some substantial reforms and that the Rudd government has tended to roll back previous economic reforms. (Unfortunately the table does not seem to be available on line.)
The table prepared by van Onselen is informative, but it would be nice to be able to compare the economic reform efforts of the three governments quantitatively. This is attempted in the chart below using economic freedom indexes constructed by the Fraser Institute and Heritage Foundation.
The chart confirms that the Hawke-Keating governments had strong neo-liberal credentials, but the two indexes provide a somewhat contradictory picture of the Howard government. The Heritage Foundation index even suggests that the Rudd government has made positive contributions to economic freedom. It might be interesting if someone could investigate why this is so and why two indexes seem to tell different stories about the Howard government.
However, while the history is interesting, the future position of the Rudd government on economic reform will be far more important to the future well-being of Australians. The one hopeful sign in Kevin Rudd’s latest graceless contribution is his praise for the reforms of the Hawke-Keating era. When he was elected to government Rudd seemed to want to be indistinguishable from John Howard in all important respects. Then he wrote an essay in which he seemed to have adopted the attitudes and language of Hugo Chavez. Perhaps he has now recognized that it is not necessary to choose between John Howard and Hugo Chavez (to paraphrase some infamous Rudd-speak).
Would it be too optimistic to interpret Rudd’s latest spin as a signal that he has now adopted Paul Keating as his role model?
By Bron Suchecki, on September 15th, 2009
Hat tip to Justin – Gold drops 25%! by Michael Pascoe:
So much for the rampant gold bugs wetting themselves about chart levels and such, never mind the overtime being worked in the mini-industry that exists around promoting gold.
As gold skeptics know, the yellow stuff occasionally has a day in the sun when there’s fear and loathing in the financial system …
But don’t try to tell hard-core bugs that – they’ve long been inured to Shakespeare’s warning that all that glistens is not gold.
I’ve created a new label called “Gold Haters” so I can keep track of them for future reference.
By Bron Suchecki, on September 14th, 2009
Yesterday I was dismissive of the recall of Hong Kong’s gold as significant, but it is another bit of evidence of a shift in central bank attitudes towards gold. Far more significant indicators include (see this MineWeb article):
* China’s announcement that it had moved 454 tonnes of gold into its reserves since 2003
* Central Bank Gold Agreement (CBGA) quota being reduced from 500t to 400t a year
* Russia’s Prime Minister stating that it should hold 10% of its reserve assets in gold
It points to a renewed appreciation of the role of gold in turbulent times. Recalls of gold like Hong Kong may also indicate a reassessment of counterparty risk. Moves to return gold are eminently sensible, of course: what is the point of a country having its gold out of its immediate physical control if everything goes to hell. That is really the whole point of having gold reserves. In a time of war (not that I’m suggesting that is where we are heading) you ain’t going to be able to buy guns or food from another country with your funny paper money.
Some have claimed that repatriation of gold by other central bankers following Hong Kong’s lead will translate into higher gold prices. However, this depends on the extent to which that gold is actually sitting in a vault somewhere or has been lent out to bullion banks. If the former, then obviously there is no effect on the price – the gold is just changing location. If the latter, then it could be potentially explosive if Frank Veneroso’s estimates of leased gold of between 10,000 and 16,000 tonnes are correct.
I would point out that central banks can’t just recall gold mid-lease, they have to wait till it’s maturity. Consider also that the leases will have been made over varying terms, from a few months to a few years, and all at different points in time. This means that all of the central bank leases will mature over a number of years. What the term to maturity of this global lease book is, is hard to say. I’ll have a stab at most of it being 1 to 2 year leases, but am prepared to stand corrected.
So not all of Mr Veneroso’s leases will be recalled immediately, or to be more accurate, declined to be rolled. Plus not all central banks will decline to roll their leases (although that may change depending on how bad things get).
Also, don’t fall into the trap of assuming that all of this leased gold has to be bought back from the market to repay the gold loans. This sort of simplistic analysis is based on an ignorant view that “leasing = bad”. The reality is a bit more complex. To explain, I am going to have to be a hypocrite and be simplistic myself. There are three things someone can do with borrowed gold:
1) Manufacture it into jewellery, coins or bars. Sell these for cash. Use cash to buy replacement gold. Hopefully have left over cash = profit. Repeat many times.
2) Sell the gold. Use the cash to build a mine. Extract the gold from the ground. Repay your gold loan. Hopefully have left over gold. Sell this for cash = profit.
3) Sell the gold. Invest the cash to earn interest. Hopefully gold price drops. Use part of your cash to buy gold. Repay your gold loan. Left over cash = profit.
All of the above are ultimately promises to repay gold, but not all of these have the same risk profile. I’ve ranked them in terms of risk and the first two are materially different to the third. In the first two the gold loan is backed by gold, either in inventory or below the ground.
In the current gold market, one would have to consider the risk of failure low for the coin/bar business – everyone wants the stuff – and I’m sure that central banks, through bullion banks, would not consider these leases high risk and necessitating recall. For jewellery, the increasing gold price equals less sales, so we could expect some business failures, so while these leases are backed by physical it would have to be considered at some risk.
For miners it is a bit more risky. Sure they have it in the ground, but lets not forget Bre-X or Sons of Gwalia. As long as any hedging is modest and loan maturities tied to production, these would also be considered lower risk by central banks.
In the case of the first two it ultimately comes down to the extent that the lease is secured: the first two are not risk free – business ventures do not always turn out as expected. To the extent that they are not secured in some way, central banks would have to be nervous, but not as much as our third category.
In the case of the short sellers, the gold is gone and only cash is left. To the extent that a miner has excessively hedged (did I hear someone say Barrick?), then they are also in this category. The crux of the issue is to what extent have the short sellers put up collateral and more importantly, have the ability to put up more (or the willingness to put up more)?
This collateral issue I will discuss in my next post. My point for the moment is to not get awe struck by the 16,000t figure (or whatever other figure is bandied about) and think it is all going to have to be bought back, and now, and therefore the gold price is going to the moon.
If central bank reassessment of counterparty risk results in requests for leases to be repaid, then it will occur over a number of years as those leases mature. This will manifest itself as a steady stream of short covers, not as a big bang, and be a source of solid “base” demand for gold for a number of years. 
By Trace Mayer, on September 14th, 2009
The silver backwardation has been on-again off-again throughout 2009 and this portends gigantic problems for the worldwide monetary system. Backwardation is a situation where the fiat currency price of a commodity is pregnant with a premium the buyer is willing to pay for immediate delivery. The price of a commodity for future deliver is lower than the spot price. This is contrasted with contango where the spot price is lower than the futures price. Backwardation seldom arises in the monetary commodity gold or the quasi-monetary commodity silver.
QUESTIONS
The depth of one’s intellect can usually be answered by the questions one asks. In our family we have a couple jokes. For example, ‘How big is yellow?’ And, ‘How many kids with ADD does it take to screw in a light bulb? Wanna go ride bikes?’
As my articles are widely syndicated throughout the Internet it is interesting to see the comments they receive. I really wish I had the time to read them all and respond, which I do occasionally, but there are more important things to do. But in preparing this article I decided to review some of the comments from my earlier articles and found it quite humorous.
For example, on 25 Feburary 2009 Cesato remarked, “In my experience backwardation has sooner or later led to a price collapse in any commodity. I’ve never been a long term buyer when a commodity is in backwardation”. On 25 February 2009 silver closed at $13.81 and by 11 September 2009 the backwardation had ended and silver closed at $16.77, a 21.4% gain or a 39.5% annualized rate when measured with the undefinable dollar.
On my article ‘How the Treasury Bubble Will Burst and Why‘ at Seeking Alpha I received a comment from Alan Brochstein, CFA and fellow Seeking Alpha Gold Standard Contributor who provides analytical services for hire. He said, “Trace, sorry, but this makes absolutely no sense…” This is not surprising considering his 8 Dec 2008 article ‘Own Gold? Time to Fold‘ where he stated, “Gold remains a sucker’s bet…” On 8 December 2008 gold closed at $772.25 and by 11 September 2009 gold closed at $1,005.70, a 30.2% gain or a 39.8% annualized rate.
In February 2009 after I observed about two week’s worth of silver backwardation I then proceeded to ask and answer this question:
What if silver trades in backwardation for an extended period? Well, I already answered this question earlier. It means individuals are unwilling to take the risk of holding national currency illusions or the risk of an exchange’s failure to deliver. Potentially the national currency illusions could be pulled into the event horizon leading to the fiat currency graveyard.
The fundamental outlook for the FRN$ has gotten even worse, although there is a case for the FRN$ to rise, and the potential for a COMEX gold or silver delivery failure is a constant specter.
BACKWARDATION SPECTER RISING
The specter of backwardation is rising. The COMEX contracts for Sep 2009 and Oct 2009 had the same settlement price.
Likewise the London SIFO, the Silver Forward Mid Rates, have been trending towards backwardation.
 Additionally, the LIBOR-SIFO is moving toward dangerous territory.
 While silver has not settled into backwardation yet this will be an important trend to watch. Having the physical metal in one’s possession or with a trusted third party like GoldMoney gaining in importance. I would be particularly wary of unallocated gold or silver accounts. Usually silver is a very quiet metal. But when it moves, it moves! About 90% of silver’s price movement happens in 10% of the time.
SILVER IS RELATIVELY CHEAP
SILVER INVESTING GUIDES
For those that are new to the silver market and are considering how to buy silver an excellent book is from Mr. David Morgan of Silver-Investor called Get The Skinny On Silver Investing or Mr. Michael Maloney’s Guide To Investing In Gold And Silver.
CONCLUSION
At all times and in all circumstances gold, silver and platinum remain money. The silver market is miniscule compared to the amount of total tangible and financial assets in the world. Yet silver can never become worthless because it is a tangible asset. As capital continues seeking a safe and liquid home silver is among the beneficiaries. With the Chinese and Indian acquisition of physical silver there will be even more strain on the paper markets for delivery. While silver is currently not as cheap as it was earlier when I recommended buying; the ‘tears of the moon’ is still a decent value.
DISCLOSURES: Long physical gold, silver and platinum with no position in the problematic GLD or SLV ETFs.
By Eldon Mast, on September 14th, 2009
U.S. consumer sentiments since last month indicate a slight upward trend toward greater confidence in the country’s economy. Courtney Schlisserman reports in the Bloomberg Press that projections by Reuters/University of Michigan on “Americans’ perceptions of their financial situation and whether it is a good time to buy big-ticket items like cars and homes” rose 5.2 points, and that consumer expectations for the economy in six months’ time shows anticipation of more than 4 points, to 69.2 just since consumer sentiments in August. While these numbers do not show a huge increase, they do indicate a turn towards optimism at the same time that consumers are more focused on careful spending and paying off debt.
Most economic analysts are tentatively encouraged by this news and even in the shadow of a 9.7 percent unemployment rate, results from a recent Bloomberg News’ survey shows a predicted 2.9 percent annual rate of growth for the U.S. economy through this month. This week’s beige book summaries and other recent indications show second half growth accelerating.
By Ajay Shah, on September 11th, 2009
By Bron Suchecki, on September 10th, 2009
From China alarmed by US money printing quoting Cheng Siwei, former vice-chairman of the Standing Committee and now head of China’s green energy drive:
“Gold is definitely an alternative, but when we buy, the price goes up. We have to do it carefully so as not to stimulate the markets,” he added.
This is a strong contender for my quote of the year.
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