Gold is a pure Epsilon/Narrative asset

I came across this gem of a blog from a reader sending me Mauldin Economics' latest.

I think I could argue the case that gold is almost all Epsilon and little Alpha or Beta, because it is a Monetary asset, because of its massive stocks to flow ratio. As I said here "It is actually supply - the withholding of supply - that matters most." What those holders think matters, and that "think" is what the blogger calls a Narrative.

What we see going on in the goldbug internet is an attempt to construct a Narrative around gold. However, as the blogger says, it is not necessary for the Narrative to be true, "it is only important for a Narrative to sound truthful." Truth is not relevant because the point of the Narrative is to serve the interests of the powerful/those who are communicating it. How true - truth doesn't matter as long as it generates clicks and sells newsletters and coins.

It seems my, at times, crusade for truth in the blogosphere is in vain because what matters is "the more Common Knowledge in play at any given time, the more that market behaviors will be driven by the rules and logic of the Common Knowledge Game than by fundamentals or traditional factors."

Certainly I would have to concede that the current goldbug Narrative (a group of various memes) is all pervading in the gold blogosphere and I'm not really making a dent. There is a catch however. What the goldbugs don't realise is that their Narrative is not the Narrative that the rest of the world is using. Indeed in this post the blogger says that gold doesn't have a Narrative:

"In some periods of history gold is money. In other periods of history gold is not. But gold is always something, and that something is defined by the Common Knowledge of the day. To be an efficient gold investor in any period, I believe it’s crucial to identify and measure the relevant Narrative that is driving the Common Knowledge regarding gold. Only then can one construct an informational surface that predicts how the equilibrium price of gold will respond to new information ... There is no stand-alone Narrative regarding gold today, as there was in 1895. Today gold is understood from a Common Knowledge perspective only as a shadow or reflection of a powerful stand-alone Narrative regarding central banks, particularly the Fed … what I will call the Narrative of Central Banker Omnipotence. Like all effective Narratives it’s simple: central bank policy WILL determine market outcomes."

The result is that those who operate under the blogosphere Narrative will make the wrong decisions:

"You may privately believe that J.P. Morgan is still right, that gold has meaning as a store of value. But if you participate in the market on the basis of that belief, then you will buy and sell gold in an incredibly inefficient manner. You would be a smart gold investor in 1895, but a poor gold investor today."

This is a challenging statement for goldbugs - it doesn't matter if you think gold is a store of value, or if it should be one, what matters is what most people think gold is. I first came across this idea when reading The Social Construction of Reality (see this blog post of mine for background on this idea). When making investment decision what matters is what is, not what ought to be. I think most blogosphere Narratives are about the Ought, not the Is. That's fine, just don't buy and sell on that basis.

Gold and silver market status update

An update to my previous posts here and here on the state of the gold and silver markets as the Perth Mint sees them. Coin demand (retail and wholesale) has also eased but still good. Our retail outlet in Perth is quiet.

On the gold kilobar market, premiums have come off a bit but are still way above normal levels. This market action is confirmed by Warren "the ETF bar list guru" James at Screwtape Files who has observed a clear preference by bullion banks to choose 99.99% 400oz bars rather than 99.5% bars when redeeming physical from the ETFs as investors sell up, as the 99.99% bars can just be melted down and recast into kilobars (no refining required) and sold at a premium. Warren will have a post on his blog showing this graphically when he gets time.

On the Depository front, over the past few weeks we are now seeing net selling. It seems a bit of that is clients selling up part of their holdings and switching into equities. This may reflect what Financial Sense Newshour said in this podcast where they have clients who originally had a modest allocation percentage into precious metals but after the bull market (and no rebalancing) they are now sitting on excessive allocations of say 75%. Clients may have been induced into rebalancing with gold not showing any signs (yet) that a rapid rise is coming combined with the stock market showing gains.

We have also seen some physical collections of metal in Depository, mostly silver but minor quantities overall. The net loss in Depository is modest an similar to the percentage losses Bullion Vault, GoldMoney and BMG Bullion are also showing, according to Sharelynx's Transparent Holdings page (you'll need to subscribe if you want to see the data). The ETFs have been showing a lot more percentage losses than PM, BV, GM and BMG have, which reflects I think our more retail (strong hand) client base.

I don't know how to read this market behaviour. Weak investor sentiment like this could portend a bottom, but it could also make the market suseptible to a sell off if the April price smash entity decides to test the market's strength again as it need not worry about position limits and the CFTC catching them out.

Gene Arensberg at Got Gold Report also sees the market as “very imbalanced” and “dangerous for both sides of the battlefield.” with the largest hedgers of gold are positioned as though they see very little downside left, while on the other the Funds, while still net long gold, have put on their largest gross short position since the disaggregated data begins in 2006. 

Further confusing messages comes from the contrast between James Turk and the Royal Canadian Mint. James Turk reports some stress in the wholesale markets (although I think when he says that "some of the larger orders to buy bars have been moving out to as long as T+5, which is extraordinary" he is referring to kilobar, not 400oz bars, as GoldMoney isn't showing premiums or delays for their 400oz bar backed product) and that "the buyer or buyers who pushed the gold price up during the London PM fix yesterday were obviously desperate to get their hands on physical metal and were prepared to pay whatever price it took to obtain it".

Then we have this Globe and Mail article which notes that the Royal Canadian Mint's gold and silver exchange-traded receipts were trading at a 1.7% and 1% discount on Wednesday. The fact that "major investors holding at least 10,000 of the gold ETRs or 5,000 of the silver ones could also redeem them for metal and acquire holdings at a below-market price" certainly isn't reflective of a shortage in the wholesale markets.

At this time I think I agree with Gene: "We have to admire the courage of those willing to sell gold short in this, very imbalanced environment, knowing that a reversal could occur any moment and that it could be epic in its violence. Rest assured we have neither the courage nor the inclination to do so ourselves."

Time to give up on the CFTC

Gene Arensberg has an article out on the COMEX price smash where he concludes that:

"in order for the initial 124 tonne sale to have occurred “legally” it would have had to have been 14 traders, all with zero orders open, all acting simultaneously, all acting independently, in their own self-interest, without colluding with each other to “sell-for-effect” or conspiring to foment a price smash.

In actuality, the chances that there were 14 traders who held zero open orders all acting independently, all throwing their full allowable 3,000 contracts into the gold market within a few minutes of each other are infinitesimally small."

Gene notes that hedge members have a bona fide hedger exemption "to sell more than the limit, but not without filing paperwork with the exchange" which means that "whoever blew out the gold market on April 12 is already known to the CFTC (and what documentation they used to back up their trade)."

Now I would have thought that position limits would still apply to the person whom the hedger was executing for. A quick google search brought up this 20 page client update document from a law firm. Reading through the first few pages I was confronted by stuff like this:

"To qualify as a bona fide hedging transaction under the Final Rule, a transaction or position must (1) represent a substitute for transactions made or to be made or positions taken or to be taken at a later time in a physical marketing channel, (2) be economically appropriate to the reduction of risks in the conduct and management of a commercial enterprise, and (3) either (a) qualify as one of the eight enumerated bona fide hedging transactions under the Final Rule and arise from the potential change in the value of (x) assets a person owns, produces, manufactures, processes or merchandises or anticipates owning, producing, manufacturing, processing or merchandising, (y) liabilities a person owes or anticipates incurring or (z) services a person provides, purchases or anticipates providing or purchasing, or (b) qualify as a “passthrough swap.”"

Eyes glazing over? Same here, so I then proceeded to the scroll/skim through reading method. My lay person summary: plenty of loopholes for someone to do what they want and have the CFTC running around in circles.

Now you know why the CFTC investigation into silver has been going on for years without any result.

As I said in response to this question: Do you think Bart Chilton of the CFTC is imagining things when he says its happening, or maybe he wants to be loved by the Goldbug crowd?:

"Consider that the CFTC has to deal/manage/politic two types of market participants – producers, who want prices to be high and consumers, who want prices to be low. I have seen the theory that Bart’s role is to play to or appease the consumers, which in the case of PMs means they want high prices. I really don’t know if this is the case or he is just straight up. Either way he is often very careful in what he says, and keep in mind the difference between manipulation and suppression. Bart talks of manipulation, not suppression."

To that I'd add the CFTC has to deal with a complex set of rules and regulations. When regulations get this complex market fairness and transparency is actually harmed, and the only ones who benefit are those big enough to have lawyers able to work out the loopholes.

What the market needs is straightforward commonsense rules that everyone knows in advance, just like Kid Dynamite points out in this post on cancelling trades. Or just drop the pretence and go free-for-all law of the jungle.

Having interest rates this low doesn't help, as speculators have minimal cost in holding a position for a long time (until it blows up) or taking on large positions. This just adds to the volatility.

Time to give up on the CFTC being able to control this, just like Ted Butler did.

BTW, Perth Mint once had a new hire in our Treasury department suggest we should trade on COMEX. That got laughed at (and that was before MF Global). We will take our chances in the OTC market, where at least we can pick our counterparties, do due dilligence on them, and trade on our terms.

Why the price smash affected GLD and SLV stocks differently

A number of bloggers have observed the difference between GLD's gold stocks and SLV silver stocks in response to the April price smash. Sharelynx is reporting the following changes over the past four weeks:

GLD down 3,031,042oz (-8.23%), current stocks 33,811,468oz

SLV down 341,111oz (-0.10%), current stocks 335,666,675oz

Sharelynx also tracks all the other major ETFs, COMEX, TOCOM, Sprott, BMG, Central Fund, Bullion Vault and GoldMoney reported stocks. The change in the total of all those over the past four weeks is:

Gold down 5,576,479oz (-6.12%), current total 85,565,264oz

Silver up 912,541oz (0.11%), current total 855,911,574oz

Whether you look at GLD vs SLV or total gold stocks to silver stocks, silver is basically holding even with gold taking a 6-8% hit. The explanation I think has a lot to do with who is investing in GLD vs SLV (or gold vs silver more generally).

Latest figures from Reuters has GLD's ownership by institutions at 51.3% while SLV's is 19.6%. Deutsche Bank notes that "one-third of institutions holding bullion will probably keep it. We expect that the bulk of the drawdown comes from institutional investors rather than retail investors".

So GLD/gold holdings have dropped primarily due to institutional liquidations whereas SLV/silver holdings has held up because there are more individual "buy and hold" investors in SLV/silver.

My thesis is sort of supported by looking at Bullion Vault's numbers, as Bullion Vault is primarily a retail product (average account is $50k link). For gold over past four weeks they are only down 1.6%and for silver they are up 1.1%, which is very different to the general trend.

The investors in the Sprott funds are the strongest hands of all, with PHYS and PSLV showing zero change in ounces held (that is a joke, BTW).

PS - a couple of interesting facts from the Sharelynx numbers:

1. Both GLD and SLV have a "market share" of publically reported stocks of 39%

2. Ratio of silver oz to gold oz is almost exactly 10:1 (ie for every ounce of gold held, 10 ounces of silver are held)

3. Ratio of silver to gold by dollar value is 0.16:1 (ie for every dollar invested in gold, only 16 cents is invested in silver)

COMEX stock drawdown: single most important metric to watch

To understand what is going on with COMEX stocks, don't look at the stock level - it will lead you astray. You need the metric I presented at the Gold Standard Institute's 2009 seminar; one which Professor Fekete thought was the single most important metric to determine stress in the market. The second thing you need to do is put recent market action in historical context.

Firstly, lets review some historical stock levels for gold and silver for some key years - the 1980 peak, the 2001 bottom, 2012 and now. There is only one place I know that has that data going back that far, and it is www.sharelyxn.com. It is a lot easier to follow by looking at the charts of the stock levels, which are available for gold and silver if you have a subscription. If not, then just sign up for a free trial, it will be worth it just to see the charts I'm talking about.

The table below shows the average total (registered + eligible) COMEX stock in millions of ounces for each of those years.

Year	Gold	Silver
1980	3.5	80
2001	1.0	100
2012	11.0	140
Now	8.0	166

First thing to notice is that even after the big gold drop being talked about, the total gold stock is still massively up on the 2001 bottom and the 1980 bull market. Not surprisingly, given the behaviour of SLV's holdings, COMEX silver hasn't dropped.

However, the stock figure by itself doesn't tell us much, as how can we compare the 1980s with today when we have a much larger economy. The important metric is to compare stocks in relation to open interest. If stocks decline but open interest declines as well, then the stock drop is to be expected.

Thankfully Nick at Sharelynx calculates this for us - what he calls Owners per Ounce, or Stocks Cover and you can find the charts here. It is just open interest in ounces divided by stock in ounces. I like to invert it, which gives you a percentage indicating how much of the open interest is backed by stock, a sort of fractional reserves figure. The table below has those approximate figures I've eyeballed from Nick's charts.

Year	Gold	Silver
1980	13%	10%
2001	9%	28%
2012	26%	22%
Now	19%	21%

So even after that COMEX stock drop in gold, we still have a coverage ratio that is way above that which applied in the 1980 bull and which is not down much on 2012. The current coverage of around 20% also needs to be kept in context of the percentage of open interest which stands for delivery, which for gold and silver over the past five years averages between 2% to 4%. So it looks like COMEX has plenty of stock on a historical basis. It is when that percentage coverage gets a lot closer to the average standing for delivery rate that we can consider COMEX under stress and at risk of cash settlement. We aren't close, no matter how the much the pumper sites like to hype the recent stock declines.

And for those who will say what about if everyone stands for delivery, well consider that while most of the shorts don't have the metal, most of the longs don't have the cash. We know this because of all the talk about margin calls causing people to have to sell. Think about that - if they couldn't meet the margin calls, then it means they didn't have the money to stand for delivery.

Chill out dudes

OK, it is all getting a bit silly out there on the gold interwebs, particularly in respect of the supposed physical-paper price disconnect. I have been trying to kill this meme ever since it first appeared in 2008 but it seems the idea of production capacity shortages seems too difficult for many to get.

The "real" price of gold isn't what you pay for a 1oz coin on eBay. As Mish says "Premiums on small denomination coins is not the same a general premium on physical gold itself." But don't take his or my word for it, here's what Jim Sinclair says:

"For many retail investors around the world they are dialed into the paper market in various exchanges. The second market is a small one, but popular among retail investors, and that’s your corner or even major coin dealers. But neither of those are in fact the real gold market, which is the cash market for gold. This is the cash market for 400 ounce deliverable fine gold bars. That represents the true price of the market on any given day. ... for the physical market, not the coin dealers, but the real market, the 400 ounce deliverable market and Asian type settlement ..."

So what is going on in this real market? Well, don't look to Jim Willie who thinks that "those who purchase metals in bulk are having to pay $2000 or more an ounce for gold in the Asian markets". I work for the Perth Mint and we sell tonnes and tonnes of gold kilo bars into Asia every week and we'd be lucky to get a few dollars of premium above the so-called fake paper spot price. That tells me there isn't any stress in the wholesale markets. So COMEX and LBMA aren't going to be failing any time soon.

Then we have the ABN Amro story with John Embry claiming that "the Dutch Bank ABN AMRO came out and literally said that if you have allocated gold with us, you can’t have it. That, to me, is a default". Sorry, not true, thanks to About.Ag who found this link to the English translation of the conditions of those accounts and on page 6, section 4.3, it says:

"1. You have no right to the physical precious metals which you invest. However, under certain conditions, you can physically obtain the precious metals. ... 3. You cannot always physically receive the precious metal. ... In that case, you therefore have no rights or receivables vis -à-vis DBN or the bank."

Sounds like a classic bank unallocated account, which unlike the Perth Mint's, is not necessarily backed by physical. So it is not a case of default.

Final example is Bill Downey's claim that "the London physical platform that buys and sells physical gold gets locked up. The system freezes". When I told Dan at The Fundamental View that there was no "the" London platform, he followed it up and discovered that:

"The screen shot in the article is not of a "physical" market but just a trading platform from a bank (one of many, each BB has their own platforms) for trading spot unallocated XAU/USD FX pair. The post made it seem (to the unaware) that this was "the" London platform. – Mr. Downey acknowledged this error in his email to me. ... His articles made it seem as though the system “shut down and locked people out from placing orders”. To his credit, Mr. Downey admitted to me that this could not be proven and that this was simply speculation on his part. He did admit that orders could still be phoned in."

Simply speculation on his part. This price drop seems to have resulted in a lot of that. Look, it is great news that retail investors have gotten a bit smarter and are buying on price drops rather than chasing the price up like they have in the past, but it does not portend the end of the (paper gold) world, yet.

If you want to be a little smarter, consider what I said to Ed Steer today, "buyers really need to go for the cheapest physical they can and be a bit more flexible on who makes it...or go from coins to bars. Paying high premiums just because you want a certain brand or bar size, just means your money buys less ounces, which takes less ounces off the market."

I note that Sprott's gold trust is trading pretty much at spot. So if you are a suspicious goldbug, which is why you want physical, then doesn't it make a lot more sense to buy the trustworthy PHYS at spot and then when this rush dies down, to sell your PHYS and buy physical coins/bars at more reasonable premiums? Funny how none of the physical pumpers mention this. That's because they can't make money off exorbitant fabrication premiums if you buy PHYS rather than their coins.

Like the post title says, Chill Out, and think a bit deeper about the memes being pushed on you. To help with that, suggest reading this speculation that Andrew Maguire is a US Federal Reserve double agent. That site is a joke by the way, for those without a sense of humour, although the question of why Andrew hasn't produced a CV to stick in Jeff Christian's face is valid and something that puzzles me and some on this Kitco forum thread.

If they didn't warn, then don't listen

So every gold commentator has an opinion on gold's drop. My question is if they didn't warn you beforehand about the risk of a big drop, why pay attention to what they have to say about it after the fact? That is my response to Gordon's comment.

I find it particularly amusing that those who purport to have inside information on the physical market or contact with deeply embedded kingpins did not warn their readers that the market setup was weak, that central banks would not be buying aggressively on the dips and in increasing size at $x price. Yet their followers still think they are gurus.

I could say that they either knew and traded against you, or that their contacts are no good, or that their contacts knew but fed them wrong information (ie they are being played) because their contact knows they have a wide audience and wanted to trade against the guru's followers, or that they are just frauds and don't have any contacts and just make up those stories as it sounds a lot sexier than just saying "my opinion is". I think the most likely answer is just that the gold market is an opaque over-the-counter market where participants only have a view of (their) part of the market.

From my part of the market weeks before the crash the Perth Mint was getting a strong bid from bullion banks for our refining output as kilo bars into Asia. I only really watch those premiums as they are for tonnes at a time and we are about 10% of new mine production. So if you asked me I would have said the physical market was looking good.

So the drop was leveraged paper longs head-to-head against paper shorts. Yes the shorts don't have the gold, but obviously the longs don't have the cash either, otherwise they wouldn't have had any problem meeting margin calls and being ready to stand for delivery.

This is a case of the tide receding and finding out who is swimming naked. That is, we now know that when gold was $1900 it was composed of $1300 of strong hands and $600 of speculative weak money. That is the lesson to remember for next time gold has a run - ask yourself how much of the price is strong and how much speculative.

But why listen to me? I didn't warn you beforehand.

Precious metal commentary: propaganda, porn or entertainment?

I'm still alive. Haven't blogged for a while due to a lot of work on, primarily on a few Perth Mint Depository related business initiatives as well as trying to get up a research section on our perthmint.com.au site.

One of the more radical blogs I follow is Unqualified Reservations. His recent post on propaganda is a worthwhile read for those interested in social media manipulation and the state of precious metal "commentary".

Below is a quote from a book by Jacques Ellul that Unqualified Reservations refers to. I've edited it and changed a few words to make it read like it applies to precious metals:

Investors are faced with choices and decisions which demand maturity, knowledge, and a range of information which they do not and cannot have. The individual wishes to be conversant with economics and precious metal markets. He wants to form an opinion on them. But in reality he can't. He is caught between his desire and his inability, which he refuses to accept.

For no investor will believe that he is unable to have opinions. Public opinion surveys always reveal that people have opinions even on the most complicated questions, except for a small minority (usually the most informed and those who have reflected most). The majority prefers expressing stupidities to not expressing opinion: this gives them the feeling of participation. For this they need simple thoughts, elementary explanations, a "key" that will permit them to take a position, and even ready-made opinions.

As most investors have the desire and at the same time the incapacity to participate, they are ready to accept a propaganda that will permit them to participate, and which hides their incapacity beneath explanations, judgments, and news, enabling them to satisfy their desire without eliminating their incompetence. The more complex, general, and accelerated precious metal market phenomena become, the more investors feel concerned, the more they want to be involved.

And the investor does not want information, but only value judgments and preconceived positions. Here one must also take into account the investor's laziness, which plays a decisive role in the entire propaganda phenomenon, and the impossibility of transmitting all information fast enough to keep up with developments in the modern world. Besides, the developments are not merely beyond man's intellectual scope; they are also beyond him in volume and intensity; he simply cannot grasp the world's economic and political problems.

Faced with such matters, he feels his weakness, his inconsistency, his lack of effectiveness. He realizes that he depends on decisions over which he has no control, and that realization drives him to despair. Man cannot stay in this situation too long. He needs an ideological veil to cover the harsh reality, some consolation, a raison d'etre, a sense of values. And only propaganda offers him a remedy for a basically intolerable situation.

Following that quote, Unqualified Reservations observes that "the modern propaganda addict (we cannot call him a victim) experiences political authority ... entirely as porn. That is, as a simulation entirely without substance."

Simulation entirely without substance. Exactly what a lot of precious metal commentary is - Propaganda/Porn. Maybe to be less harsh I should say a lot of it is Entertainment (making it amusing to read them ranting against the main stream media when they themselves engage in the same dumbing down).

All very dangerous to your financial health, unless you know you are consuming entertainment. But how to identify it? I'd suggest asking: what do you associate the word "propaganda" with? I'd say Emotion. Propaganda is emotive, angry, fearful, blindly patriotic. Not rational or calm. That is one of its "tells".

Al Korelin Interview

Did an interview with Al Korelin on the weekend. Covered China, the challenge ETFs present to gold mining shares, World Gold Council's purpose in creating the ETFs and institutional demand the Perth Mint is seeing and how we are only in phase two of a bull market.

The circus moves on

I forgot to post that TF Metals Report responded to my response to Andrew Maguire's article on price suppression mechanics.

Gene Arensberg did a post on my November 30 article. I watched it for a few days but no one commented so I stopped checking it. A day later on the 5th blogger Dave In Denver posted some comments, which I missed.

TF picked up on these comments a day later, turning them into a post titled Cage Match: Bron vs. Denver Dave. Dave's main beef seemed to be that I didn't critique GLD and was thus an apologist for the ETFs. He completely missed the point of my response, which was solely about addressing the suppression mechanics.

You can find my response to Dave here. One important extract is some core views I have:

• I do not recommend ETFs for anything but short-term trading.
• If you don’t hold it in your hands, you have counterparty exposure - period.
• Allocated with bar numbers in a non-bank vault does not have some magical force-field that stops it from being stolen. You are trusting your custodian.
• If you hold it in your hands, you have theft exposure. All precious metal investment has risks, only you can decide what risks you are comfortable with.
• Don’t let anyone tell you that you are an idiot for storing it yourself or for storing with a custodian.
• If you don’t understand a prospectus/agreement, stack physical.
• If you don’t understand a company’s business model (which includes the Perth Mint’s “use in our business” unallocated), stack physical.

The third last one is one that annoys me whenever I see it - this judgemental attitude that you must hold your metal without any consideration that what is right for you may not be right for someone else.

Interestingly, at the TF blog no one was interested in my response and it didn't gather any further debate. As I commented at TF:

I wasn't expecting much comment one way or the other. TF posts so frequently that the circus moves on and unless you can comment within the day of the post it is too late, which is difficult for me being 12 hours behind.

I do not like getting into this sort of infighting but as everything lives on forever on the internet and if you don't reply the claims stand and become accepted as fact. This whole negative dynamic is not good as I agree with Gene Arensberg's comment (where Dave's comments originally appeared) "In fact they succeed only in one respect - of confusing and turning some people off to the entire sub-sector. It is a pity they do not realize that one cannot poison just part of a well."

My response will also be a handy reference link to give next time I'm accused of being a bankster shill.

I suppose it reflects the fact that the TF Metals Report has a client base who are just buy and hold type stackers. They have made their decision and thus most of them aren't interested in debating or learning, they are primarily there for entertainment. TF's use of "army" imagery and the "cage match" characterisation are indicative of that.

Nothing wrong with that, except that I don't know how they are going to know how to assess when to sell their metal, which is something they will have to work out for themselves because it is doubtful TF or Maguire (or many people selling gold products) will do it as it doesn't help your business model to tell your clients to leave. However, if they haven't spent the bull market thinking critically and trying to understand the market's dynamics, it is likely they will get the exit all wrong.

The true test of who the charlatans are in this business will be those who continue to say buy buy buy all the way through the bubble top as they try and squeeze every last bit of profit out of their clients before they close up shop and move on to the next story.

CFTC alleges paper gold scam

The CFTC in this press release allege that the defendants "conducted illegal, off-exchange commodity transactions, and deceived customers in connection with financed transactions in precious metals." I've listed the defendants who have websites:

Hunter Wise Commodities
Lloyds Commodities
Blackstone Metals Group
Newbridge Alliance
United States Capital Trust

The key text from the press release (my emphasis):

According to the CFTC complaint, the defendants claim to sell physical metals, including gold, silver, platinum, palladium, and copper, to retail customers in retail commodity transactions. Under the defendants’ retail commodity transactions investment contract, customers allegedly make a down payment on certain quantities of physical metals, usually 25 percent of the total purchase price. Defendants allegedly claim to arrange loans for the balance of the purchase price, and advise customers that their physical metals will be stored in a secure depository.

The complaint further alleges that these statements were false, and that the defendants do not purchase any physical metals, arrange loans for their customers to purchase physical metals, or arrange for storage of physical metals for any customers participating in their retail commodity transactions. Instead, all the transactions are just paper transactions, according to the complaint. Defendants allegedly do not own or sell metals to customers; customers are charged storage and insurance fees on metals that do not exist; and are charged interest on loans, which are never made by the defendants.

I'm surprised the gold blogosphere hasn't picked up and run with this story, particularly the bits in bold. Maybe they have given up on the CFTC on finding scams so don't bother to check their site.

Interesting to look at the websites. They all look slick on the outside but what I find interesting is that their "about us" sections are mostly motherhood statements with little or no firm history, nor any directors or officers listed. That is a red flag to me.

Gold Symposium Trip

Back from my week long trip over East and have now caught up on the inbox/to-do. Monday and Tuesday was the Gold Symposium. Good to see a lot more bullion dealers there and a lot of people interested in the bullion investment sessions, in contrast to mining companies which has been the focus of the conference in the past.

David Evans from Gold Nerds gave the same presentation as last year but had tightened it up (click here). I think it is one of the best presentations for people new to gold or why they should be buying gold - its doesn't hype up the case or is too gloomer and is quite factual. If you have someone you are trying to convince to get into PMs, I'd recommend sending them this presentation.

Keith Weiner's presentation was also good but I can't find it on the Symposium slide share site. Other ones worth looking at are Richard Karn, Dan Denning and Rickards of course.

Funniest part was the presentation by the BetaShares guy on their USD hedged gold listed ASX product. I met him before his presentation and said I wouldn't heckle (as the Mint's PMGOLD is a competitor) but when he said that the 50% CGT discount didn't apply to physical gold purchases I couldn't let it go by with a comment/question at the end. However, I had to first wait for the inevitable questioning about his statement that physical buyers risked a 5%-10% cost for refining/assay when selling back!! He also lost a lot of people in trying to explain how the 30 forward FX hedge worked. All in all it was a Fail, as they say.

I think next year they should have one room for mining company presentations which you can drop in and out of as you see fit (plus it would give them a bit more time) with all the investment in PMs presentations in another room.

At the dinner/awards at the end Jean Kittson was very good with the mining/gold jokes. Also I think Gold Stackers should have won Trader of the Year award and got stooged on that.

Wednesday I went to the Sydney silverstackers lunch time meet up but had to cut that short because had lunch with Dirk Baur from University of Technology Sydney to chat about gold. He has done a few papers on gold, safe haven assets & seasonality - worth checking out for the academically minded, see his section on the SSRN website.

Thursday met up with BullionMark/Ainslie/Reserve Vault. Class outfits all of them and Mark will bring his usual professionalism to the Reserve Vault business providing another option for Brisbane stackers not happy with the outrageous Allocated storage fees of the Perth Mint :) Seriously the more options for investors the better for the market as a whole - its all about diversification.

Later in the day caught up with Warren from screwtapefiles blog to chat about his Bullion Bars Database project to see what we might be able to find out about the OTC bullion market. Pity Warren has a day job and can't spend all his time on that work as I think there are some nuggets buried in the data. Dinner later that night with some Brisbane PM bugs of varying ages was a treat intellectually and I was bummed to have to cut the stimulating conversion short due to an early flight out the next day.

Friday was a fly in and fly out visit to Nick of Sharelynx. It was great to meet Nick in person for the first time and we gasbagged on gold for about 6 hours straight and forgot about lunch (but not beer). The amount of data Nick has accumulated since the 1990s is invaluable. Well worth the subscription as I always say.

Go Slow on Silver

Screwtape Files guys have a good post on silver cautioning that silver may be primed for a correction.

I've been following the story of Israel Switt and the 10 x 1933 Saint-Gaudens double eagle coins he "acquired". ABC is reporting his family lost an appeal in the Eastern District Court of Pennsylvania. They will be appealing to the 3rd Circuit. For $80million I would be too.

Finally, the Reserve Bank of India continues on with their "socio-cultural revolution" against gold: "Because interest rates are very low, people are investing in gold. But the poor should never invest in gold for whenever they have purchased gold, it either lands up in the temple or in the hands of the moneylender or, at the most, it may be given away during a daughter's marriage."

Maybe they should have a chat to their mates in Vietnam, who have given up on verballing and just taken over the gold market, with the State Bank of Vietnam saying "it had taken over gold bar production in late May, making Saigon Jewellery Company (SJC) the national brand. Since then, all production of gold bars in the country has been exclusively handled by the government."

Take Gold With You On Your Journey Into The Unknown

Have a post up on the corporate site about the Deutsche Bank's latest long term asset return study, subtitled A Journey into the Unknown.

Any analysis that looks at asset returns in gold terms is worth a read. It is interesting in that it has an ambivalent view of gold - usually when people write about gold they have a strong pro or con view.

My view is that if we are in uncharted economic territory as the study argues, then that is exactly the time to hold some gold insurance.

First Majestic and Silver Speculation

A few days ago Ed Steer made this comment in response to First Majestic's 2nd quarter financial results:

... here's an interesting item from that report..."In addition to cash, First Majestic was carrying 574,000 PSLV (Sprott Physical Silver Trust) units at quarter end with an approximate market value of $6.65 million...and 100 Silver Futures contracts representing 500,000 ounces of silver valued at $1.7 million including the unrealized gain and the margin requirement. The Company is currently holding 150 contracts representing 750,000 ounces of silver at an average cost basis of $27.277."

750,000 ounces of paper silver? They mine this stuff...and buy paper silver? I'm sure that JPMorgan laughed with glee as they sold them the Comex futures contracts. You can't make this stuff up! It makes me want to sell my position in the company at the open this morning, but I won't.

This drew the following response from their Investor Relations Manager:

Hi Ed – Hope all is well. Thanks for reading our news release yesterday, however, I’m honestly quite surprised to read your comment below in today’s G&S Daily

Mr. Neumeyer (like yourself) is a silver bull and employs the use silver futures to trade the volatility in the market. By utilizing some of the top physical metal traders in the world (whom trade approx.. 70% of the world’s silver market), we have access to valuable information. Furthermore, this activity is nothing new… for more than 2 years our shareholders have benefited from this activity. For the first half of 2012, First Majestic has realized a gain of $2.3M; 2011 +$2.4M; 2010 +$2.9M.

Quite frankly, I realize your issue is not with the trading activity; it’s directed at the use of Comex futures. Your concerns have been received and we always appreciate valuable shareholder feedback.

BTW - the use of stops are not practical for professional trading…

Can anyone explain to me the difference between the mindset expressed in this response and how the "banksters" and hedge funds operate? What is being described is speculation using other people's money, pure and simple.

We have no real appreciation of the risk of using futures, which after MFGlobal and PFG one would have to acknowledge has some risk of loss of one's margin associated with it - "concerns have been received" is all that is said.

But it is OK because they are trading off inside information of sorts from top traders and it has been profitable (so far)!

Basically what we have is a miner's silver flow being used as the base off which the CEO speculates on silver prices. It reminds me of Sons of Gwalia which failed due to a hedge book which blew up when production/reserves were not sufficient to meet the committments - the hedge book part of the business was far too big relative to the operations with little margin for error.

If Mr Neumeyer wants to speculate on silver I'd suggest doing it in separate vehicle like a hedge fund and keep the miner just doing mining. That way the performance of the speculation is clear for all to see and if it blows up it won't affect the ongoing mining operations.

Or am I just old fashioned?

Before and After

I think Warren's market flowchart needed to be refined.

Financial Survival Network

Been a busy boy this week, click here for my interview with Kerry Lutz. Starts off with questions about the Perth Mint and the Certificate Program, but he hits me up with a question on price maniplation at the end where I distinguish between manipulation and supression.

Also, a very good post by Warren at Screwtapefiles blog on his favourite topic of social media manipulation in the precious metals space. His chart on flowchart of how the metals market works is also a classic.

Silver Seasonality

Inspired by a chart Ed Steer posted on silver's seasonality, I decided to have a deeper look at it. I was looking for a strong pattern and considered many different time periods but just couldn't find anything reliable enough. I think silver is just too inherently volatile and driven by differing globally dispersed demand drivers to exhibit any consistent seasonality.

Article can be download from here.

COMEX is not the be all and end all

Have been involved in a bit of a non-debate (as in the other side doesn't want to explain their position) on whether traders can just rely on data from COMEX. My answer is no, as the COMEX precious metal markets are but one part of the total market for paper and physical metal and through arbitrage are tightly linked to each other. Therefore just relying on COMEX open interest, volume, etc data will give one an incomplete view and thus trading methods based only on COMEX analysis will produce a lot of "surprise" events/patterns.

I covered this point in this post on short term trading. To observe me banging my head against a brick wall, and for a further exposition of this view, read the comments posted at Scott Pluschau's blog.

Interview with The Street

During my recent trip to New York I did a short interview with The Street, see here.

Was over there for the Euro Pacific Capital Global Investment Conference. Peter Schiff did about an hour talk at the start, pretty much covering the stuff in his new book The Real Crash, all without notes. Got a chance for a short chat with him but forgot to get him to sign the book. Doh.

Also managed to catch up with a few Depository clients. Always good to get feedback and I got a few tough questions thrown at me as well. I haven't met a client I don't get along with, I think its because us gold holders all have the same concerns, values and outlook on how economic life should be organised (or should I say not organised).