Why Won’t Sprott Buy More Silver For PSLV and crash COMEX?

By Bron Suchecki, on July 20th, 2011
Kid Dynamite has come out all guns blazing in his latest post. His post goes into detail into a point I raised in my last post – why isn’t Sprott doing secondary share issues for his silver fund?
He has a point. By not issuing more shares in the face of demand, all that happens is investors are paying $120 for $100 worth of silver. This means $20 worth of silver is NOT being bought and taken off the market, which takes pressure off the bullion banks.
The response that if he did a secondary that it would reduce the premium, hurting the existing investors, is valid. But the point is he shouldn’t have allowed that situation to develop in the first place. Now he is caught. By not wanting to hurt existing investors he is diverting silver demand AWAY from taking physical off the market INTO just bidding up the premium.
In any case, I would counter the “reduce premium” argument by suggesting that Sprott could do the secondary in a way as to probably cause no loss to existing holders. Consider that PSLV has 22.3 million ounces. A 20% premium suggests there is at least demand for 4.46 million ounces (20% of 22.3moz). I think most would agree, however, that he could do a secondary for double that given the profile and trustworthyness of his fund.
COMEX has registered stocks of 26.8moz. Consider if Sprott slowly bought 8.92moz of silver futures and then stood for delivery. That is ONE THIRD of the entire COMEX stock. What do you think that would do to the price of silver when Sprott and others assert that the physical market is currently so tight? Those that believe this would have to expect that you’d get a price increase that would easily cover any decrease in PSLV’s premium.
And the argument that Sprott shouldn’t do it because COMEX would cash settle does not hold water. Even if the
cash settlement price is below the current “real” physical price, it would still probably be above his purchase price (as silver is in a bull market). In any case, if his actions were able to cause such a significant and high profile failure to deliver, then the resulting price move really would be “explosive”, producing a profit on his existing silver holdings that would cover any loss (if any) on the cash settlement of his futures contracts, and benefitting existing PSLV holders to boot.
It is a win win: if COMEX delivers they take a huge hit to their stocks, if they don’t, the price gets a huge hit to the upside. Personally I don’t think it would play out this way. Bullion banks would source silver to deliver into the Sprott contract and thus maintain COMEX stocks. But that is just a theory. Until someone with the capability to make such a move does it, it is all talk, both on my side and theirs.


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Silver debunking

By Bron Suchecki, on May 3rd, 2011
Silver has been running hot and so has the misinformation. Some antidotes:

Sprott Begins Selling PSLV Shares Good detective work by Kid Dynamite on Sprott’s other funds selling their PSLV shares. My guess is that the funds sold their shares and then bought physical at spot, pocketing PSLV’s 17% premium

Comex Explains Large Adjustment in Silver & Gold Registered Inventories Brian O’Flanagan explains the large transfers of COMEX silver from registered to eligible.

How the COMEX Didn’t Lose its Silver Tom Szabo’s detailed coverage of the COMEX transfer issue.



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Dave in Denver - The Golden Truth?

By Bron Suchecki, on May 2nd, 2011
A couple of weeks ago this blogger did a post about the University of Texas taking delivery. In it he made the following statement

“Delaware Depository also serves as one of the Comex depositories and you risk having your gold mingled with unallocated gold or “accidentally” borrowed”

To me he is saying Delaware Depository would defraud their clients by giving/lending a bullion bank the client’s allocated gold without their knowledge. I left a comment saying as such and that I thought he had stepped over the line with this.

He replied, saying I “crossed over the line by accusing me of crossing over the line”. I left another response disagreeing, but he did not allow it through. I emailed him to ask if he hadn’t got the response or had, but wasn’t going to publish it. No reply back from him.

My view of blogging is that you should be prepared to defend yourself (or admit you were wrong) if you are really after the truth. Dave obviously disagrees. Below is the response he would not publish – I’ll let you make up your mind on whether Dave is really after the Golden Truth.

“Very few people/entities can be trusted in the world of precious metals” Agreed, but I gather you don’t include Perth Mint in that :)

Your argument against DDSC is based on two red flags. First is non disclosure of insurance arrangements. Here “DDSC agrees to maintain “all risk” insurance coverage for Precious Metals stored for you.” That is a bit vague as it doesn’t say “fully” but they do say here that “All precious metal assets held at DDSC are maintained in customer-specific custody accounts, on a fully insured basis, and off of DDSC’s balance sheet.” If they aren’t fully insuring but saying they are then that is not good and a real red flag – I’m assuming you know for a fact that they don’t fully insure.

I would note that any depository of size is unable to be fully insured because insurance markets don’t have the capacity/willingness to underwrite it. That would cut in at around $1b – $2b with the cost getting prohibitive beyond that, assuming it is even available. If DDSC’s total holdings are above that you may have a point.

“DDC is a Comex depository – sorry, guilt by association and guilt by sleaze.” I think you’re second red flag of guilt by association is weak. As you say “With the sleaze and corruption embedded in our entire system, especially on Wall Street” you can’t trust Wall Street. But then you yourself “trading on Wall Street. For nine of those years, I traded junk bonds for a large bank”, so couldn’t someone just raise a similar guilt by association red flag on you? You don’t disclose that you didn’t work for Goldman? Don’t get me wrong, I’m not saying you are guilty by association, just suggesting you put the shoe on the other foot and see how it feels.

“If you want to read into or infer anything from what I wrote, that’s your business” I don’t think it is just me reading that in, I think most people would. Because I think most people would read that into it that is why I think it steps over the line.

When you say “you risk having your gold mingled with unallocated gold or ‘accidentally’ borrowed” you are saying there is a reasonable possibility (ie risk) that DDSC will engage in criminal fraudulent action to comingle a client’s metal and/or lease it out. That is a pretty strong statement.

“you crossed over the line by accusing me of crossing over the line” So it is OK for you to accuse someone of being at risk of acting criminally but not OK for me to simply say I think you went too far by making that statement? I think our differing views about “crossing the line” is a difference between Australia and America in respects of custom and laws regarding defamation and free speech.



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In Gold We Trust

By Bron Suchecki, on June 30th, 2010
In Gold We Trust is a special report by Ronald-Peter Stöferle of Erste Group Bank. It is very comprehensive and well worth a read because it covers across its 65 pages all key factors influencing gold prices, leading to their conclusion that:

“The risk/return profile of gold investments remains excellent. … Our next 12-month target is USD 1,600. We expect the parabolic trend phase to still be ahead of us. At the end of this cycle the price should reach our target of USD 2,300.”

In the section “Paper gold vs. physical gold” (pages 36-37) however I would debate the following statements:

“At the moment physical gold commands a premium of up to 20%.”

In the wholesale physical market the Perth Mint is not seeing anything abnormal. Even in the retail market premiums are back to normal (subscribers to Sharelynx can see this for themselves at the CoinPremiums page). I have asked Ronald-Peter where he is getting this number from but no response as yet.

“According to Paul Mylchreest the London OTC market trades 2,134 tonnes of gold every day. This is 346 times the daily production and close to the global annual production.”

This point is presented as proof of a discrepancy between the physical market and paper gold market. As discussed in this blog post, I don’t see any problem with this rate of turnover. In his report Mylchreest concluded that gold’s 12.7% turnover “is excessive and doesn’t pass the smell test.” My alternatively conclusion is that “the very fact that gold is no one’s liability and cannot be printed means it attracts a disproportionate amount of trading and speculation. … Could not the 12.7% figure be proof of the special monetary nature of gold, proof that it is the King of Currencies?”

“According to Jeff Christian, founder of CPM Group, the trade on the LBMA is based on a leverage factor of 100:1″

Mr Christian has stated that he was talking about COMEX paper trading versus physical COMEX deliveries. There are some who think he is trying to retrospectively cover up his admission. My view is that a 100:1 fractional is ridiculous considering the crucial role London plays in the physical market. London unallocated simply could not function on a 100:1 ratio in my view. Those who accept this number do not appreciate to amount of physical delivery made ex-unallocated accounts by the trade. In any case, Mr Christian actually confirmed the fractional/leverage ratio of bullion banks at around 10:1. See this blog post.

“The volume of gold derivatives is worrisome as well. According to the Bank for International Settlements, the nominal value of all gold derivatives at the end of 2009 amounted to USD 423bn.”

I have often seen the nominal value referred to and while it produces an impressive number the way it is presented is often misleading on two fronts:

1. Common interpretation of these numbers is that the market is short $432bn worth of gold. In fact the nominal value is the summation of both long and short positions, it is not a net figure. If one looks at the BIS figures it can be seen that bought and sold options somewhat net out (although it is not that simple because of differences in dates and strikes).

2. Nominal does not equate to actual value at risk. As per the BIS report: “Nominal or notional amounts outstanding provide a measure of market size and a reference from which contractual payments are determined in derivatives markets. However, such amounts are generally not those truly at risk. The amounts at risk in derivatives contracts are a function of the price level and/or volatility of the financial reference index used in the determination of contract payments, the duration and liquidity of contracts, and the creditworthiness of counterparties.”

They note that “Gross market values provide a more accurate measure of the scale of financial risk transfer taking place in derivatives markets” and if one looks to page six of the report it states that the gross market value of the $432bn nominal figure is actually $48bn.

There is also the issue of what the actual delta-adjusted position (see page 10 of GMFS Hedge Book for an explanation) of the $432bn nominal gold derivatives and real impact on the spot market, but that is getting a bit technical. The point is don’t get over excited by the $423bn figure and assume it means the market is short 10,000 tonnes of gold.



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COMEX Gold And Silver Margin Requirements Raised

By Trace Mayer, on December 17th, 2009

The COMEX has raised the margin requirements for gold and silver futures contracts. Additionally, gold is trading in minor backwardation but this is probably not serious. The margin requirement rise validates the strength of the bull market. There will likely be additional margin requirement increases during this upleg.

MARGIN REQUIREMENT

A margin, or performance bond, is collateral that the holder of a position in futures contracts, securities or options has to deposit to cover credit risk.  The use of margin greatly amplifies either the gain or loss with a position.  The higher the margin requirement the more capital is required to control the same amount of the underlying asset.

One consequence that can result from using margin to purchase assets is a margin call.  If the margin posted in the margin account is below the minimum margin requirement then the broker or exchange issues a margin call.  The investor has to either increase the margin deposited or close the position and can be accomplished by selling the securities, options or futures if they are long and by buying them back if they are short.

If they do not do any of this the broker can sell his securities to meet the margin call.  If the exchange is unsuccessful in executing margin calls and receiving enough capital then the exchange could fail.

The COMEX has recently raised the margin requirements for gold and silver contracts.

The result of these increases in the margin requirements will likely be somewhat bearish for the metals in three to six months.  This is because it will require more capital to control the same amount of the commodity and will serve to dampen some of the speculative hot money which has been flowing into the metals lately.

Margin requirements and other exchange rules are what put a damper on the Hunt brother’s plans.  Overnight the rules were changed without notice and it resulted in tremendous losses and margin calls to the Hunts.  The effect of margin requirements on the instruments of the gold price suppression scheme does cause some questioning.  For example, are they even subject to the requirements?

GOLD AND SILVER BACKWARDATION

As of 16 December 2009 there has been some minor backwardation appearing for both gold and silver.  For example, gold for delivery in December 2009 was higher than the January, February and April contracts.

Likewise the LBMA silver forwards have been showing some particularly interesting activity since about 24 November 2009.  For example, the SIFO for one month was higher than all other months on 15 December 2009.  The 16th showed similar unusual activity.  Silver only recently slippped out of significant and prolonged backwardation in June 2009.

This bout of both silver and gold with backwardation is likely minor or immaterial.  With gold it is likely due to delivery considerations.  With silver there would need to be a prolonged condition to merit much more attention.  Either way this is a condition to observe.  Backwardation in the monetary metals implies loss of confidence in the paper instruments and both the desire and ability to take immediate possession without the use of margin.

PRECIOUS METALS BULL

As the gold, silver and platinum precious metals bull continues gaining intensity it will gather in more capital.  With their use as currency in ordinary transactions, through services like GoldMoney, it will continue to increase the percentage of the total market that is owned outright.  Already, most physical gold bullion is owned outright without any attaching liabilities in jewelry, coin or bar form by either individuals or massive central banks.  This adds stability to the market because when an asset is owned outright then the owner cannot be margin called.

By analogy one of the reasons the US residential property market, which is heavily purchased on margin, is in such dire straits is because of the constant ‘margin calls’, the surplus inventory which is put on the market after foreclosure which results in further declines in market prices and more margin calls.  In contrast, real estate in Argentina is 93% owned outright with only 7% encumbered.  This adds tremendous stability to prices.

The increase in margin requirements on the precious metals will only serve to strengthen the bull market.  But in the short term the effect could be to depress the price because of margin calls to speculative hedge funds.

CONCLUSION

There is old advice that the market can remain irrational longer than you can remain solvent.  But this advice applies if margin is used.  Gold, silver or platinum that is completely paid for becomes sovereign wealth, cannot be margin called and therefore the owner can hold it indefinately without fear of insolvency.  Unlike with a margin call there is no forced selling.  Holding the monetary metals in such a way is in harmony with provident living principles and a safe way to buy gold.

DISCLOSURES: Long physical physical gold, silver, platinum and no position the problematic SLV or GLD ETFs.

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