Citizen Economists » gold prices

Fat Prophets

Bron Suchecki — Thu, 24 Dec 2009 19:45:58 +0000

Fat Prophets have been gold bulls for a long time and I give them kudos for that. However, in a recent article The Silent Gold Rush Is On they make the following faulty analysis:

The Australian newspaper reported over the weekend that the Perth Mint is not taking any more orders for gold until January. Our guess is that the Mint does not want to expose itself to higher future prices given that it does not have the inventory to meet the demand for bullion.

I sent the response below to them a couple of weeks ago, no response as yet:

Your guess that we do not want to be exposed to higher future prices is incorrect and is based on a misunderstanding of how the gold markets work. If we take an order and fix a metal price (it is also possible to take an order and agree to fix a price at the time the bullion is ready for delivery) then we immediately buy the raw gold that will be used to make the bars/coins for the client. There is therefore never any exposure the future prices. I discuss this is more detail in my blog on the value chain.

I really wish commentators would just call us up and ask us questions, rather than just guessing or making stuff up.

To Roll or not to Roll, That is the Central Bank’s Question

Bron Suchecki — Mon, 14 Sep 2009 18:45:47 +0000

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.

Gold Party Barely Started

Trace Mayer — Wed, 09 Sep 2009 18:29:06 +0000

The FRN$, the world’s reserve currency, has no definition and the quantitative easing will fail. After all, what is a dollar? Because there is no definition therefore it is impossible to perform accurate, or even semi-acccurate, calculations of value using this tool. Consequently, other key ratios ought to be used to hone in and focus on value.

MAY 2009 RECAP

While the DOW may continue its rally I highly doubt it will breach 11.5 gold ounces before it resumes its downward destiny and reaching 5-6 ounces sometime this year. Silver will likely continue its upward ascent and return to a more normal ratio with gold around 55. A little bit more difficult to prognosticate is oil but if I were to wager it would not descend too far below 15 on the chart but the probabilities are not particularly clear either way.

In May the DOW to gold ratio was 9.32, S&P 500 to gold ratio was 0.97, gold to silver ratio was 66.4 and gold to oil ratio was 16.2. I concluded,

There appears to be (1) a strong uptrend for gold, (2) a fairly decent bear market rally for equities that is running out of upward pressure, (3) a resurgent oil, (4) insane accounting sorcery that is rending any remaining confidence from the financial statements of corporations, (5) insolvent banks being sustained only through government bailout, (6) massive job losses with (6) continued bankruptcies which (7) detonate financial weapons of mass destruction.

Around the end of July I warned of the coming market crash. At the time the DOW to gold ratio was 9.5 ounces and the S&P 500 to gold ratio was 1.05.

CURRENT RATIOS

The DOW to gold ratio is 9.49 and S&P 500 to gold ratio is 1.03.

Despite the S&P 500 rocketing up over 10% in FRN$ during the past 4 months when priced in gold, a definable currency, there is no material change. In other words, despite the proclamation of recovery and green shoots, which are really only red roots, the market has not been fooled. The rising equities are really just a function of an evaporating fiat currency. Where does the top line come from when 40% of working age Californians are unemployed? California is just a portent for the other states.

The resurgent oil price, with the gold to oil ratio at 13.95, seems to be the most difficult to explain. Because of the slowing economic picture, empty ports, empty trucks, empty railroads and empty stores the demand for oil seems to have slowed considerably. Natural gas stockpiles may soon exceed capacity. Why the oil price, in gold, has continued rising is probably the result of it being extremely cheap compared to historical norms. Even with the 12.5% gain in gold it still has a significant ways to go before it reaches much more normal territory.

Perhaps the market is beginning to take the Peak Oil Theory seriously? But we understand the importance between gold, oil and our stomach. Perhaps Nate Hagen understated the magnitude of the recent IEA report when he wrote, “the initial language in this year’s Executive Summary is of an urgent nature.” The Independent reported, “The IEA estimates that the decline in oil production in existing fields is now running at 6.7 per cent a year compared to the 3.7 per cent decline it had estimated in 2007, which it now acknowledges to be wrong.”

GOLD AND SILVER

Silver’s movement seems to amplify gold’s. The current gold to silver ratio is 60.2 and declining quickly.

Physical gold is on the move as both the Arabs and the Chinese are moving physical gold bullion bars out of London to the Middle East and Hong Kong. As MarketWatch reported, “Hong Kong is pulling all its physical gold holdings from depositories in London, transferring them to a high-security depository newly built at the city’s airport”. The timing with the CME clearing of OTC gold derivatives is particularly interesting.

Additionally, Barrick Gold “will issue $3 billion in stock to eliminate all of its fixed-price gold hedges and a portion of its floating hedges, taking a $5.6 billion hit to third-quarter earnings, the world’s top gold miner said on Tuesday.”

Dr. Greenspan testified before Congress in 1998, “Nor can private counterparties restrict supplies of gold, another commodity whose derivatives are often traded over-the-counter, where central banks stand ready to lease gold in increasing quantities should the price rise.”

Central banks carry gold in the vault and gold out on loan to the bullion banks as the same line item and in effect report cash and accounts receivables as the same thing. As Bill Murphy of GATA has observed, “They cannot get this gold back. They say they lent it; when you lend something out you expect to get it back.” Is the gold cartel retreating in the face of a coming tsunami of physical demand?

PROGNOSTICATION

The DOW to gold ratio is fairly above the 200dma while the gold to oil ratio and gold to silver ratio are significantly below. A relative price is the current price divided by the X day moving average. For example, the 200 day relative price would be the current price divided by the 200dma.

In FRN$ the DOW is at a 200 day relative price of 1.14x, gold is at 1.05x, silver is at 1.26x and oil is at 1.29x. Based on seasonal trends gold and silver will be strengthening, with the strongest months in September and November, while oil just finished the usual August surge and will be weak the rest of the year with the weakest month in October.

This upleg in gold and silver will have significant strength because of the long period of consolidation just like in 2004 and 2006 which provided the foundation for the uplegs in 2005 and 2007 that took gold from $400 to $700 and $650 to $1,000, respectively. If the current upleg is similar to the previous two then the 200 day relative prices for gold and silver at the top of this upleg would be about 1.5x and 1.7x, respectively.

This puts $1,300 gold and $25 silver within range without greatly exceeding previous trading norms and would result in a gold to silver ratio of 52 which would be about average for the past few years excluding the panic of 2008 where silver went into backwardation for nine weeks. If the DOW retreats to 6 ounces then that would be about 7,800 and a gold to oil ratio of about 12 would mean $110 barrel oil. While we could see both the USD Index and gold rise at the same time, because of their respective places in the liquidity pyramid, I think it is more probable than not that the USD Index will retreat below the 75 level.

CONCLUSION

Given the shakiness of the FDIC, the routine bank failure Friday and counter-party risk from OTC derivatives, financial weapons of mass destruction, it still makes sense to establish an alternative and eventual substitute monetary system for your ordinary daily and business transactions. While the OTC derivatives were latent they have now become financially lethal.

To immunize and protect yourself and your capital I recommend either buying gold, silver or platinum and taking possession of the physical bullion or using a trusted third-party storage service like GoldMoney which allows for physical delivery at anytime. By all means, stay away from the problematic GLD or SLV ETFs if you are seeking safety.

The markets are not fooled by the red roots being touted as green shoots. The technicals, fundamentals and seasonality are merging and consequently the ratios are materially changing. The Great Credit Contraction is grinding on and capital is seeking the safest and most liquid assets. Gold and silver have been preparing for the next upleg for over a year and laid a strong foundation for a massive run which has likely just started.

Humanity’s gold lust has been dormant for nearly a century and when it awakens it will be extremely vehement and go viral. Those who own gold know of what I speak. The yellow metal seems to call out to the inner conscience and resonate with our DNA. Our cash balances ought to be denominated in gold to avoid unnecessary risk from barbarous relics like fiat currency and fractional reserve banking. Think of how few people have held physical gold in their hand; let alone owned it. This fact is perhaps the most bullish aspect of this upleg. Consequently, this gold party has barely started.

DISCLOSURES: Long physical gold, silver and platinum with no position in the DOW, S&P 500, Barrick or the problematic GLD or SLV ETFs.

Gold to break $1000 but then down to $500!

Bron Suchecki — Fri, 14 Aug 2009 15:36:24 +0000

I have kept my super secret system a secret for many years, but I have to let you in on it now because a great calamity will befall gold shortly – once it breaks $1000 it will be downhill to $500. The chart below does not lie!
You will note on my chart that the time scales for the two different time periods does not match. This is because the world has gotten faster, information move quicker, therefore chart patterns are compressed. After many years of study I discovered that the world had accelerated by 40%, so that each day in the 1970s equals 1.4 days in the 1990s.

I then realised that one cannot study gold patterns until 1975, when it was no longer illegal to own gold. This allowed for human emotions to show up in prices. I then realised that the speeding up of information began in 1996, because this was the year that the Internet really began to take off. With this insight, I found this pattern and have kept it to myself to make massive profits but now the charts foretell collapse. You have been warned, get out now.

PS – As you can tell from the above that I don’t put much store in reading tea leaves, sorry, charts. There is a legitimate use of them, but I think a lot of people choose timescales and see patterns just to reinforce their preconception.

Resurgent Russia Discharging Dollars

Trace Mayer — Wed, 03 Jun 2009 15:21:19 +0000

RUSSIA IS MASSIVE BUT DISAPPEARING

Russia with 6,592,800 square miles (17,075,400 square kilometers) spanning 11 time zones is easily the largest country in the world covering about 1/8th of its landmass. The BRIC economies, Brazil, Russia, India and China are both similar and different. With only about 142 million people, tremendous natural resources and about 8 million unemployed Russia is more akin to Brazil than the population behemoths.

Russia’s total fertility rate is only 1.3 births per woman where 2.1 is required to maintain a stable population. The death rate of 15 per 1,000 people per year is 66% above the world’s average of 9. With neither a rising generation nor much immigration and rapid deaths the Russian population is disappearing.

WANING OLIGARCHS

The collapse of the Soviet Union resulted in massive chaos. Three wings, the siloviki, ‘The Family’ and the ogligarchs frantically grabbed power, resources, companies and wealth. Into the KGB Putin brought the siloviki, mostly former KGB and other security contractors, and ‘The Family’, Yeltsin’s relatives who burrowed into business and government to keep him in power along with the technocracy aligned with Western interests that kept foreign direct investment funds flowing on Russia’s terms.

The billionaire oligarchs were allowed to keep their fortunes so long as they did not play politics. For example, Mikhail Khodorkovsky the owner of oil super-major Yukos decided to play politics and succeed Putin as President. Mr. Khodorkovsky is still in a freezing Siberian oubliette.

The credit crisis in 2008 has decimated most of the oligarchs. With gigantic debts, declining revenues, access to very little credit and dissipating companies the oligarchs found that their business empires had rapidly evaporated. For example, the Forbes billionaire list saw Russians disappear from from 87 in 2008 to 32 in 2009.

REGENERATING KREMLIN

The real power elite in Russia are both siloviki and oligarch as they infest both corporate boardrooms and the Kremlin. Like the politically connected in America they make the ‘bailout cut’. The Kremlin is able to determine which oligarchs survive. Government power is consolidating in financial, economic, business, social and political spheres.

Out of the G-20 party came pressures on tax havens. Obama and the US government led the charge. Likewise the Russian government struck deals such as with Cyprus and Deloitte reported, “one of the most favourable treaties the Russian Federation has concluded”. It is getting increasingly difficult for those trying to figure out how to vanish.

TD F 90-22.1 FORM DUE 30 JUNE 2009 FOR 2008

This may be a good time to mention that for those subject to US jurisdiction the TD F 90-22.1 Form for reporting foreign bank accounts is due on 30 June 2009 for 2008 activities. I have received many inquiries about its application to GoldMoney holdings. There are significant legal issues, questions of law and particular facts unique to each individual that will determine individual application.

I recommend filing the form if there is any question as to its requirement because it is not very burdensome and the penalties for not filing are draconian. Nevertheless, if you do not wish to file because after reading the instructions on the form you do not think it is required then I do suggest consulting competent legal counsel.

THE AGE OF REAL THINGS

Ironically, during the Information Age there is a return to all things real. Immediate worldwide communication overextends and will eventually decimate the inherently unsound, unstable and immoral financial and monetary system.

The Internet is quickly aligning perception with reality. Monstrous malinvestment is being liquidated and the costumed criminal clowns in Washington DC and St. Petersburg are intentionally exacerbating the greater depression. As the tide goes out it is increasingly apparent which wealth is real and which was illusory.

Russia does have a real economy built by real labor that grows, produces or builds real things and generates real wealth. Nevertheless, as Russia Today reports, “Russia’s economy is contracting at the fastest pace in 15 years”. Meanwhile the ruble has lost about 40% of its value in the past year and yet Putin praises the central bank. Russia may not have anything to worry about.

ANOTHER ATTACK ON FRN$ HEGEMONY

The Gold Anti-Trust Action Committee, GATA, held the Gold Rush 21 Conference 7-9 August 2005 in Dawson City, Yukon, Canada and had an extremely interesting visitor: Andrey Bykov a highly regarded economic advisor to Vladimir Putin.

Gold was trading at $436 at the time and two days later the gold market broke traditional trading norms and a bull upleg started that eventually took gold to new highs. On 22 November 2005 Vladimir Putin said, “The central bank should review its gold and forex reserves policy in favor of increasing the weighting of gold.” Putin is learning where and how to buy gold bars in his hot little hand.

On 19 May 2009 the FRN$ stopped being Russia’s reserve currency with 47.5% of currency assets in the Euro, 41.5% in the FRN$ and about 500 tons of officially reported gold or about 2%.

Likewise Russia has begun asserting economic and military ambitions in its region. There has been the Georgia skirmish with the US in August 2008. On 26 May 2009 the Civil Georgia reported that protesters of United States puppet President Saakashvili filled the 55,000 seat Tbilisi’s national stadium. Also, Russia has offered Azerbaijan assistance in building a nuclear plant.

Russia has agreed to pay Ukraine to run military drills over the Crimean Peninsula. Of particular interest though is that while the American government says this ‘could prove provocative and destabilizing’ on 15 May 2009 Vladimir Putin met with Sergey Bagapsh, leader of the Georgian breakaway region Abkhazia, and agreed to sign an agreement for Russian military bases in Abkhazia where Russian troops will be stationed for at least 49 years.

CONCLUSION

Russia is a regional powerhouse but disappearing because of demographic factors. The oligarch’s power and influence is waning as the Kremlin reasserts its dominant role in finance, economics and politics. The Great Credit Contraction grinds on and real things are becoming increasingly sought after.

Resurgent Russia is discharging dollars like refuse through a garbage disposal. This challenge of FRN$ hegemony with its world reserve status along with United States dominance both economically, diplomatically and militarily will have significant geo-political and geo-strategic implications. As a result, the FRN$ will be impacted negatively while gold will be a prime beneficiary of this change.

Disclosures: Long physical gold and silver, no problematic GLD or SLV ETFs and no TLT.