“Perhaps gold is being used as collateral for margin and cash liquidity, sold by counterparties to bring the price lower, leading to margin . . . → Read More: Survivor Bias and TBTF Tyranny]]> London Banker “has been a central banker and securities markets regulator during a varied and interesting career in global financial markets” and is a very credible commentator IMO. From his latest:

“Perhaps gold is being used as collateral for margin and cash liquidity, sold by counterparties to bring the price lower, leading to margin calls for even more. A crisis arising from a major default (Greece, Portugal, a huge bank) would force the price lower still, when the collateral would be exercised on default. Following on, the price might rocket again to enable the conspirators to seize outsize profits. Just a scenario, mind you! (Although, I note that Lehman’s counterparties reported record profits through much of 2009.)

What is left of the global markets becomes a game of engineered survivor bias. Only those operating outside the law and with unlimited regulatory forbearance can win while the rest of us lose.”

Some may remember my comments on FOFOA blog about how “Bullion banks are like spiders in the center of a web. They can feel the twitching of the flies in the web and determine the mood of the market better than anyone else and often in advance of others.”

London Banker again: “Their top down view of clients’ trading and custody portfolios and cash positions and flows puts them in a position to exercise tyranny. They can game their clients, taking advantage of superior information, credit and liquidity to ramp or crash targeted markets as needed to precipitate a crisis.”

In other words, it is not just about avoiding debt (or its variant, leverage/derivatives) but also avoiding having most of your positions and trading with one bank.

Reading this stuff makes me comfortable that the Perth Mint will be one of the few left standing after all this is over. We don’t engage in speculative trading/risk taking and the AAA rating means we don’t have to beg and put up collateral with banks to be able to do the covering trades and other transactions necessary to keep the business running.

In the coming flight from risk, it won’t just be about moving to cash (and hopefully many moving to precious metals), but it will also be about a flight to riskless/conservative counterparties. The problem for those looking to store precious metals is that at that point the Perth Mint is likely to run out of capacity – both in physical storage and also insurance (as we fully insure – few others do). All that will be left then is personal storage, which won’t be a problem for those with small holdings. But for those with multi-million dollar holdings it will be tough as there aren’t many non-bank fully insured custodians.

The lesson is to prepare now, which I’m sure all my readers have, as it is going to get nasty.

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” It’s important to try and keep a sense of balance because the way things trade, particularly in silver, it’s easy to get fixated upon an idea and to . . . → Read More: Emotions, Premiums and Backwardation]]> Good interview between Jeff Lewis (silver-coin-investor.com) and Grant Williams (vulpesinvest.com). Grant makes a very good point on emotions influencing how events are interpreted (my emphasis):

” It’s important to try and keep a sense of balance because the way things trade, particularly in silver, it’s easy to get fixated upon an idea and to blame every move on that particular idea. In the case of silver, the big theory about silver is the manipulation of the COMEX futures. … It’s a dangerous game to sort of ascribe every single move in an instrument to a construct that has yet to be proven beyond any doubt. While I suspect there is definitely something untoward going on the silver futures as Bart Chilton has intimated in his comments this past year. I think it’s a very dangerous game to not have a balance, to just simply look at the way markets behave, look at the extraneous events that may have an effect and cause the de-leveraging or liquidation and to try and get a more rounded picture of why something moves now.”

Later he says what the extraneous event was:

“I think a lot of that downdraft we saw in both gold and silver going into year end, was just people who are having to raise cash and selling the thing that they had a little bit of profit built into. Now, once they start going down, the shorts are going to press that; and so these falls get a lot more vicious than perhaps they would be in just an orderly market where people were looking to sell a bit of precious metals to raise some cash for year end. But as I say, you have to try and take your emotions out of this thing.”

Interesting here that Grant says that the initiator of the price drop was year end selling, which was further “pressed” by speculators. I made a similar point in this corporate post when talking about bullion banks being aware of falling Indian consumer demand. My point, and Grant’s, is that not everything is a manipulation (as in being initiated by speculators) and sometimes speculators are just riding a physical market trend. Don’t drink the Kool-Aid (or should that be “Silver-Aid”) of the pumpers which blame every price drop on manipulation but who never question any price rise.

As Ted Butler says (my emphasis) “… when silver experienced two separate 35% price declines in a matter of days. Such a decline in a world commodity for no observable supply/demand reason is unprecedented and I would say impossible in a free market.” Same applies when you have the London AM Silver Fix increasing 20.1% over 24 hours from $10.77 to $12.93 on 18 Sep 08 (note: I can’t find two 35% price declines in London Fix data, Ted must be talking intra-day).

Some who has been drinking the Silver-Aid is Tyler Durden with the silly headline Physical Silver Surges To Record 30% Premium Over Spot, In Backwardation. Regrettably, it was picked up by Money Morning Australia (from whom I’d expect better), to which I left this comment:

“What that chart tells us is that PSLV is a closed end fund with some possible tax advantages with good marketing, hence the premium. In the real physical wholesale silver market which is not constrained by a limited number of shares, Perth Mint is not having any problem acquiring, or selling, silver at spot.”

Tyler must be drinking a lot of Silver-Aid or desperate to alleviate the cognitive dissonance of a circa 25% increase in COMEX silver warehouse stocks since mid-2011 to claim that a stock exchange listed trust is as good as and representative of cold hard physical in your hand.

Further proof that Tyler is suffering is his conclusion that the backwardation discussed in Keith Weiner’s appended article “means, although for those who like the punchline here it is, as above: shortage” when, if you read Keith’s good article, he says at the bottom that (my emphasis) “In a normal commodity, backwardation means shortage. … But in gold and silver it means something else entirely. People have the metal. But for whatever reason(s), they choose not to take this free money. In the silver market right now, trust is in short supply.”

Why everyone thinks that Zero Hedge is a credible source when in this example (and I have others) he can’t even understand that Keith is saying there isn’t a shortage of metal, there is a shortage of trust. I covered this idea in the Gold Standard Institute’s 2009 Canberra seminar (I’ll post up the points from the presentation shortly for those interested).

I’ve left this comment on ZH, let’s see what comes of it:

“Perth Mint does not incur any premium when it pulls physical out of London. Whoever is feeding you that is making a fool out of you. If you really are independent and after the truth, more than happy to chat with you anytime – you have access to my email in my profile.”

There are plenty of good reasons to hold precious metals I don’t know why people resort to this shortage and premiums meme – maybe it is just a simple idea easily understood and communicated compared to some more intellectually dense analysis of the market’s supply/demand/stocks.

Anyway, to finish on a more upbeat tone, here is Grant again:

“… we are left with an awful lot of strong hands holding silver now. I’m here in Asia, the futures price is really more of an irrelevancy. Over here it’s all about physical metal both in gold and silver and so we see a lot of buying of physical metals here in Asia when the price comes down on the COMEX and we see premiums expand because it’s very tough to get delivery.”

I focus on the base trend for precious metals and see it driven by increasing numbers of strong hands. The day-to-day volatility (down AND up) is driven by leveraged money of speculators and hedge funds and bullion bank prop desks. I’d suggest ignoring that volatility, otherwise you waste too much emotional energy stressing about it. Just buy your PMs (or dollar cost average in) and forget about it and relax. That’s what insurance is for.

And from the “who can make the most dramatic price forecast” department comes The Possibility of $1,000 Silver before Hyperinflation. Has anyone made a higher . . . → Read More: Gold The Most Explored Mineral Commodity]]> Got a post up on the corporate blog on how 50% of all money spent on non-fuel mineral exploration during the last 15 years was spent on gold exploration.

And from the “who can make the most dramatic price forecast” department comes The Possibility of $1,000 Silver before Hyperinflation. Has anyone made a higher call?

To save you reading the whole article, here is the key logic behind the headline:

“…with gold at this relatively conservative top of $10,000 – if silver is at its historic 16:1 average in relation to gold – silver will be $625 per ounce. We have also explained above how it is entirely possible for silver to overshoot this 16:1 average, which is normally what happens when a trend has been misaligned for such a long period of time. If silver does reach a 10 to 1 ratio as it has done before at different times throughout history, then we would be seeing a price of $1000 per ounce…”

I suppose when you start off with the assumption that $10,000 gold is “relatively conservative” then $1000 silver is not far behind.

The key “gotcha” is in the headline: “before Hyperinflation”. That is not a situation in which you want to trade your silver for $1000 of soon to be worthless fiat.

Looks like the much hyped Pan Asia Gold Exchange is dead. Not sure where this leaves those who claimed that it “will ultimately destroy the remaining short positions . . . → Read More: Is PAGE dead on PBOC ban on non-Shanghai gold exchanges?]]> Mineweb (ex-Reuters) is reporting that “Gold exchanges in China outside of two in Shanghai are to be banned, authorities said in a statement released on Tuesday.”

Looks like the much hyped Pan Asia Gold Exchange is dead. Not sure where this leaves those who claimed that it “will ultimately destroy the remaining short positions in both gold and silver”.

I will come back to this story but for the moment I want to see how the pumpers and hype merchants spin it, or unspin what they said before.

I also find it interesting that this story breaks at the same time as China Daily reports that “China should further diversify its foreign-exchange portfolio and make more gold purchases when the metal’s price dips but is still at a relatively high level, a senior central bank official said on Monday.”

What is China’s game re gold? How can we weave these two stories into a coherent explanation?

This capability was the key differentiator of GoldMoney to other online precious metal storage businesses. It . . . → Read More: GoldMoney is no longer Gold Money]]> Digital Gold Currency Magazine is reporting that GoldMoney is suspending the ability to make and receive payments in precious metals to or from other GoldMoney customers due to the “global increase of compliance requirements for payment service providers.”

This capability was the key differentiator of GoldMoney to other online precious metal storage businesses. It is an unfortunate development for gold standard advocates.

The decision was not entirely driven by increased regulations as GoldMoney also indicate that “our customers’ use of the metal payments and currency exchange services is not significant.” Looks like a case of disporportionate compliance effort for GoldMoney on something that didn’t drive business.

Interesting then that customers have voted and said they aren’t really interested in gold as money. Possibly this may change if those customers are faced with high inflation or banking system instability, but it will be hard for GoldMoney to restart the functionality and catch up with any regulatory requirements in place at the time (assuming there is any regulatory tolerance for alternative payment systems at that time).

Freegold anyone?

Do you remember the stories about HSBC clearing out space in their vaults, or JP Morgan building new vaults? What could be the explanation for this if the aggregate gold stock is so stable? Then it occurred to me that unallocated storage is much . . . → Read More: FOFOA, New Vaults and physical/paper price]]> A couple of weeks ago FOFOA made the following statement:

Do you remember the stories about HSBC clearing out space in their vaults, or JP Morgan building new vaults? What could be the explanation for this if the aggregate gold stock is so stable? Then it occurred to me that unallocated storage is much more space-efficient because the gold sits stacked on pallets. Allocated gold often gets put into cubby holes to assist in recordkeeping. That takes up much more space. So the process of allocation after many decades of non-allocation requires an expansion of vault space. This is how I now interpret these stories.

I left a comment suggesting other reasons for new vaults:

1. Investment’s share of demand vs jewellery/industry is much higher now compared to past, thus more going into vaults rather than around necks.

2. ETFs and others (eg Goldmoney) share of investment demand vs coin/bar is greater compared to past, thus more going into vaults rather than backyards.

3. Industry consolidation during gold bear market meant vault closures and thus increase in utilisation of remaining vaults, leaving less spare capacity to absorb above factors before new vaults were needed.

Just to clarify that last point, say there were 10 vaults with capacity of 100oz but each was only holding 60oz. Total spare capacity is 400oz. Then you have 3 vaults close during gold’s bear market and metal is moved into the remaining 7 vaults. You now have 600oz in 7 vaults, leaving only spare capacity of 100oz.

Another point is that allocated metal is not “often gets put into cubby holes”. Allocated does not rely on physical segregation by client. For example, you can have a pallet of 32 x 400oz bars with 32 owners of each specific bar number on that pallet. My guess is that except for all but the most paranoid client (mostly likely central banks), most allocated at bullion banks is held this way, rather than piles segregated by client.

I also forgot to mention that my guess is that the amount of physical supporting unallocated metal accounts with bullion banks has increased, that is the fractionalisation has declined. This puts further pressure on vault capacity.

Evidence for this is that whereas unallocated accounts were free a number of years ago, there is now a small fee on unallocated. My guess is that the physical turnover/redemptions have increased in line with a more busy gold market and thus bullion banks have needed to hold more physical to back their unallocated to deal with day to day fluctuations.

Of course it could just be the banks going for a fee grab if they felt their clients would just accept it.

And while I’m doing posts on my comments on FOFOA’s blog, here is another for those who don’t follow the FOFOA blog comments closely – and I can understand that considering some posts get 400+ comments (link here):

Re 1) [major refiners would start posting their own price for physical gold, having their own auctions, making the trading volume public], that is what the Perth Mint already does. The 5 tonne or so per week we refine is currently auctioned. Settlement can be full cash, but mostly is done in London paper gold plus a cash premium. I just watch this premium, it will tell me when paper gold has really disconnected.

BTW, miners sell their metal to us either for cash or swap for paper gold (which they then on trade).

The system will break when miners find few willing to take their paper gold or the price offered is much lower than what we will pay. And in that situation we will always be after to better the offers they get because we are getting better prices for the real physical at the other end.

Because the Perth Mint stands as intermediary between physical buyer and physical seller, the miner is always informed as to the real price of gold.

We are not reliant on the London market to tell us the price, we make a Perth price every day. However currently London is a convenient settlement mechanism for us the miners and the buyers, but it is just to help the flow.

There is also a very good video of why gold was (is?) favoured as money over other elements/metals in this post The Science Of Gold

And in response to this cheeky question from JR re that . . . → Read More: Has Gold’s Uptrend Been Broken?]]> I have a post up on the corporate blog featuring a Sharelynx log chart of the gold price.

There is also a very good video of why gold was (is?) favoured as money over other elements/metals in this post The Science Of Gold

And in response to this cheeky question from JR re that post “Is the Perth Mint claiming that gold is money due to its unaltering quality!?”, the answer is No. The “What others are thinking” category on the corporate blog is for non official views and maybe the wording “gold is all but unrivalled as the outstanding candidate for money” could have been a bit more qualified in retrospect.