Fraud on GLD holders?

Further to my post yesterday, FOFOA left this comment on his blog discussing two risks he sees with GLD:

1. That the gold in GLD has multiple claims on it. Quote: “GLD's gold bars originated as reserves in the mainstream bullion banking system. That is, they are essentially reserves on loan to the ETF from the bullion bank's fractional reserves. And the lending of anything always creates a synthetic supply” and “that lent its reserves to paper GLD investors in the first place”

2. That shorting of GLD results in multiple claims on the gold: Quote: “The other side is the lending of this "synthetic gold supply" that creates an additional synthetic supply of synthetic gold. When someone shorts GLD they borrow the shares from someone else. And that same share can potentially be borrowed again and again.”

My short response is I disagree with 1 in respect of “lending” but agree with 2. Now for the long response.

The idea in point 1 that GLD has encumbered gold in it was raised in Catherine Fitts’ “Precious Metals Puzzle Palace” and also Hinde Capital’s “Precious Metals ETF Alchemy GLD – the new CDO in disguise?”

I discussed this issue in this post. If Authorised Participants borrowed physical (or used physical backing their unallocated liabilities to their clients, which is the same thing) and delivered that to GLD, there is no claim or encumbrance by the original lender to the Authorised Participant on those bars held by GLD.

To claim otherwise is to question the entire basis of Allocated gold that the market (and “giants”) operate and rely on, as no giant with a couple of tons of gold can just bury it in their backyard. It would also question the integrity of GATA consultant James Turk’s GoldMoney as well.

The second part of FOFOA’s comment is that any delivery to GLD by a bullion bank of physical gold that was supporting/backing the bullion bank’s fractional unallocated liabilities is a “synthetic supply” that effectively suppresses price by “divert[ing] growing investment demand away from the tightening physical market.”

I would note that for this statement to be true the bullion bank(s) in question must be naked short. Not all Authorised Participants for GLD would have access to the physical to do this, nor would they all be willing to take on such a financial exposure. Question to FOFOA: how many tonnes of GLD do you think are short?

A final point (and FOFOA probably won’t like this conclusion). I would claim that those at risk from this activity are not holders of GLD, but bullion bank unallocated clients because the legal title to the metal in GLD is held by the Trust, not the Authorised Participants or bullion bank unallocated clients.

Now this is a simple legal fact. It does not mean that in any meltdown when fractional claims come home to roost, holders of GLD will survive while bullion bank clients will not. It may happen that the custodians do “take” the gold behind GLD and give it to their unallocated clients first and use the get out clauses in GLD to say they “lost it” or some such other fraud if they are unable to subsequently replace it. Some believe that this is likely behaviour, others that no matter how ruthless bullion banks may be, that they would not engage in such outright fraud. I'll leave that to you, the reader, to have an opinion on.

FOFOA seems to think this is a possibility because he thinks that the bullion banks somehow have a special right to the gold in GLD, see this comment:

A place to park your unallocated deposits and sell them for dollars that can then chase an ROI, knowing that the gold will still be there for you to buy back any time it is needed, because you are an Authorized Participant with special rights to the gold.

I do not see how Authorized Participants have any special rights. Once they deliver gold and get GLD shares and then sell them for cash which they then "chase an ROI", they give up an rights to the GLD share or gold. Yes an Authorized Participant has special ability to redeem GLD shares for gold, but they have to tender the GLD share first, which in the situation above, they can only obtain by buying GLD shares off investors, thus pushing the price up.

If you, the reader, think that it is likely that bullion banks would steal Allocated gold, I would then argue that if a bullion bank was to consider engaging in such fraud, it would not do so with GLD’s Allocated metal because that is an exchange listed product with regulatory, audit and client visibility (through the bar list). Using Allocated metal held by other clients with the bullion bank would be a far lower risk as that is an over-the-counter market arrangement, subject to far less oversight as it is in the "dark". Again, GLD represents the least risky paper gold – the last to fall, so to speak.

Remember that gold ETFs are only 2,000t out of 30,000t of privately held gold, a fair bit of which is Allocated with bullion banks and other custodians. I think it is a more believable thesis that any short covering, fraud etc is more likely to occur in the over-the-counter "dark" market first, leaving the visible ETFs to maintain the façade that everything is OK.

The point of my discussion above is not to suggest GLD is a safe investment. It is just to introduce a little more nuance beyond a simplistic “GLD is bad because bullion banks involved.”

In respect of point 2 about the shorting of GLD, I would like to see some numbers on that. I am not sure it is as pervasive as implied. This article on ETF shorting in general and ETF settlement fails give a sense of the extent of the issue, but unfortunately GLD is not mentioned.

One final comment by FOFOA:

From my perspective, GLD had the opposite effect on the price of gold (and may have been intended for just that purpose) as it diverted growing investment demand away from the tightening physical market.

All I will say to this is that is was not intended by the WGC for that purpose and there was obsession about creating a product that resulted in "physical offtake". Whether the vehicle that resulted was the best design is another matter. There seems to be this view that the WGC is part of the "bullion bank conspiracy". I suggest one look at the membership of the WGC and some of the companies and their involvement in other activities supportive of gold. WGC wanting the gold price to drop doesn't stack up in my view.

Funny business in GLD

FOFOA has an interesting speculation on the movements in GLD:

So now I offer up a scenario, not as a statement of fact, but as fodder for thought and discussion. In this scenario I am not assuming that the drain on GLD to date has been the direct redemption of ETF shares by Giants. I presume it is simply redemptions by Bullion Banks in order to meet the delivery demands of "important clients," real Giants, perhaps from Asia and the Middle East. And because the BBs would normally have better options than plundering GLD, I am assuming those options are either gone or far more problematic than legalized looting.

Also, following Lance Lewis' "puke indicator," one could be forgiven for suspecting that the Bullion Banks have some way to temporarily "pound" the price of gold down on the COMEX in order to buy back ETF shares during a "good price window" with the intention of redeeming those shares into deliverable gold for clients that purchased it at a higher price.

I left a comment, which I post below FYI:

The reason one cannot correlate gold price and GLD holdings is because authorized participants (AP) don't have to create and redeem GLD shares on a daily basis in response to investor activity in GLD.

For example, if you're an AP and have a view that the market is bullish, then you expect over time to see net buying of GLD. Therefore, if on one day there is net selling of GLD, then you can:

1. Buy GLD shares

2. Immediately lease gold and sell it (or just short futures).

3. AP is now long GLD and short unallocated gold or futures. Important to note they have no exposure to gold price movements.

4. Sit on the GLD shares and when investor bullish sentiment returns

5. Sell your GLD shares

6. Buy unallocated gold and repay your lease (or close out your short future).

The above process means that the AP avoids GLD share redemption and creation costs.

Same thing happens in the face of net buying - an AP borrows gold and delivers it to GLD for shares, which they sit on an over a period of time sell into demand for GLD.

This is a way of minimising transaction costs when making a market in GLD or SLV or any other ETF.

The end result is that we see lumpy creation and redemptions, reflecting accumulated buying or selling activity over a number of days.

In the case of large lumpy redemptions, that can reflect an AP who held on to GLD shares in the expectation they would be able to offload them later into expected buying. If that buying does not eventuate, then the AP offloads the lump of GLD share they have as they are incurring ongoing funding costs.

You are correct in that redemptions of GLD cannot really be used to infer too much about what is going on re investor sentiment. The GLD bought back by an AP and gold redeemed is just sold by the AP to someone else, ultimately.

All GLD holding movements tell us is the sentiment of GLD holders. All that futures tell us is the sentiment of futures traders. Are these markets representative of the all private investors in gold. Maybe, maybe not.

What commentators miss is the OTC "dark pool". Consider that ETFs + Futures only represent less than 10% of estimate privately held gold (see this post).

In that case, we should not get too excited by the activity we see with ETFs and futures as it is not where the real giants are.

Consider also that bullion banks know their activities in ETFs and futures can be seen/deduced in some way. Therefore you must assume they let you see what they want you to see, with their real position and activities hidden in the "dark" OTC market.

Who is Draining GLD?

Freegold Foundations

Australian Housing Prices

I've been following an excellent series of posts on the high cost of Australian housing and land from The Unconventional Economist blog. Worth a look if you are interested in the reasons why this is the case - Leith van Onselen's puts it down to restrictive government policies on land use.

Reserve Bank of Australia Gold Sale

Further to The Australian's 11 January article "Reserve Bank's gold sale cost us $5bn", I thought my readers may be interested in the then Perth Mint CEO's response to the 1997 sale.

Consider these quotes:

"It is important to remember that we are evaluating gold now in a low-inflation environment, in which other financial assets are currently performing extremely well, the most important of which is the stockmarket. However, current conditions are not going to last forever. In my experience, in the long term, politicians cannot help themselves. When they are faced with a really tough decision, such as the one creeping up on them now - that of how to create jobs - they will take the easy option and let inflation go."

and

"When the crunch comes, governments will want to be re-elected. Rather than take the tough decisions, they will turn the inflationary tap back on. For that reason, I believe that gold will again have its day. I have not lost faith in gold."

The foresight of these statements come from the fact that Mr Mackay-Coghill worked for International Gold Corporation (Intergold) from 1971 to 1986. Intergold represented South African miners in the production and selling of Krugerrands and Mr Mackay-Coghill was responsible for the introduction of the Krugerrand to world markets in his role as CEO of Intergold.

Open Forum

BASKETBALL AND FOREX

We can learn a lot about how we should strategize in forex from basketball. In basketball if a player misses a shot, the team doesn't sit down, close their eyes and ears, while the other team is still playing; hoping that the game is going to come back in their favor. If a coach told you that was his strategy, you'd say that was ludicrous. Yet in forex a trader will put in a bad trade, turn off the computer, leaving the mistake to grow bigger, hoping that things will come back in his/her favor.

Good trading doesn't work like that, you have to practice good defense, you have to protect yourself!!

Everyday in forex you have an opponent and you must use your defense if you are going to be consistently profitable.

In basketball if your point guard has an injury that is keeping him from scoring, you cut that player and use the back-up point guard. In forex You must do the same thing. When your primary plan fails, you MUST cut that position and use a back-up plan..

Many times as traders we take a hit and quit. If you have a good strategy, you can keep playing until you are ahead of the game.

Two things you must remember to get into the big leagues. #1 CUT BAD TRADES QUICKLY #2 DON'T OVER-TRADE YOUR ACCOUNT. When I say don't over-trade, I mean if you have $1000.00 account don't trade a half of a lot.

If you have a $100.00 account and you trade 1 micro lot (.10) you can grow that by $5.00/day. Everyday that You reach your goal you can add 2 more pennies, which will give you an extra dollar everyday on 50pips. At that end of the 1st week, you will have $35.00, $75.00 the 2nd, and if you stop at that (.30), you can make an additional $150.00 for the month, for a total of $260.00 the 1st month; which is more than double what you started out with. The 2nd month you'd have $300.00, that is an additional $3560.00 for the year if you add .02/day to .10 and stopped at .30 and stayed there the rest of the trading year.

Remember forex is a get rich slow game, so don't over-trade your account.

Use discipline with a good strategy. Most importantly CUT BAD TRADES QUICKLY, because the best strategy in the world is no match for a free running loss!

NEVER LET THEM TRAP YOU!!!!!!!!!!!!!!!!!!

CUT BAD TRADES QUICKLY!!!!!!!!!!!!!!!!!



If you take a hit, don't sit down and quit hoping the other team is going to have mercy and let you win. They are your opponent, they are not your babysitters, they are out to beat you. You have to stay in the game, practice good defense, and protect yourself if you are going to come out ahead!!!!!

You can do this(^_^)!!!

Reference Point: Gold - Update #1

It's Déjà vu All Over Again

Happy New Year!

Windmills, Paper Tigers, Straw Men and Fallacious Fallacies

Kicking the Hornets' Nest

Focal Point: Gold

Sprott says SLV has physical?

I found it interesting in this Sprott piece The Silver Lining that Sprott includes SLV in his table of "real investment demand for silver".

In the context of his point that GFMS and The Silver Institute neglect investment demand, I assume by the use of the word "real" Sprott must mean physical. In which case by including SLV's 305,205,951oz he is therefore saying it does have the physical.

If SLV doesn't, then he shouldn't include it in the table as their holdings would represent fake paper silver. However if he doesn't include SLV then he has no point about GFMS/Silver Institute missing investment demand of 225,783,924oz because without SLV the "aggregate implied investment demand" figure from GFMS/Silver Institute covers the other funds' inflows.

Freegold in the Proper Perspective

CONTROLLING RISK

One of the most important things You can do as a trader is to control your risk. In other words pre-set a point that You have determined that You could possibly be wrong.



Remember, trading isn't hard, it is just tricky because everyday the market does the same thing, it moves up and down and sideways and gets choppy. It not only does this every day, but every week, every month and every year. Your job is to determine the primary direction of the market's movement and try to profit from that knowledge.



Sounds easy, but there are hidden traps in the market to snag You, and keep things interesting. Market Makers are always trying to to trick You before taking price strongly against You. They are attempting to trap You in a losing position. This happens everyday in the market, and it WILL eventually happen to You too.



You advantage is in keeping your losses small. Have a predetermined amount of pips the You are willing to lose. Once You have determined that amount, 'say 20 pips or so on a short term trade, MAKE NO EXCEPTIONS!!!!!!!



A FREE RUNNING LOSS can be a major game changer!



It should not take a -200 pips in short term trading before You realize that You have loss Your advantage. If You are telling yourself "Ah it will come back", chances are very good that You are already in trouble!



Being a pro traders does mean that you never take losses, being a Pro Trader means that You never let losses take You out of the game!!!



NEVER LET THEM TRAP YOU!!!!!!!







If You are telling yourself "Ah it will come back", chances are very good that You are already in trouble!



CUT BAD TRADES QUICKLY AND GO IN THE DIRECTION OF PROFIT!!!!!

YOU CAN DO THIS (^_^)!

Brodsky on Gold

The Value of Gold

Thanksgiving Week Open Forum

Black Friday Open Forum

FOA on Currency Styling, Currency Management, Dollar Hyperinflation and End Game Scenarios

Open Forum

Dilemma 2 – Homeless Dollars

Dilemma

Happy Halloween

SEASONS

This was an amazing gift from a Friend this morning and I had to share it:

There was a man who had four sons. He wanted his sons to learn not to judge things too quickly. So he sent them each on a quest, in turn, to go and look at a pear tree that was a great distance away.

The first son went in the winter, the second in the spring, the third in summer, and the youngest son in the fall.

When they had all gone and come back, he called them together to describe what they had seen.

The first son said that the tree was ugly, bent, and twisted. The second son said no it was covered with green buds and full of promise.

The third son disagreed; he said it was laden with blossoms that smelled so sweet and looked so beautiful, it was the most graceful thing he had ever seen.

The last son disagreed with all of them; he said it was ripe and drooping with fruit, full of life and fulfillment.

The man then explained to his sons that they were all right, because they had each seen but only one season in the tree's life.

He told them that you cannot judge a tree, or a person, by only one season, and that the essence of who they are and the pleasure, joy, and love that come from that life can only be measured at the end, when all the seasons are up.

If you give up when it's winter, you will miss the promise of your spring, the beauty of your summer, fulfillment of your fall.

Moral :

Don't let the pain of one season destroy the joy of all the rest. Don't judge life by one difficult season. Persevere through the difficult patches and better times are sure to come some time or later.



Thanks Jonathan, it was a much needed lesson for life (^_^)

YOU CAN DO THIS (^_^)

Flow Addendum

It's the Flow, Stupid

Recent Posts

I'm posting now on the corporate blog, recent posts FYI:

A World Of Multiple Reserve Currencies

Vote On Proposed Changes To PMG

Gold Helps Manage Risk More Effectively

RIP Benoît Mandelbrot (1924-2010)

One Tin Soldier

A LOSS IS LIKE A RATTLE SNAKE

A loss is like a rattle snake, DROP IT BEFORE IT KILLS YOU!!!!!!!

As of late, I have been getting emails from traders who have blown up their accounts. Believe me, I know first hand the pain, desperation and frustration that comes with that experience as I have had it many times. The first time I blew up an account I had to get two jobs 7 days a week to almost cover my bills and I was still struggling.

No matter how many accounts I have blown up, I have always managed to do it the same way every time 'holding on to a loss' that grew up to kill me because I refused to let it go, hoping and praying that the market would come back in my favor.

When I would read other traders info that said cut losses, I thought they were being negative and trying to make me lose my money. Had I listened to that wisdom, it would have saved me many heart-aches.

Let's deal with some hard facts about trading:

#1 YOU ARE GOING TO LOSE MONEY HERE!

This is a big girl's game, if You are afraid to lose money, You should be doing something else with your life, it will be much more profitable.

#2 THE MARKET IS VERY VERY GENEROUS AND WILL ALWAYS GIVE YOU OPPORTUNITIES TO MAKE MONEY!!!!!!

-CUT BAD TRADES QUICKLY AND GO IN THE DIRECTION OF PROFIT!!!!!!

Most of us got into forex with the idea that this is easy money, ignoring everything that told us that 95% of all 1st time traders go broke in the market. We ignored it because we decided that we would be part of the 5% who beat the odds. If You are like I was, You read every book You could get your hand on, every website and attended every webinar to make sure You were part of the 5% who were successful here.

FOREX IS NOT HARD. FOREX IS TRICKY AND WITH THE RIGHT EDUCATION AND DISCIPLINE ANYONE CAN DO IT (^_^)

What we fail to realize is that forex is like any other profession, it take most of us a while to be successful here.

NO ONE WHO IS TRULY GREAT DID IT OVERNIGHT, it took continuous education, practice, discipline and sometimes a little blood, sweat, and tears.

I don't care how brilliant a surgeon is, You don't want him to cut on you without PROPER TRAINING & PRACTICE. Notice how many high powered professions are always practicing, 'Practicing Physician', Practicing Attorney'. Other professionals are practicing to get better and so should You.

You can be successful at forex, but not if You are not willing to do what it takes to succeed.

SUCCESS LIST FOR FOREX:

WAIT for a proper trade set-up before entering the market!

LET GO of bad trades quickly!

ALWAYS TAKE MORE than You give!

YOU CAN DO THIS (^_^)

Gold Bubbles

UK financial writer Dominic Frisby argues “that both metals [gold and silver] are still in a bull-market phase. Any mania is yet to come.” In support, he notes that in 1980 gold bullion went from $400 to $873 an ounce in only 36 trading days, with silver trading from $16 to $50 in 37 days. The current market is not exhibiting those sort of price moves.

He also proposes looking at the value of the US gold reserves compared to money on issue as an indicator of a bubble - “in 1980 … the market value of the 260 million ounces of gold held by the USA in Fort Knox came in at $221bn, yet only some $160bn of paper money was in issue” so if “the market value of the gold held in Fort Knox once again exceeds the number of US dollars the US authorities have issued, then gold will be in bubble territory once again, in that it will be trading at levels above its intrinsic value”.

Dominic closes his article with his definition of a bubble that I think may explain why a lot of financial commentators are consistently negative on gold: “A bubble is a bull market in which you don't have a position”. However, I doubt we will see many of them change their view and buy gold, because these days the internet means all their previous statements are recorded and easily searchable and I can’t see them admitting they were wrong.

Perth Mint Blog

Perth Mint has launched an online bullion selling website and to go with it a corporate blog. After 2.5 years of blogging privately I'm finally going to be able to go legit!

The change in role means I will have more time to put into posts and be able to formally draw on our internal data. I'll keep this blog up for posts that aren't suitable for a corporate blog. For the moment I'll be dual posting as it is a soft launch before they go for a proper launch and marketing campaign. What I'm aiming to cover with the corporate blog can be found here and is pretty much the same as what I've tried to do with this blog.

Prof Keen Compares Bankers To Drug Pushers

Professor Keen presents a dramatic analogy in his recent article on his speech at the American Monetary Institute’s 2010 conference: “banks are effectively debt pushers, and trying to control bank lending at the source is like trying to control the spread of illegal drugs by directly controlling the drug pushers. While ever there are drug users who want the drugs, then there’ll be a profit to be made by selling drugs, and drug pushers will always find ways around direct controls.”

The comments were a response to the American Monetary Institute’s campaign to establish a 100% reserve banking system. While Professor Keen is ambivalent about the proposal, he feels that the issue “is not how money is created, but how it is used. If it’s used to finance productive investment, then generally speaking all will be well; but if it’s used to finance speculation on asset prices, then it will lead to financial crises”.

He therefore feels reforms need to be focused on modifying borrower behaviour rather than trying to regulate lenders. His article is worth a read for his proposed reforms and the civil and mostly intelligent debate of them that follows in the comments section.

High Court Judge Rules Paper Money “Almost Worthless”

In a recent High Court of Australia judgement on the Goods and Services Tax treatment of foreign currency transactions, I note with amusement Justice Dyson Heydon’s statement that:

“Apart from those rights [as legal tender], the pieces of paper had little value. They might have been used to stop an uneven table wobbling, or to jam shut a loose door, or to amuse small children, or to light a cigar. If the currency included coins, the coins might have been used to turn stiff screws or to lay on railway lines for the purpose of being flattened. But uses of that kind, which are very remote from their real purpose, would not prevent both the pieces of paper and the coins from being almost worthless.”

Before you rush to burn your money or flatten your coins, the judgement notes that “because the tokens are currency, the holder of the tokens can use them as a medium of exchange and as a store of economic value. Currency has value only because of the rights that attach to it.”

So relax, your paper money does have value. However, if you are concerned about what high inflation may do to the value of cash, you may wish to consider storing your surplus “economic value” in the form of legal tender bullion coins - sorry, tokens.

Of course, I can’t guarantee that precious metal prices will not fall, but at least you will always be able to use the coins to turn a stiff screw or two!

Open Forum

Gold Symposium Bail Out

I've had to pull out of The Gold Symposium as the Mint's Board meeting (which I have to attend) has been moved to a day of the event. Was looking forward to meeting the speakers and attendees so not too happy. In that case the Board better approve my business case for redeveloping our exhibition area :) or I will have missed the event for no good reason.

Free Sharelynx Trial

Nick from Sharelynx has opened up his website www.sharelynx.com to all viewers for one week from 27th Sept to 4th Oct. I strongly recommend his site. I've listed some of my favourite links below which should give you a sense of the massive amount of information available.

http://www.sharelynx.com/chartstemp/BubbleComparisonsHistory.php
http://www.sharelynx.com/gold/CMXAUStockpiles.php
http://www.sharelynx.com/gold/cots/ddfcotgc.php
http://www.sharelynx.com/gold/TransETFs01.php
http://www.sharelynx.com/gold/ratiochartgcsi.php
http://www.sharelynx.com/gold/200yearcpiauaggraphic.php
http://www.sharelynx.com/gold/CoinPremiums.php
http://www.sharelynx.com/gold/chartmtwk/LivePMusdauo.php
http://www.sharelynx.com/papers/GoldFuturesMarkets.php
http://www.sharelynx.com/chartstemp/IntradayGCManipulation.php
http://www.sharelynx.com/gold/chartslt/globalreservesaut.php
http://www.sharelynx.com/gold/charts4/hedgetotal01.php
http://www.sharelynx.com/gold/RealRates.php

BTW, I haven't posted for a while because I've been tied up with the final stages of our retail renovation. A feature will be the classiest bullion trading room in Australia and hopefully I'll get a video of it up on the Mint's youtube page.

SAVE YOURSELF!!!!!

Last week we got a huge surprise in the market when the bank of Japan intervened to devalue the yen against other major pairs. Most traders were caught on the wrong side of the trade. Many took huge losses and some of them let their account be blown up.

Guys when bank volume starts to move price, You may not get a pullback to take a smaller hit. If You don't have volume on your platform, You can recognize bank action by price that moves one way almost continually without much retracement. Price will get to a resting plateau and rest before exploding again in the direction of the previous price action.

Many of us will sit at our screens, cursing, praying, begging, but the best thing to do is to save yourself, by cutting bad trades quickly. DON'T DEPEND ON THE MERCY OF THE BANKS TO DO IT!!!!!! THEY ARE OUT TO EAT YOUR LUNCH ALWAYS ! THEY ARE YOUR ENEMY, AND THEY ARE RUTHLESS WITHOUT MERCY!!!!!

What happened last week was nothing more than a market shake out, it happens to traders about 3-4 times a year. The last big one in May 2010 saw a drop of up to 1000 pips in 24 hours.

What can You do to save yourself from this kind of adverse action.?????????????

#1. DON'T LEAVE OPEN POSITIONS! Trade what You can see. When You are not in the market take your money out with You. That way You can save on all of those foul words to Your broker when he tries to explain the price slippage that caused price to go beyond Your stop loss.

#2. If You must leave trades opened, put in a physical stop losses..

#GRANDDADDY OF THEM ALL!!!!!!!!!

NEVER LET LOSSES RUN !!!!!!

NEVER LET LOSSES RUN !!!!!!

NEVER LET LOSSES RUN !!!!!!

CUT THE LEGS FROM UNDER THAT BEAST AS SOON AS POSSIBLE!!!!!!!!!!

Two things are essential if You are going to enjoy a very successful and lucrative trading career.

#1 Wait for a proper trade set-up

#2 Learn to save yourself. CUT BAD TRADES QUICKLY!!!!!! So what if it comes back in your favor, many times it will, but it only takes one good shakeout to leave your lifestyle in jeopardy.

Cut bad trades to leave the most capital possible for a more profitable trade set-up. THE MARKET IS VERY VERY GENEROUS, IT WILL ALWAYS GIVE YOU ANOTHER OPPORTUNITY TO MAKE SOME PAPER, BUT YOU HAVE TO CUT YOUR LOSSES QUICKLY SO THAT YOU HAVE THE MAXIMUM CAPITAL TO TAKE ADVANTAGE OF THE RIGHT OPPORTUNITY WHEN IT PRESENTS ITSELF!!!

The market is swim, float or sink. Don't let them sink You. SAVE YOURSELF!

YOU CAN DO THIS (^_^)

Get 10 Trading Lessons FREE

http://www.ino.com/info/447/CD4033/&dp=0&l=0&campaignid=6

The Shoeshine Boy

Open Forum

Just Another Hyperinflation Post - Part 3

Just Another Hyperinflation Post - Part 2

Just Another Hyperinflation Post - Part 1

China desperate for gold & The Mind Conspirators

1) Reported by imarketnews.com:

Sales by overseas central banks could see a sharp fall in gold prices, the Financial News reported Wednesday, citing Zou Pingzuo, a central bank researcher.

"Investors should be careful about investing in gold. Gold prices could fall sharply because of intensive gold sales by the U.S. and other overseas central banks," Zou said.

To me this a sign of desperation by the Chinese. There has been no indication by the US to sell and all recent talk is about central banks buying. They are trying the old scare tactic of central bank selling to try and push the gold price down. They want to buy as much gold as they can but don’t like the current high price.

I think they are hoping this "bubble" will deflate and they can continue with their sneaky "get out of dollars and buy gold". What happens when the Chinese realise the price isn't going to drop? Will they be forced to go all out and start buying whatever physical they can?

2) Worthwhile read for libertarians - The Mind Conspirators by Nelson Hultberg. A quote:

Philosophical fallacies and socialist falsifications of economics and history have gained sway in the school system to poison our citizens' minds against the American concept of freedom. Such fallacies have created a grossly distorted image for the man in the street about the way the world works. Freedom is now seen as inimical to human dignity. Creative entrepreneurship is portrayed as exploitation of the poor instead of their only hope. Gold is termed a "barbarous relic" instead of history's proven store of value. ...

We are being conditioned to accept sloth as normalcy, servility as dignity, weakness of will as compassion, and government conveyed privilege as justice. The world of sanity and rationality gives way to regimental nightmares of Orwellian "newspeak" and "political correctness" in order for legions of middle-class sluggards to feel good about themselves while they live out their spiritually squalid lives queuing up to the entitlement troughs of the mega-state.

My response to the article agrees very much with the comments of MetaCynic:

Accepting Hultberg's argument that ideas are the engine of not only entire civilizations but of every individual, begs the question why do some ideas gain traction and not others. Why did the ultimately unworkable collectivist ideologies of the big picture intellectuals, Rousseau, Hegel, Comte and Marx, find acceptance in the midst of the wondrous prosperity produced by the Enlightenment's Industrial Revolution? Why does the siren call of unaccountable collectivism to this day continue to outsell individual liberty with all its attendant responsibilities?

Despite its clashes with reality, do collectivist intellectuals really have to work very hard to find widespread acceptance for their ideas? Maybe there has always been a ready market for their disabling poison. In politicians and bureaucrats they have, of course, an enthusiastic audience eager to legitimize their own drive for wealth and power. In the envious masses they have deluded voters proudly participating in the process to redistribute the wealth of others into their own pockets. And in the captains of industry they have "capitalists" in need of protected markets and guaranteed profits. The great majority of humans are conformists and clock watchers interested only in comfort and entertainment.

Australia’s only hard money conference

From http://www.symposium.net.au/the-gold-symposium.htm

The Gold Symposium, Tuesday 9th and Wednesday 10th November 2010

Symposium announces the launch of The Gold Symposium being hosted at the Amora Jamison Hotel in Sydney, Australia on Tuesday 9th and Wednesday 10th November 2010.

Featuring highly respected speakers from Canada, Australia and the USA, this event will approach topics such as the current state of the global markets; why gold is important as an investment; and, gold versus paper as currency.

Amongst many renowned speakers, hear from the internationally respected gold analyst and author, Mr James Dines. Even now many do not believe Mr. Dines’ longstanding prediction of “The Coming Great Deflation” internationally, but what’s next? Boom or Bust, inflation or deflation, or even a hyperinflation?

Other speakers are:
Mr Dan Denning, Editor, The Daily Reckoning
Mr Louis Boulanger, CFA, Founder and Director, LB Now Ltd
Dr David Evans, mathematician and founder of GoldNerds
Mr Robert Lambourne, Chairman, Penox SA
Mr Rudy Fritsch, President, Allsteel
Mr Richard Karn, Managing Editor, The Emerging Trends Report
Mr Gavin Thomas, Managing Director and CEO, Kingsgate Consolidated
Mr Barry Dawes, Managing Director, Martin Place Securities
Prof Steve Keen, Associate Professor of Economics and Finance at the Uni of Western Sydney
And ME!

My presentation is: Paper gold – will it “crack-up”?
• You only protect your wealth by knowing when (or when not) to sell your gold
• To do this you need a real understanding of the risks inherent in the operation and interaction of the physical and paper gold markets, not the hyped-up commentary designed to increase the commentator’s Google ranking rather than your wealth
• Otherwise you may find yourself holding worthless cash after what you thought was a bubble in gold was really a collapse of paper assets

DANCING WITH THE MARKET

Dancing with the market can often be a frustrating experience because it is constantly attempting to trip You up on the dance floor.

To make Your dance experience a little more pleasant, You must develop the discipline of a Master Trader.

You must be willing to severe trades that are working against You.

You must be willing to wait for proper trade set-ups.

You must continue to educate yourself.

The market is fickle and temperamental, some might even call it bipolar. Sometimes it is up, sometimes it is down. As a trader You must tread lightly and follow the varies moods of the market until You can see an advantage.

As a trader You only have two jobs when You engage the market in dance.

#1 Keep from being tricked........

#2 Try to put a little money in your pocket...............


That is it!!!!!!! It is as simple as that (^_^)

YOU CAN DO THIS (^_^)

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Gold and silver versus market index bubbles

Below is a chart Nick of Sharelynx has been working on to show how much of a bubble gold and silver are in (or not).

Note that the x-axis does not have time on it because each bubble had a different timelength (some of the bubbles are 20 years, others 5 years). This does skew/stretch the time, but Nick's emphasis with this chart is more on the percentage growth factor rather than how long it took to get to those bubbles.

Credibility Inflation

GLD, leasing and encumbrances

In an otherwise good analysis of GLD (Precious Metals ETF Alchemy
GLD – the new CDO in disguise?) and building on Catherine Fitts’ Precious Metals Puzzle Palace Hinde Capital (as does Ms Fitts) gets it wrong on leasing (see slide 18). A bit of a problem considering that "GLD has encumbered gold in it" is one of his key points.

In my experience most lease transactions are done in terms of unallocated account credits. In this case the lender has lent unallocated and if the Authorized Participant subsequently allocates this unallocated metal there is no direct link between the loan and the physical. The lender has an unsecured exposure to the Authorized Participant under the terms of the original lease. There is simply no legal link to what the Authorized Participant did with that leased unallocated gold.

In the case of lenders supplying actual physical bars (usually only be Central Banks) because it is understood that leased metal will be "used" (be that in a physical operation like a jeweller or mint, or for sale to create a short position), the contract cannot practically require the return of the same physical bars that were lent (ie the same bar numbers). If the lease contract was worded on a secured basis (most likely where the borrower is a jeweller or mint) the security would have to be against the general gold stocks of the borrower rather than the bars originally supplied as it is understood that the original bars are melted or sold.

Where lease contracts specify the return of physical at the end of the lease, it is acceptable to settle with any LBMA bar at maturity, with any ounce difference (due to the variability of 400oz bars) settled via cash.

As a result, there is no legal claim by the lender on the original physical bars supplied to the borrower. Therefore if an Authorised Participant borrowed physical and delivered that to GLD, there would be no claim or encumbrance by the lender to the Authorised Participant on those bars held by GLD.

I note that Hinde Capital avoids the “they don’t have the gold” claim. That is an issue I will post on another time.

Two!

Confiscation Anatomy – Part 2

Silver Leader Board July 2010

See the document below for a list of all the silver ETFs and online products.

Silver Leader Board July 2010

EVERY BROKE TRADER DOES IT THE SAME WAY

Every trader who ever goes broke does it the same way.

I have heard it said that Traders go broke because they are under capitalized, that isn't true. If You can lose $100.00, you can lose $1,000,000.00. The problem is the same in both traders, the refusal to let go of losses. The difference between the pro and the amateur isn't necessarily his/her trading ability. Trading is easy!

The difference is in how he/she takes a loss. A disciplined pro will say, " I will stop the bleeding here if I am wrong." The amateur says, " I am right and eventually the market will come back in my favor." If You are thinking that, You have lost Your advantage.

While a pro will let 10 profitable trade kill 1 loss, an amateur will let one loss eat the profits of ten profitable trades. Both traders had the same number of trades but one will end the month in profit and the other will end the month in stress and pain.
Cutting a loss quickly soon ends your attachment to that trade and allows You to pursue a more profitable trade set-up. Part of the reason it is so hard to cut a trade is because You waited forever for that trade set-up and now You not only have to admit that You did not have the advantage that You thought that You did, but now You have to start the process all over again and with a loss.

DON'T MARRY ANY POSITION; THE MARKET CAN CHANGE IN AN INSTANT!!!!!!!!
IT IS ESSENTIAL THAT YOU HAVE AN EXIT STRATEGY (ONE THAT WILL CAUSE YOU THE LEAST AMOUNT OF PAIN)IF THINGS DON'T GO AS YOU PLAN!

ANY TRADE CAN TURN INTO A LOSS!

If You play this game long enough, You will eventually meet with disappointment. It happens, cut and move on. The market will give You another chance to make profit.

Never allow yourself to become wounded beyond repair in the market, either financially or emotionally. Cutting a loss means that You love Yourself enough to save yourself.

If You are going to win at this game, You have to have the capital to play and cutting trades that have lost the edge is one way to thrive here.

Gotta learn to save yourself! If You are getting stopped out frequently, You have gotta to rethink your strategy because something is wrong.

Free Your mind to find good trade set-ups by cutting trades that are not working in your favor. Holding on to diseased trades only punishes You and eventually it can break You

The biggest discipline that a great trader learns is how to cut a loss

YOU CAN DO THIS (^_^)

Gold Leader Board July 2010

See below for an analysis of gold ETFs and other custodial products.

Gold Leader Board July 2010

SMSF coin ban update

Further to my blog on the Cooper Review into Super and the recommendations on Self Managed Super Funds, see the 4 August 2010 press release below from ANDA:

Announcement of Government guidelines for SMSF numismatic investments ‘a relief’ says ANDA

The Australasian Numismatic Dealer’s Association (ANDA) says the announcement by the Federal Government that Self Managed Super Funds can continue investing in numismatics, as long as certain guidelines are followed, comes as a relief to many thousands of SMSF Trustees nationwide.

Mr Robert Jackman, Vice President of ANDA says: ‘I’ve been inundated with phone calls since the announcement was made last Friday. The reality is that many thousands of people would have been adversely affected if the Cooper recommendations on numismatics had been implemented. The vast majority of SMSF Trustees only invest in numismatics because they deliver reliable and attractive investment returns.

‘What’s more, the majority of investors already abide by most of the guidelines which ANDA has formally developed with the assistance of the Self-Managed Super Fund Professionals’ Assocation (SPAA). Those who don’t will be forced to adopt better prudential practices, which can only be to the benefit of the industry as a whole.’

ANDA has worked closely with SPAA during recent months, and expects to continue a consultation process on SMSF guidelines which ever party is elected to Federal Government. All three main parties have rejected the Cooper Review recommendations on collectibles for SMSFs.

Relativity: What is Physical Gold REALLY Worth?

HOW I TELL I AM LOSING MY ADVANTAGE

When trading the 1 min time frame it is essential for You to be able to recognize when You have lost Your trading advantage.

These are ways that I can tell that I no longer have the advantage that I believed that I did:

If price moves above/below the previous candle even though it may not close there, I don't have the advantage.

A good trade should run in your favor almost immediately !

If you are not in a decent profit in 7-10 mins , then You may want to consider getting out with a tiny profit or at break even, because chances are high that price is going reverse on You.

Wacky MA's- Pay attention to the order of Your MA's, it is very important, they will tell You if You are in a good trade or trade hell. If your moving averages are 1, 2, 3, 4, 5, then they should be in order 5, 4, 3, 2, 1, or 1, 2, 3, 4, 5, not 4, 2, 3, 1, 5.

Lastly a flat 50 period strongly suggest that You may not have the advantage that You thought.

YOU CAN DO THIS (^_^)

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The Social Construction of (Gold) Reality

I have a book in my library called The Social Construction of Reality. Its basic thesis is that reality is socially constructed, or to put it another way, reality is what people believe it is. For example, if you moved to a new town and a rumor was circulated that you were an axe murderer, then you can imagine that people would avoid you, police would monitor you and if there was a murder, you would be an immediate suspect. Even though it was not true, you would in effect be experiencing the life of an axe murderer, at least in how people related to you. For you it would become reality because the social group believed it to be true.

You said “But if "smart" dollars of size (or let's just say all dollars of size) are not getting a bid from real physical gold of size... and only "idiot" dollars are getting a bid from "paper gold"... can we really say the gold basis is reflecting reality?”

My contention is that if the social belief is that paper gold is as good as physical gold then for all intents and purposes it is. As a result the basis reflects that and does not go into backwardation because people are accepting paper gold bids for their dollars. Saying this does not mean I condone it, but while the social belief continues, what the real “level of physical gold's bid for dollars” is does not matter regarding price.

There is little proof I have for my claim that we are still in phase two of the Degrees of Distrust as the gold market is opaque by nature. One fact I do have is the recent revelation by the Financial Times that the 346t of gold for the BIS swap “came mainly from investors' deposit accounts at the European commercial banks”. That is 346t of trust by those investors and indicates there are a lot of people who still believe in the system.

I can't 100% sure where we are at, but would caution against too much optimism. If we are still in phase two then a lot of education is still called for. I think the mass market is still not into gold in any major way and when it does it needs to be directed into products that take real physical off the market. We have to ensure investors are properly informed, that they understand the true "gold reality". That the Chimps turn into Champs, not Chumps.

Speaking at Sydney ANDA coin show

I will be doing a how to invest in gold presentation at the Sydney ANDA coin show on 14 & 15 August, details can be found here.

I would recommend Mark van der Sluys' ‘Gold as Money’ and ‘The role of Gold in an Investment Portfolio’ presentation at 2pm and then I follow at 3:30pm. We will speaking on both Saturday and Sunday. Both our presentations will be filmed and put up on Perth Mint's YouTube channel if you can't make it.

Chimps, Champs, and Chumps

Understanding negative lease rates

The reporting by LBMA of negative lease rates is often misunderstood, resulting in some commentators coming to incorrect conclusions. Given my recent discussions with FOFOA on backwardation, some explanation of negative lease rates would probably be useful.

In the real world the cost of borrowing gold outright is never negative – no bullion bank will pay you to take gold. In fact, I am aware that some lenders have a minimum rate below which they will not lease. Makes sense, would you risk lending 1 tonne of gold worth $37 million on an unsecured basis at 0.1% for 3 months just to earn $9,400?

So why does the LBMA report negative lease rates? Our starting point is how the lease rate is calculated:

Lease Rate = LIBOR – GOFO (see the LBMA’s Guide for why this is so)

First point to note is that the lease rate is calculated from LIBOR and GOFO; the LBMA does not question its market making members for their actual lease rates. It is therefore based on the accuracy of LIBOR and GOFO. If we look at how these two rates are determined (see here and here) then we see a number of differences:

1. Set at different times – GOFO rate submitted at 10:30am and fixed at 11am, but LIBOR rates are requested between 11.00am and 11.20am and fixed shortly thereafter.

2. Set on different sides – LBMA’s website GOFO is the rate “at which the Market Making Members will LEND gold on swap against US dollars”, which involves using the USD interest bid rate. For LIBOR banks are asked “At what rate could you BORROW funds, were you to do so by asking for and then accepting inter-bank offers in a reasonable market size”, that is the USD interest offer rate.

3. Set by different banks – LIBOR is set by 16 banks, GOFO by 8, with 6 common to both. LIBOR drops the top and bottom quartiles before averaging, GOFO drops the highest and lowest before averaging. It could therefore be possible that the 4 banks use to set LBMA’s GOFO (which they would calculate/relate to their estimate of LIBOR) don’t have their LIBOR rates included in BBA’s LIBOR. Probably worth noting that within a bank LIBOR and GOFO would be set by different desks.

Now these are minor differences as we would not expect rates to move too much between 10:30am and 11:00am, or much difference in the bid/offer spread, or too much divergence between banks on their rate so the dropping of high and low rates should not affect the average too much.

However, I think when rates get close to zero, these differences could have a material impact. Consider also that questions have been raised about LIBOR’s usefulness at these low rates, see here and here.

The fact is that GOFO and LIBOR are not “in alignment”. The resulting calculated lease rate is therefore just an approximation based on two averages. Caution should thus be exercised when trying to draw conclusions from it.

GOFO, however, should be able to be relied on. It should relate to the basis, although not equate to the basis as the basis is calculated from futures prices whereas GOFO is a forward rate - the economics of those two are slightly different.

Degrees of distrust

My last blog was ultimately about trust and that maybe the basis is telling us that there is still trust in the system. After writing it I remembered the presentation I made to the 2009 Gold Standard Institute seminar in Canberra. Below is the conclusion from that presentation, where I proposed four phases, or degrees of distrust:

1st Phase

We start to see increasing investment in gold reflected by increasing balances in COMEX or ETFs or GoldMoney etc, but the majority of people still hold fiat and stocks/shares. In respect of gold, people have no problem with storing their metal in "the system".

2nd Phase

We start to see occassional backwardation which comes and goes and it usually only between cash and shorter futures/maturities - 1 to 2 months. This backwardation is arbitraged away by longs who still have belief in the system(s) so are willing to take the risk to make a profit. Gold is still held in the system but growth in reported balances is slowing.

3rd Phase

We see more backwardation periods, prolonged and now not just shorter maturities but maybe 3 month going to small backwardation. It demonstrates less interest by longs to take the risk. Possibly start to see reported balances of ETFs and less reputable custodians starting to stablise even though gold price still rising, which would puzzle ignorant commentators. A physical squeeze is developing.

4th Phase

Now backwardation persists, it is a permanent state in shorter maturities, increasing to longer maturities. Reported ETF balances are declining. A clear signal not all is well. Gold is being pulled and stored outside the system. The strong hands are in the majority, the squeeze is really on.

I'd say we are just starting in the 2nd Phase.

The basis does not lie!

My answers to FOFOA’s response.

I think an accurate definition of "paper" and "physical" is important to the accuracy of your statement: "I am reasonably confident that paper and physical are bound together."


But what if you could play the arbitrage (closing the gap) game without actually putting any physical at risk of delivery? Would this change the accuracy and credibility of the basis signal?

I assume you are talking here about using unallocated. OK so lets scenario it. Assume a stable supply/demand for both cash and futures so without the actions of an arbitrageur the cash price would remain at $1200 and Dec futures at $1195 for a period of 6 months. Hedge fund notices this and wishes to profit from it but it does not want to (or have) physical gold it wants to risk.

Hedge fund contacts their friendly bullion banker and asks to lend gold. Bullion bank conjures out of thin air some fake unallocated gold, merely recording an asset in its books (loan to hedge fund) and a liability (unallocated owed to hedge fund). Let us assume the amount of ounces is enough to move the price in our otherwise stable market by $3.

Hedge fund’s first step is to buy the Dec futures at $1195 but in doing so its price increases to $1198 (lets say that is the next offer price). Secondly they have to sell spot. Say they find a trusting investor who is willing to accept a transfer of the fake unallocated gold for $1200. Again, this action decreases the spot price to $1997 (next marginal bid price) and the market is now in contango. So far so good.

But what happens in six months? The hedge fund only has two choices – cash settle or physical settle.

If they cash settle then they have to sell back their Dec futures contract, but doing so will cause the price to decrease from its new equilibrium price of $1198 to $1195. Likewise, they have to buy unallocated to repay the loan to the bullion banker, but that will increase the spot price from $1997 to $1200. All that cash settling has done is delay the appearance of backwardation but not eliminated it.

If they physical settle then they get their gold from COMEX and deliver it to the bullion bank to repay their loan. Now this would have no effect on prices. However, the bullion bank now has physical 1:1 backing its unallocated liability to the trusting investor. If that investor asks for delivery, it will have no effect on price because the bullion bank has the physical. In a roundabout way the hedge fund eventually did sell real physical gold to the trusting investor.

Now your retort may be that the fact that the trusting investor was willing to accept fake unallocated allowed the manipulation of the basis to turn backwardation into contango. You would be correct, and that is the point of my scenario. The basis is therefore reflecting reality, the reality that there are idiots prepared to accept paper gold.

The basis IS telling the truth. It is not the hedge fund or the bullion bank who have “manipulated” the basis, it is the trusting investor. But in a sense the basis has not be manipulated, arbitrage is ensuring it reflects reality, that there are idiots who are prepared to bid dollars for paper gold.

If that trusting investor was not so trusting, then the hedge fund would not have been able to execute their arbitrage because there would be no one willing to accept their paper gold. The cash price would have remained at $1200 and the market in backwardation, and the basis would reflect reality, the reality that people were only willing to bid dollars for real gold.

You said “If gold stops bidding for dollars (low gold velocity), the price (in gold) of a dollar falls to zero. This is backwardation!” My reply would be that even if all (real) gold stops bidding for dollars, but there is plenty of paper gold bidding for dollars which are being accepted, then there is no backwardation.

My logic therefore leads me to the conclusion that the basis does not lie, that it cannot be manipulated. Professor Fekete was right all along, long live the basis. However, I don’t feel totally confident in this statement, as I said I’m not an expert in futures so there is probably a flaw in my scenario and logic. If so what is it?

Over time, group 1 will swell and end up holding most of the above-ground physical gold in the world. Group 2 will shrink and end up holding mostly paper gold. Group 3 will be financially sucked dry by the vampires in group 4. And group 4 will ultimately find it has no more markets to churn.

This is the theoretical process that gold backwardation should represent. A healthy and REAL gold contango SHOULD send this process into reverse, perhaps slowly at first, but reverse nonetheless.

So the question I am asking is which direction are we heading right now in this process? How close are we to the end of this process? And why aren't the market signals matching the rest of the picture?

If group 1 already has most of the physical gold and is now a one-way flow, is that not the state-of-the-market that backwardation should signal? And if the state is present but not the signal, what does that say about the signal?

Following from my conclusion that the basis does not lie, then the “signal” must be correct, which means “the state” of group 1 strong hands having most of the physical gold is not correct and we not close to the end of the process you describe. This is consistent with the defence by goldbugs to claims we are in a gold bubble that investment in gold is still a fraction of portfolio allocations and the mass market is not buying gold. Dollars are not being bid for gold, real or paper.

If you don’t like the conclusion, then you must find a flaw in my logic about the basis. I am more than happy to be proven wrong. Well, maybe not just yet, I'd like to pick up some more cheap gold :)

Follow up to FOFOA

FOFOA has hit me with a lot of questions in this comment. It is 11pm in Perth, so this will be brief, but they are interesting questions and I will cover off on them over the next few days.

When it comes to COMEX FOFOA, I also am a "conceptual thinker and a fundamental analyst-blogger". This is because my gold market experience has only been with the Perth Mint and the Perth Mint has never traded on COMEX, and nor can I see any reason why we would in the future. It is a position you can take I suppose when you refine 300 tonnes of physical per year. I mention it so it is clear where my expertise lies and where it does not. This won't stop me from theorising however, because that wouldn't be any fun.

You question the reality of COMEX. Certainly the fact that one does not have to put down full cash and only margin means that there may well be many technical traders playing with computer digits, and they may be in the majority. However there are also real physical players like miners and manufacturers.

However, I am reasonably confident that paper and physical are bound together. To make that statement I rely on one thing - arbitrage, or greed. Greed as a motivator is something I feel pretty confident relying on. I just don't consider it believable that a bullion bank or hedge fund or other big trader would leave profit on the table.

We cannot discount manipulations or games being played with cash or future prices. But to manipulate one of those means that the gap (ie the basis) between the market you are manipulating and the one you aren't widens or shrinks. If the manipulation goes too far then that will present an arbitrage opportunity to other players, which if we rely on greed as a motivator, they will take. That action closes the gap.

Now as one can "trade" the basis (for another day) as distinct from the price, it must therefore be possible that the basis itself can be manipulated. However trading the basis involves two "legs" - eg buy spot, sell futures or sell spot, buy futures - which again widens or shrinks the gap/basis, presenting arbitrage opportunities to others.

The game of trading to my mind is a "base" of real price setting physical deals with that price pushed and pulled by competing manipulators, speculators and arbitragers, of both paper and physical price. Price may go up, it may go down. Both cash and futures prices may go up, but the gap widen. Or both prices go up and the gap shrinks.

I see it like an elastic/rubber band being stretched and then bouncing back. That stretching is the "noise" I mentioned in my last post. It is fun to watch and I'm sure such watching can give you an insight into the games being played, but what matters is when it is stretched to far, and breaks.

When does backwardation matter?

FOFOA started a little excitement with his post on backwardation. Professor Fekete responded and Zero Hedge weighed in as well.

I would not be surprised that for many this backwardation thing makes their head hurt and perceive it as all very theoretical and of no practical use. But this is not true and backwardation is a potential profit opportunity for those holding gold. However, it is also being overplayed.

Backwardation is when the future price is less than the cash (spot) price. Consider you are a long term holder of gold expecting to sell it in a couple of years when the price peaks. One day you wake up and note that the price of gold six months into the future is being quoted on COMEX at $1150. You check with your local coin dealer and he is quoting to buy your gold at $1200. What does this “backwardation” mean to you? See below (numbers for purposes of calculation simplicity, not real costs).

You work out that it will cost you $100 to ship your 100oz to the dealer. He will pay you $120,000. You deposit $20,000 of that with your broker as margin (plus extra to cover fluctuations) and buy the $1150 futures contract, plus brokerage fee of $50. You deposit the remaining $100,000 cash in the bank for 6 months at 0.5%. On maturity of the futures contract you stand for delivery and incur $50 brokerage and $100 shipment cost. Your profit on this is $4950, composed of

* Sale of gold: +$120,000
* Purchase of gold: -$115,000
* Interest on cash: +$250
* Brokerage and shipment costs: -$300

Now this is a great deal. At the end of the 6 months you still have physical gold but you have earned additional money while you wait for your eventual sale in a couple of years. Why would you not take up this opportunity?

Well, the deal is saying “Sell us your gold now and (trust us) ... we will have it to sell back to you in the future for less!” You are exchanging your current physical gold for a future claim to gold. You have “counterparty risk”, to COMEX, to the short on the other end of your 6 month futures contract.

Of course, such a wide difference between cash and futures prices does not normally occur, because faster and bigger players see the profit opportunity and get in first. Their action of selling lowers the $1200 cash price and their buying of the 6 month futures increases the $1150 price and thus eventually the gap (and profit) disappears. That is arbitrage.

But if you did see such a big difference in prices, it means the big players aren’t taking up the deal. The cash-futures gap is telling you that people don’t trust COMEX, they don’t think they’ll get their gold back in the future. What backwardation is telling you is that people don’t want to give up their gold, even for a little while. As FOFOA says: “gold stops bidding for dollars”.

This leads to my closing point, which is best summed up by Tom Szabo’s December 2008 comment: “Let’s talk if and when the backwardation is large enough that the arbitrage was there and yet still nobody chose to go after it. That would be truly something!”

For example, if the cash price was $1200 and 6 months futures $1199.25, in my simplistic (and unrealistic from a cost point of view) example, that would mean a profit of $25. That is technically backwardation and technically a profitable one. But could you (or the big players) be bothered with all the work involved in selling gold, buying futures and then taking delivery, all for $0.25 per ounce profit?

Therefore, the only backwardation that matters to me is backwardation that:

a) means reasonable profit and
b) no one is willing to take that profit (that is, it is persistent).

Any other backwardation is just noise and has no “information value” by itself.

If this topic interests you, the following two services specialise in tracking the gap between cash and futures (known as the “basis”):

The Metal Augmentor (Tom Szabo)
Gold Basis Service London (Sandeep Jaitly)

These services look at the bigger picture and don't get distracted by instances of technical backwardation. They look at the trend in the basis, trying to identify in advance when significant and persistent backwardation will occur.

KEEPING RISK SMALL

Keeping risk small and rewards big is what a good trader is always attempting to do.

How can we do that???

How can we gain that kind of advantage??????

One way I have discovered is by trading off of the 1 minute time frame.

Why is that an advantage??????
It keeps your risk small when you find yourself on the right side of the trade and within a matter of minutes, you will see that you can secure a very nice profit.

The advantage that it has over larger time frames is that you are able to get in on a move quicker, giving you access to more profit with a smaller risk. Many times when you are trading off of the larger time frames by the time you get your confirmation, the move is almost over, the reward is smaller and the risk bigger, especially if you day trade.

One of the problems that comes as a result is that you find yourself in a nice profit briefly before price reverses strongly on you again, then you find yourself hoping and waiting for price to come back in your favor, kicking yourself all of the time, thinking 'I should have got out when I had a profit.'

Now I do need to mention that while you get many more trading opportunities off of the 1 min time frame, You also get many more false trading signals.............

Let's put the odds in your favor a little more. I don't use a trend line on the 1 min chart, just on my longer time frames, so there is always a trend line available, but it comes off a larger time frame. On your 1 min chart, you may want to consider a moving average, right now I am experimenting with the 8, 10, 14/15, 20 and the 50 period SMA.

Though your SMA is a lagging indicator, it can still give you some clear trading advantages by showing you the times that the odds are the most in your favor.......



The real sweet spot.......

TIME, time is the magic ingredient to pulling off a successful and profitable trade. There are market sweet spots, times when your pair is the most active. Those are the times that give you the biggest opportunity for profit. You want to capitalize on these times. Two good trades at these sweet spots will make your trading day.

Here is a chart that will give you an idea when your pairs are the most active:
http://www.mataf.net/en/tools/02-01-volatility.

The most important thing to remember about the 1 min chart is to get in, get your profit and get out. You can not ride a 1 min trade all day.................On the 1 min chart it iS imperative that you cut your profits when things are no longer going in your favor, because price can soon engulf your profits if you don't.

So in closing the things you want to keep your risk small are:
The sweet spot in time:
A proper trade set-up
Speed of execution.

YOU CAN DO THIS (^_^)

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