Sunday, July 25, 2010

Red Alert: Gold Backwardation!!!


Did I get your attention with the title? Good! It's a great headline, isn't it? Well, stick with me for a minute and I'll try to live up to my seemingly feigned hype.

And for you noobs that weren't attracted like moths to a freeway headlight by this title, you can get up to speed here, here and here.

First, let me ask you a question. Which of these two scenarios should be more instrumental in the transition to Freegold?

1.) A bottom-up shift in value perception as millions and even billions of small savers use their meager dollars all at once to bid up the price of gold.

2.) A top-down shift in risk perception as the very few physical gold holders of size in the world all at once withdraw their physical from the marketplace.

Just think about this question. That is its only purpose. And one more; Would either of these events be exclusive of the other?

One other item I would like to touch on before I get started is the distinction between loaning or leasing your gold to someone else versus putting your gold up as collateral for a fiat loan that you need, sometimes called a "swap".

In the former case you are handing over your gold to someone else in exchange for an income stream (the lease rate) as well as the promise that your gold will be returned at a predetermined time in the future. In the latter, you are handing over your gold to someone else in exchange for a lump sum of money, usually close to the full value of your gold, as well as the promise that you can buy your gold back for that same amount of money plus a fee (interest rate) at a predetermined time in the future.

In the former case, when leasing out your gold, you are generally said to be "deploying a 'dead' asset in pursuit of a yield." While in the latter case, putting up your gold asset as collateral for a loan, you are likely trying to keep other creditors at bay, paying them off with cash from this new loan rather than letting them take your gold. And, depending on who your new creditor is, you may be said to be "protecting your gold asset" from those other creditors who had intended to take it away for good.

I wanted to clarify this distinction because I read one article where the analyst seemed to view these two acts as one and the same, and in so doing, in my opinion, drew the wrong conclusion about the recent BIS gold swap.

The Gold Backwardation Story

Do any of you check the GOFO rate from time to time just to see if it is getting close to zero? GOFO is a relatively good proxy for the gold contango because it represents the cost basis a dealer calculates to take either side of a 'gold for currency swap' over a fixed length of time. It is also a good proxy for liquidity in the gold market. It should never turn negative because that would mean it costs more to borrow gold than to borrow dollars. (GOFO = $ interest rate - gold lease interest rate) In other words, if GOFO goes negative, the message is that gold is more precious than dollars.

As long as the GOFO rate is positive, the borrowing of dollars will cost you more "elbow grease" (debt service) than borrowing gold. So it can be said that there is a bid from gold for dollars as long as the GOFO is positive! When it turns negative, it can be said there is NO bid from gold for dollars.

Dollar forward mechanism - LBMA

I check the GOFO rate every few days, but more for amusement than analysis lately as it has been rising!

(A side note: Last week when I clicked my GOFO bookmark that I have been using for years, for the first time ever it asked me to log in, which apparently costs "an application fee of £1,000 (which is not refundable if the application is rejected for whatever reason) and an annual levy of £2,500." I'm sure this was just a normal LBMA site improvement though, because they put the new URL for free GOFO data in the small print down at the bottom. And they also improved the actual GOFO data by reducing the font size to tiny, compressing the columns, and reducing the contrast to light-gray on white background making it much easier on these tired old eyes.)

LBMA "website improvements" - Click image to view actual size

Looking at the 3 month GOFO rate for the calendar years of 2005, 2006 and 2007 (here) we see a steady gradual rise at an average annual clip of 34%, with a maximum of 79% in 2005 and a minimum of 1% in 2007. Yet so far this year we have a 221% rise from Jan. 29 through July 23 alone.

That 221% rate change in 6 months is pretty high volatility for this normally stable metric except in the remote instances of impending doom. But surprisingly, the rapid rate change this year has been in the direction of "nothing to see here, folks."

So here is the basic story of gold backwardation. On September 29, 1999 gold went into backwardation for the first time in modern history. The cause is commonly cited as the Washington Agreement on Gold that happened three days earlier in Washington, DC. This backwardation manifested itself in three common metrics. First, the price of gold shot up.


Second, the gold lease rate spiked. And third, the GOFO rate went negative in all five durations, from 1 month to 12 months.

What is important here is both the meaning of these anomalies and the message they send to the marketplace. The GOFO rate is basically a measure of unencumbered physical gold's desire to bid for dollars. And the lease rate is the banks' bid to borrow your gold so they can sell it and then do whatever it is that banks do with your money.

So the message of a high lease rate is "lease us your gold, PLEASE, and we'll pay you handsomely for it." Remember, a lease is where you "rent out" an asset to derive an income stream. And a swap (like GOFO) is where you need a loan, so you offer an asset as collateral and then YOU pay the income stream to someone else. Only with a negative GOFO rate, you retain control of the gold PLUS you receive the income stream coming in, so why would anyone LEASE their gold in this backwardation scenario?

For that matter, why would you even SWAP your gold in this scenario? Unless, perhaps, you were desperate for dollars and you were swapping your gold with someone you knew for a fact would hold it safe for you and do nothing else with it. Like a "rich uncle" perhaps?

I know this is complicated, but just take a look at the lease rate and GOFO charts from Sept. 29, 1999:



The point to take home here is that the spikes in these charts DO represent potentially imminent collapse of the dollar, but they are not the cause of the potential collapse, they are the system's response to it. In a way, these charts are to a collapse like a thermometer is to the temperature. Or like a body's immune response is to a bug.

They don't show the actual backwardation, they show the "immune system" response to it.

These images ARE what backwardation looks like. But in a strange way backwardation is kind of like AIDS to the fiat money system. Once it's in there, you can't get it out. And you can't actually see the HIV virus. All you can see are the antibodies that attack it. That's how you know it's in there, eating away at the system.

A few years after the Sept. 29, 1999 backwardation event the following conversation was revealed and can be found on many gold websites:

"In front of 3 witnesses, Bank of England Governor Eddie George spoke to Nicholas J. Morrell (CEO of Lonmin Plc) after the Washington Agreement gold price explosion in Sept/Oct 1999. Mr. George said "We looked into the abyss if the gold price rose further. A further rise would have taken down one or several trading houses, which might have taken down all the rest in their wake.

Therefore at any price, at any cost, the central banks had to quell the gold price, manage it. It was very difficult to get the gold price under control but we have now succeeded. The US Fed was very active in getting the gold price down. So was the U.K."


2008

Jump forward nine years to 2008. On Thursday, November 20, in the middle of the unfolding global financial crisis, the 1 and 2 month GOFO rates suddenly turned negative. By November 25 they were back to positive again. The lease rate also spiked as you can see in the chart above.

Four years earlier, in 2004, Antal E. Fekete had written a paper in which he explained what backwardation in the gold market actually means. Very simply, gold backwardation signals the permanent end of the current system and the beginning of dollar hyperinflation [FOFOA: and the beginning of Freegold?]. Here is his 2004 paper:

What Gold And Silver Analysts Overlook, May 1, 2004
SNIPS:
...As it is not set up to satisfy demand for delivery on 100 percent of the open interest, the gold futures market will default. Exchange officials will declare a “liquidation only” policy to offset long positions in gold. At that point all offers to sell cash gold will be withdrawn. Gold is not for sale at any price. The shorts are absolved of their failure to deliver on their gold futures contracts.

...Previous descriptions of hyperinflation purporting to explain the descent of a currency into the abyss of worthlessness do so in terms of the quantity theory of money. My explanation of the hyperinflation that is staring us in the face is very different. I dismiss the quantity theory of money as a linear model that is not applicable.

...Moreover, previous episodes of hyperinflation affected isolated countries which had embraced the regime of irredeemable currency out of desperation, while the rest of the world stayed the course of monetary rectitude. In the present situation the entire world has been inflicted with irredeemable currency.

...My description of hyperinflation is not in terms of the quantity theory of money, but in terms of a model where the relentlessly declining gold basis leads to backwardation destroying the gold futures market.

The dollar and other irredeemable currencies will go the way of the assignat...

Backwardation in gold should therefore be considered the self-destroying mechanism for the regime of irredeemable currency that “only one man in a million may identify and understand” (my thanks to Keynes for the felicitous phrase). This is where supply/demand analysis is utterly useless. The huge stocks of monetary gold are still in existence, yet zero supply confronts infinite demand.

Fekete followed this paper up with several more in 2006 and 2007 on the subjects of the gold basis and backwardation:

The Rise And Fall Of The Gold Basis, June 23, 2006
Monetary Versus Non-Monetary Commodities, June 25, 2006
The Last Contango In Washington, June 30, 2006
Gold, Interest, Basis, Mar. 7, 2007
Gold Vanishing Into Private Hoards, May 31, 2007

Over the years he became well known as possibly the only person in the world ringing this particular warning bell. Then, on Dec. 5, 2008, Fekete published RED ALERT: GOLD BACKWARDATION!!!
(Yes, that's where I got the title.)

But Fekete wasn't watching the "reactive" GOFO and Lease rates, he was carefully analyzing the gold basis, looking at specific trading prices in the spot and gold futures markets. And on Dec. 5 he announced the beginning of gold backwardation as of Dec. 2.

Fekete not only believed that when backwardation finally turns permanent it will end the fiat dollar, but he also boldly proclaimed that the gold basis was the foolproof metric! That it could not be falsified!
When contango gives way to backwardation in all contract spreads, never again to return, it is a foolproof indication that no deliverable monetary [metal] exists. People with inside information have snapped it up in anticipation of an imminent monetary crisis.

What he meant was that the gold basis, the difference between the price of cash gold and contract futures of different maturities, could not be manipulated! And he not only proclaimed this loud and clear, but he also put his money where his mouth was, developing an investment fund that would profit from tracking the gold basis.

At this point, in late November/early December '08, everyone and his brother was on "backwardation watch". Backwardation quickly became associated with the expected COMEX default. (COMEX Default & Backwardation?) Fekete's articles were prolific, and everyone was eating them up, myself included. Remember this site? Vaporize COMEX countDOWN « Meltdown It was started on Nov. 29, 2008 and later abandoned.

Fekete followed that Dec. 5 piece with several more on the subject, and "backwardation watch" continued in earnest for at least the next quarter:

RED ALERT: GOLD BACKWARDATION!!!, Dec. 5, 2008
There Is No Fever Like Gold Fever, Dec. 10, 2008
Backwardation That Shook The World, Dec. 14, 2008
Backward Thinking On Backwardation, Dec. 18, 2008
Forward Thinking On Backwardation, Dec. 21, 2008
The Vanishing Of The Gold Basis and its implications for the international monetary system, June 23, 2009
More Dress Rehearsal For The Last Contango, Aug. 25, 2009

To this day I believe that Fekete was absolutely correct that backwardation is THE existential threat to the system that he said it was. Where he went wrong was in his assertion that the gold basis was the only metric that could not be rigged. He has since admitted as much.

The Gold Basis Is Dead -- Long Live The Gold Basis!, Oct. 17, 2009
A year ago I conducted a Seminar on the gold basis and backwardation in Canberra, Australia. I suggested to my audience that the gold basis (premium in the nearby futures on spot gold, with negative basis meaning backwardation) was a “pristine indicator that, unlike the gold price, cannot be manipulated or falsified by the banks or by the government. Thus it is a true measure of the perennial vanishing of spot gold from the market, never to return, at least not as long as the present fiat money system endures.”

That was then. Today we are one year older and that much more experienced. We now know that the banks and the government have in the meantime found a way or two to manipulate the gold basis as well. Next month I have another Seminar coming up in Canberra. I shall address the problem of gold basis, giving a full account of what we know about the efforts of the powers that be in trying to falsify this most important indicator, the guiding star of refugees who have entrusted their fate to a golden dinghy on a stormy sea. To the government, the gold basis is like the naughty child who blurts out unpleasant truths. He must be gagged and silenced at all hazards. Fool’s gold basis is even more important than fool’s gold in terms of the number of people victimized.

Goldman Sachs

I would now like to draw your attention to this March 25, 2009 research paper put out by Goldman Sachs:
Forecasting Gold as a Commodity
SNIPS:
The inventory-demand curve is quite stable and downward sloping, with less inventories of gold being held on the COMEX as gold lease rates increase. Following the onset of the current financial crisis in the second half of 2007, however, the gold lease rate began to climb to a much higher level than would have been expected, given the level of physical gold inventories...

The link between the current financial crisis and the increased demand for physical gold inventory can be seen explicitly by looking at the correlation between gold lease rates in the recent period and the TED spread or the difference in (one-year) interest rates between LIBOR and the US Treasury...

As the degree of counter-party risk increases, so too does the demand for physical gold… the gold lease rates are well explained by the TED-spread and the level of COMEX registered gold inventories.

...COMEX inventories and nominal interest rates drive the shape of the gold forward curve, specifically the price spread between near- and long-dated contracts. High inventory levels place downward pressure on near-dated prices relative to long-dated prices, as the market anticipates inventories returning to more normal levels over time.

...The gold lease rate is the interest that must be paid (in our case in US dollars) to lease, or borrow, physical gold for a specified period of time. Consequently, this can be viewed as the explicit cost of borrowing gold to hold for a period of time or the opportunity cost of holding one’s own gold and not lending it out to another.

Clearly, someone at Goldman Sachs was studying the gold basis, the related lease rates and the relationship of these metrics to the dwindling COMEX inventories in late 2008/early 2009. And, of course, why does Goldman Sachs study any market metric? I know you know the answer to this question.

Goldman Sachs studies market metrics to figure out HOW TO RIG THEM! Then they publish a paper about how their findings would work in a normal free market, and then they laugh all the way to the bank. Oh wait, they are the bank. So I guess they just spin in their chairs laughing, huh?

Lease Rates and COMEX Inventories

It is a curious observation that published gold lease rates have been decidedly negative ever since Goldman Sachs released that paper, isn't it?



And as Izabella Kaminska at ft.com/alphaville observes, "negative [lease] rates should suggest some pretty hefty Comex gold stocks," even by the logic in Goldman's own paper. But oh, so mysteriously, COMEX "registered gold" has diverged during this same timeframe from the overall picture painted by negative lease rates.

She also points out that COMEX registered stock hit a significant multi-year low in Dec. 2009 and then "magically" recovered. And I'll add that the GOFO rate hit very close to zero a month later and then also "magically" recovered.

Dollars Bidding for Gold? Or Gold Bidding for Dollars?

When you think about the message that the lease rate sends, it is directly tied to the liquidity the dollar desperately needs. On Sept. 29, 1999 the message was "lease us your gold, PLEASE, and we'll pay you handsomely for it." Today the message is "we don't need to borrow your gold, and if you insist on lending it to us, it'll cost you."

Now, if I am a liquidity creator for the dying $IMFS - a bullion bank - how do I create dollar liquidity? I take a piece of unencumbered physical gold (owned or borrowed) and I fractionalize it. I sell it off to the extent that the probability of a delivery demand is lower than my physical reserves. And in the process, I am creating DEMAND FOR DOLLARS because my "golden tickets" are bidding on dollars. Remember what ANOTHER said...

Date: Fri Jan 23 1998 19:01
ANOTHER (THOUGHTS!) ID#60253:

All modern digital currencies do not go into an investment, they move THRU it... There is an alternative. Gold! It is the only medium that currencies do not "move thru". It is the only Money that cannot be valued by currencies. It is gold that denominates currency. It is to say "gold moves thru paper currencies".


This is the key to EVERYTHING!!! It is not "gold liquidity" that the bullion banks create... it is DOLLAR LIQUIDITY. Dollars bidding on MSFT stock set the value of that stock. If dollars are frantically bidding on MSFT (high velocity), the stock skyrockets. If dollars stop bidding for MSFT all at once (low velocity), the price falls to zero. This is true for everything in the world except gold.

Gold bids for dollars. If gold stops bidding for dollars (low gold velocity), the price (in gold) of a dollar falls to zero. This is backwardation!

Fekete says backwardation is when "zero [gold] supply confronts infinite [dollar] demand." I am saying it is when "infinite supply of dollars confronts zero demand from real, physical gold... in the necessary VOLUME." So what's the difference? Viewed this way, can anyone show me how we are not there right now? And I'm not talking about your local gold dealer bidding on your $1,200 with his gold coin. I'm talking about Giant hoards of unencumbered physical gold the dollar NEEDS bids from.

Think about it. You can't make it cold in July by simply rigging the thermometer.

And in my - purely speculative - analysis, "the BIS gold swap" CONFIRMS this view!

What the bullion banks do is they take a piece of gold and they inflate it 1,000% and sometimes up to 10,000% so it appears to be a SUPER BID for dollars. And they prefer to do this by LEASING gold (borrowing your gold) rather than buying it outright. It's a lot cheaper that way.

But right now the signal going out to the marketplace is "we don't need to borrow your gold, and if you insist on us borrowing it from you, it'll cost you." It is a completely bogus signal, and has been for more than a year now!

And just as with all bogus signals that the government, the Fed and Goldman Sachs create, the response is the same. The marketplace withdraws from games with bogus signals. Volume dries up, and Goldman Sachs ends up playing against itself to create the show. Just like price controls create shortages... SAME EXACT CONCEPT.

So Goldman Sachs (the $IMFS) has rigged the GOFO as a big F-YOU to Antal Fekete.. but it shot itself in the foot in the process.

Just like unemployment isn't really 9%, I think it is possible that gold is actually in permanent backwardation at this very moment and may have been for a while now. You can't change the temperature by simply rigging the thermometer. But you can't know the exact temperature either.

The dollar NEEDS voluntary bids from private physical gold to survive. My guess is that pool of REAL bids of size is bone dry and cracking. And "dollar liquidity" is just a cheap façade at this point. This is why the dollar NEEDS a rising gold price. As the price (for selling, not borrowing gold) rises, weak little bits of gold here and there will bid for dollars.

Of course that won't be enough (dollar demand from gold) to float the dollar for long. Gold must EXPLODE to reach equilibrium. And the knock-on effects of that explosion will kill the ability to run perpetual deficits, which will kill the value of all outstanding dollar debt, and on and on and on. It's all connected.

I don't view gold backwardation as only its simple metric signals that can be falsified. I view it as the terminal disease behind the metrics that has been present in the system and periodically erupting since 1999. I don't need a working thermometer to notice that it's hot outside and I don't need an accurate blood test to see that the patient is already dead.

Sincerely,
FOFOA



_________________________________________________________

UPDATE - Fekete responds: Gold Basis Screwed

_________________________________________________________

87 comments:

Ishkabibble said...

If the interest spread to borrow gold far exceeded the interest paid on dollars, a premium would have to be paid in dollars for the privilage. It would have to be kept out of the public eye, so as not to affect the facade that is the end of the dollar. Such a spread might be identifiable as excess printing, or excess borrowing.

It has recently been shown that US borrowing exceeds capital burn by more than $1 Trillion. This isn't the only place that excess could have gone, but it is the type of off-balance sheet transaction one might look for to explain it.

Bron said...

Lease rates are not negative. I do not see that in the market place.

The LBMA lease rates are just derived from LIBOR and GOFO and it is LIBOR that is not reflective of real cost of borrowing hence the calculated lease rate is not reflective of the real cost of borrowing gold.

FOFOA said...

Hello Bron,

"I do not see that in the market place."

From the post: "And just as with all bogus signals that the government, the Fed and Goldman Sachs create, the response is the same. The marketplace withdraws from games with bogus signals."

I wouldn't lease out my gold at a loss either!

Sincerely,
FOFOA

costata said...

FOFOA,

This one will get some attention IMHO. Great work as always.

BTW I can see another clue emerging that suggests backwardation despite false published metrics.

If the Giants and CBs (net buyers now) have withdrawn their aboveground supply then the market manipulators are now on a just-in-time system like most "retailers" of commodity products. The trouble is that there is no substitute for gold. They can only deliver physical gold at the same rate and tempo as the producers and scrap dealers can supply refineries, fabricators and thence the bullion banks.

What would that look like? IMHO exactly the kind of Comex market Izabella Kaminska described above and as Harvey Organ has been describing for some time. Choppy! Stop-Go! Confusing inventory numbers.

According to HO it's even worse for silver. Apparently there are significant "backorders" waiting for supply. What's the betting that in a transparent, free market silver would be in severe backwardation as well?

Tina said...

Foafoa, your lease rate chart differs a bit against a chart i am lookin for at the following site:
http://www.goldseiten.de/content/kurse/leaserates_gold.php

You can see there are two high spikes in April and May.
Can you please give a comment about that?

FOFOA said...

Hello Tina,

My charts came from Kitco.com as did yours. They are both listed under "Current Lease Rates" as:

Gold (small): Yours
Gold (detailed): Mine

Mine take a larger perspective than yours. They use data points spread out over time a little bit more than yours does. Sometimes this broad perspective misses short-term volatility. I don't have an explanation for you spikes, but I'll bet they have something to do with the overall credibility of this metric.

Sincerely,
FOFOA

muelwagon said...

Today's article (27/07) from Mr Fekele advocating restoration of the gold standard and its clearing house, the international bill market

http://www.atimes.com/atimes/Global_Economy/LG27Dj05.html

costata said...

muelwagon,

"... and its clearing house, the international bill market"

Currency swaps can perform the same function IMHO.

costata said...

IMO currency swaps are the evolutionary successor to "Real Bills" in the structure that could make the Euro Freegold project fly like a bird.

Currency swaps have the same two critical features of Real Bills that Professor Fekete perceived so acutely in his analysis of the last true gold standard: (1) discounts as opposed to interest rates and (2) expiry/cancellation once the transaction is concluded.

In other words, a currency swap can be a temporary addition to the money supply without creating a bias to being a permanent addition to the money supply, just like "real bills".

Shanti said...

Brilliant piece Fofoa !

@Constata

"In other words, a currency swap can be a temporary addition to the money supply without creating a bias to being a permanent addition to the money supply, just like "real bills".

Do you mean, there are no consequences even for the velocity...?

GG said...

EXCELLENT stuff FOFOA! Just brilliant.

erik said...

"Gold must EXPLODE to reach equilibrium"........ SOON I HOPE!

samix said...

@erik, please hold I have a lot of hoarding to do!

FOFOA keep up the good work.

Indeed Antal Fekete's work is illuminating! except for the fact that I have to constantly keep using define: in google! haha

William said...

Hi FOFOA,

Have you seen this today's front story in "Barron's"? It is called 'A Contrarian's View of Gold" by Alan Abelson and is moderately bearish, predicting a slow downtrend over the next few years. I think you may find it interesting, if for no other reason than to see how the "doubters" thought process works.

FOFOA said...

Fekete responds: Gold Basis Screwed

costata said...

Shanti,

"Do you mean, there are no consequences even for the velocity...?"

I'm not talking about currency in circulation so there are no implications for velocity in the swap itself. If there is two-way trade between the issuing countries the currency swaps need never leave their Central Banks to fulfill the "Real Bills" function.

You could think of the swap as an "exchange of hostages". Once the trade goods are supplied the swaps are reconciled in a book-keeping sense. It could be purely a digital, temporary issuance of "currency" between Central Banks. It does not require a physical exchange of currency.

Freegold provides the realtime valuation for each currency and, if required, the net settlement function over a time period for the total net volume of trade.

Think of the respective fiat currencies as zero coupon, variable duration credit/debit instruments. In the same way that an interest rate can be imposed on a currency so too can a discount rate be applied in order to create a profit motive for the issuing Central Bank, a performance incentive for the traders and a de facto "duration" for each transaction.

An individual trader's profit would become part of the circulating currency but that would not necessarily be inflationary unless the country issuing that trader's legal tender/currency runs a trade deficit. Again, if the overall trade balance resulted in an overall increase in the money supply, Freegold would provide the adjustment mechanism (a currency devaluation relative to gold and potentially the trading partner's currency).

Apologies for the lengthy response. It's a big concept to try to capture in a few words.

costata said...

From Dave Kranzler via Harvey Organ's blog. (The latter is a must read today IMHO)

"See what I'm saying? If the Fed stops paying interest on the excess reserves, expect to see that money being funnelled into more Treasury auctions and into the stock market. You see? The Fed can start to unleash QE2 without even making a formal announcement, because it's already been created, just not put to work - yet."

In a recent post Jim Sinclair may have identified the destination for some of the bankers' war chests ie. hoovering up small banks de-risked by loss sharing agreements with the FDIC/US Treasury.

Are there only a few hundred insolvent US banks who were heavily exposed to RE loans? IMHO there's more likely to be several thousand.

Rich pickings in terms of foreclosed assets if the losses are shifted onto the taxpayers. All that's missing is a dose of high inflation to get rid of the remaining debt burden. In the paragraph below just replace the words "borrowed heavily from banks" with "borrowed heavily from the Fed".

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/7909432/The-Death-of-Paper-Money.html

"The winners were those who -- by luck or design -- had borrowed heavily from banks to buy hard assets, or industrial conglomerates that had issued debentures. There was a great transfer of wealth from saver to debtor ..."

As GG once remarked:
BUY. PHYSICAL. GOLD. NOW.

Martijn said...

From Dave Kranzler via Harvey Organ's blog. (The latter is a must read today IMHO)

Harvey Organ seems to be highly biased, as I've said before. He regularly believes the COMEX will explode while the bullion banks are 'throwing everything but the kitchen sink at gold'.

So far he has never been proved right.

I believe that he is not open to the amount of rigging going on in the market and therefore unable to understand the market.

It's a bit similar to all those wise guys with a pc calling Bernanke an idiot for printing so much money because the have read something about e.g. austrian economics.

Those people most likely understand little of the position the USD and Bernanke are really in, and I guess the same applies (albeit it to a far lesser extend) to Harvey's take on the gold market.

Martijn said...

Btw great post FOFOA. And nice to see mr. Feteke along your readers!

nugget said...

I have been puzzling about the following for two years now: Why is there a 6 month delay in the delivery of bullion sovereigns in the UK? I order, and wait, and wait. There is obviously huge demand, but no supply. I thought the gold market was supposed to highly "liquid". I thought the price was supposed to rise until demand was met. How is it that dealers have premiums at 14% (rather than the historical value of ~4%) - surely the spot price should be 10% higher and the premium the same - given what consumers are obviously WILLING to pay? (Or even more than 10% higher given that the 14% is a SPREAD - if you turn around and sell tomorrow you lose 14%). Something is broken. I have known about the relationship between price controls and shortages for ages - but never connected this with my gold purchasing problem. Now I have. Thank you.

Tina said...

@ nugget,
you have to find the real dealer.
I bout from different in the past and they mostly need 2-6 weeks for delivery.
Now i find one which delivers in 3-5 days after payment.
He is from Austria,very good.
Name: http://www.vg-edelmetalle.at
Everythin is on stock so there is no shortage.

samix said...

@tina and nugget, this is news for me, I go to my dealer, give him worthless paper and he gives the valuable gold at that time itself... There is no delay, rather so many times I first take the bullion and then give the money.

Such is the norm in the East atleast!

Mike said...

they are really hitting the paper gold market down 7% so far. this should help a lot of people buy physical.

lucky for those who are buying more :)

Tina said...

There are only a few dealers in Germany and most banks gave up dealing with gold.
If you wouldnt buy with 4% over spot you have to do it at the web.

samix said...

wow FOFOA , even Antal Fekete reads your blog! Are you really a little man as you claim ?

Anyways considering the state of USA and the political ramifications I support you being anonymous.

Martijn said...

The COMEX a little while ago changed its rules to allow for the shorts to deliver ETFs instead of physical gold should they be called upon for delivery.

In a paper game like that, backwardation might just be a little bit easier to control.

samix said...

The COMEX a little while ago changed its rules to allow for the shorts to deliver ETFs instead of physical gold should they be called upon for delivery.

Should we then consider a high chance of a stampede out of paper into physical, at-least now ?

GG said...

Prof. Fekete was among the first (and most important) people who helped me unravel "The Matrix". I respect him and admire his work greatly. I doubt if there is anyone else on this planet besides Prof. Fekete (and FOFOA) who knows what is REALLY happenning.

GG said...

Thanks costata!

Also, given today's price action in Gold, I think we should all send JPM personal thank you notes. It's the least we can do for the generous discount we have just been offered!

GG said...

Prof. Fekete says:

"Most trades are bogus, sales as well as purchases."

That's true, but it serves an excellent function while it lasts (at least for me): We get to buy C.H.E.A.P. PHYSICAL Gold due them bogus trades!

Mike said...

the only problem is WE as in small orders, you can't buy big orders even if you won the lottery (10 million) buying 5000oz of Gold would be very difficult.

Martijn said...

Should we then consider a high chance of a stampede out of paper into physical, at-least now ?

Personally I believe the players at the COMEX are only interested in cash ROI. They don't mind playing a casino as long as they're able to tap good (cash) revenue stream from.

I doubt parties interested in obtaining physical would want to go through the COMEX as long as they see another way.

I tend to see the current decrease in gold prices as more evidence of the strong political forces behind the yellow metal.

Martijn said...

FOA did say: Had the prices of paper gold been rising all these years, it would have indicated a continued support of the dollar based gold markets.

Obviously it has for the past decade, but one might wonder whether that has changed now. And if so, what that means.

However, the begin of a single summer sell-off does not provide much ground for thoughts like that.

samix said...

Martinj I agree with you, its a long drawn battle and as long as the players will see any profit in keeping the system propped up, they will do so.

All that the CORPORATION has to do in order to keep the system up is invoke the base desire of greed in these people and most of the time its a done deal.

Mike said...

guess this blog is really getting big now

http://www.zerohedge.com/article/antal-fekete-responds-fofoas-speculation-gold-backwardation-manipulation

Geoff said...

For years I have read and wondered "Who is this most generous man who freely gives us all the keys to the jail? For it is the truth that sets us free...that puts light to the darkness of lies!" I for one salute you sir and am sure I speak for many...for the truth is the solid foundation upon which we may build our house in the knowledge that it will withstand the storm.You do us all a great service and have won our gratitude and respect.

erik said...

Seems like every anti-gold mouth -piece, talking- head is out on their favorite board today. Will be rewarding to See Free gold.

FOFOA said...

Just a few snippets from the archives...

Date: Sun Oct 05 1997 21:29
ANOTHER ( THOUGHTS! ) ID#60253:

It was once said that "gold and oil can never flow in the same direction".


Date: Wed Feb 04 1998 21:02
ANOTHER (THOUGHTS!) ID#60253:

Mr. Kiwi,
"Will the paper market ever represent the physical?..."

You will see it in our time!

"Will a total collapse be necessary first?"

Perhaps a "almost total"??

"It seems the vested interests in the paper game are powerful enough to keep the physical down indefinitely?"

In a very real sense, games can go on forever. The question here is;

Can those powerful thru "paper wealth" go on indefinitely? History has shown that they end suddenly, with great puzzlement as to the loss of importance without wealth.


Date: Sat Feb 14 1998 19:10
ANOTHER (THOUGHTS!) ID#60253:

Look to LBMA, for currency looking for gold! Compare the Comex average open interest with its average daily trading volume. Now use average daily trading volume at LBMA and convert to open interest in London, using comex ratio. Here you will find "real currency" in "paid for" gold derivatives ( not futures ) ! This money is now looking to convert to physical! It is caught in this paper with no way out! Know that this amount covers not CB gold moved by big trader! That wealth is safe, as it is for the good of all in those countries!


Date: Tue Feb 24 1998 21:46
ANOTHER (THOUGHTS!) ID#60253:

Ladies and gentlemen, today, the paper gold market is larger than available, tradable physical gold, by a factor of three! This market will continue to expand until we reach a massive gold derivatives failure. This will come about as those, who had no wish to gamble, but traded paper gold anyway, make a mad rush to dump paper and buy gold. Very, very few of them will succeed! You see, the largest bulk of the tradable physical gold will never come back into the market, "in terms of currency"! It will return as a trade for "another commodity"! OIL!

What do we look for to see the coming end of this present overleveraged economic system? The complete and total destruction of the world gold trading system!

From Another: " the destruction of the present currency system will be preceded by the total unlinking of all gold for currency trading" "gold may find a price of $50US/oz or $50,000us/oz, but the truth will not be known as an open market" " yet gold will find an increase of value of biblical proportions"


5/3/98 Friend of ANOTHER

The paper gold market is still controlled by London, and we will see tremendous paper spikes up and down as this monster is killed!


FOA (03/20/99; 14:38:56MDT - Msg ID:3624)
REPLY

Gandalf,
We meet again! In your post (#3617), I would add to your brackets to read [Middle East and many others]. Perhaps the Central Bank Of China, a BIG TRADER that has had a lot to do with the evolution of the present gold market. I think, after a long absence (year or so) that BIG TRADER is about to reenter the gold market with a concerted effort, now that the Euro question has finally been resolved.

FOFOA said...

A little before the 3/9~3/12/01 GLR spike and brief negative GOFO:

Trail Guide (2/24/2001; 7:15:55MT - usagold.com msg#: 48858)
Comment
USAGOLD (Michael),

In a line from Forest Gump; "stupid is as stupid does"!

I have to observe that; "Confidential is as Confidential does"! (smile)

The point I was making to the forum (for some time now) is that; ECB / BIS were telling everyone to go ahead and print all the paper gold the market can stand because we don't want your kind of market anyway,,, anymore.

All the while watching to see just how far the ratio of official physical to paper could expand. Sooner or later, London would hit the mathematical no return point and something had to give. Are we there yet?

Now we see a little white flag that's; from the other side,,,, and no one else was to see it,,,,, yet it was about as private as having your general walk out on the battlefield dressed in white!

This little confidential note could be saying; let's talk about this,,,, can we work something out,,,,, perhaps we can do whatever it is you guys want to do? (smile)

But, you never know what is behind these little notes? Could be just a trial balloon? Never the less, I think we are moving into a new stage in all this and our paper market place for gold is about to get "adjusted somewhat" for its ability to equal physical.

As Another would most surely say to their signal,,,
"we talk now, yes"!

Randy and all,

I want to take another trail hike but am waiting for the weather to settle. Storm clouds are blowing in and I want to walk with a few private friends before the wind. Never know, might have to board up a window in the thick of it. (smile) OK, be back when able.

TrailGuide


And then right after...

Trail Guide (3/13/2001; 7:29:22MT - usagold.com msg#: 49942)
Comment: On the markets!
Hello all:

We could be watching history in the making here? Physical gold demand and its lack of supply is beginning to break the relationship between the paper gold market and physical market. Paper credibility is being seriously challenged by a sustained high lease rate and the lack of that dynamic's ability to raise the paper pricing structure. Something we have been waiting for!

A continued falling price in the face of spiking lending rates is signaling contract supply being offered without physical supply. It's becoming a full blown paper arena (fiat gold) as the BB establishment must protect it's books to keep paper prices down, even if no gold is traded!

In the past, such a dynamic could perform the same function and still have the effect of lowering lending rates as investors dropped physical gold stores in trade for a return on fiat paper gold. That supply fed the physical market. The Dollar / Euro economic war is beginning and now, that game is driving wealth into holding real gold. This breaking ratio between paper lending rates going up and paper prices going down (if it lasts) will quickly separate said pricing structure. In time, we will embark on a different price for physical. The premiums will rise well above the paper prices, Believe it!

FOFOA said...

Trail Guide (03/16/01; 19:57:42MT - usagold.com msg#: 50184)
Comment
Hello all,

So, the contract price of gold gets sold down as if tonnes and tonnes of bullion were dropped on the market. Yet, the one month lease rate didn't return to 1/2% or some other fraudulent amount. Almost makes one think someone is selling paper bullion without the bullion behind it?

The stock markets begin to price in open economic warfare and our media says it's just a little slowdown? Now, OPEC lowers production to keep prices at a level that can only wreck the US economy and people wonder what they are doing? It's almost as if someone is moving their troops in a way that will eventually bring down the dollar and it's financial structure.

Yet, here I am, holding mostly Euros as my currency,,,,,, drawing interest,,,, and able to spend said money on goods at the same rate that dollars will buy wealth? But the currency traders say my Euros are worth less than dollars?

And my gold bullion (coins and all) are safe and sound,,,,, waiting the breakdown of the paper bullion pricing system. A process that seems to have just started,,,,,, for the first time,,,,,, in real time!

And in all of this I fully well expect my wealth holdings to not grow one bit over the next twenty years!!!!!! But, I do expect the world markets to evolve and revalue my assets, showing their true at a later time that was always their real worth today.

No, not near gold, not almost gold, not poor mans gold, not gold in the ground or other paper gold,,,,,,,,,,,, just plain old gold in the hand. An asset that will out perform every other holding in the times to come.

--------- The wealth of ages; a lifetime of work kept in a savings from our past. --------

Be back tomorrow to talk (smile).
TrailGuide


Me: The current battle between the flow of physical gold and its controlling paper gold pricing structure is not two years old. It is 13 years old!

And the uptake in physical by the Middle East and China is a one-way trade. Gold goes in and doesn't come out.

Bron said...

FOFOA, you may find my post on backwardation of interest: http://goldchat.blogspot.com/2010/07/when-does-backwardation-matter.html

Martijn, re your "COMEX a little while ago changed its rules to allow for the shorts to deliver ETFs instead of physical gold", this is not true, ETFs are only allowed as one leg of an exchange for physical transction. In such a transaction no futures contact is delivered/extinguished.

Nugget, re your delivery delay, you need to distinguish between production capacity shortages and real shortages of raw physical gold. They are two different things.

FOFOA said...

Hello Bron,

Thanks for your fine post continuing the conversation. I like it a lot! It adds great clarity to a murky subject.

But what if physical gold isn't even changing hands on the "gold futures market"? How would this affect the basis? I know, it's a big "WHAT IF?" Does the Perth Mint use the COMEX for physical purchases? How about sales? Does the US Mint? Where did the Mint say it gets its blanks? So who is using the COMEX to buy physical gold? Better yet, who is using COMEX to SELL their physical gold... to bid for dollars with their gold?

The COMEX is where the basis comes from, isn't it? What do I know? I'm just a conceptual thinker and a fundamental analyst-blogger. I'm not a trader or a technician.

As Trader Dan said today, "today’s markets have changed dramatically from those that I cut my teeth on more than 2 decades ago now. They have become almost totally dominated by technicians. Any trader looking to profit therefore must respect the technicals in a market."

Are these "technicians" following ANOTHER'S advice and hoarding physical gold as a lifelong wealth? Or are they doing what FOA warned against and trading paper gold for a paper dollar profit?

"Today they hide behind a computer and trade the screen. Very few of them have what I would consider a working knowledge of the fundamentals behind the markets they ply their craft in. They do not finesse trades but dump entire positions in huge blocks or enter markets in huge blocks."

If they are hiding behind a computer are they taking delivery? Are they providing physical gold from their computers for delivery demands from... I don't know... anyone buying physical through COMEX? Is the basis even alive?

"Today, they really do not care who knows what they are doing because they know that once the computer enters their orders, nearly all the rest of the computers of the fund world will do the same thing. The big “skill” set in trading today is who can get in or get out FIRST. Do it in large enough size, and you are guaranteed that the rest of the crowd will follow your lead without asking questions."

This doesn't sound like gathering physical gold as a lifelong holding of wealth to me.

Cont...

FOFOA said...

...

"When I first began using this data (many years ago), it was easier to gauge an overbought or overextended market because we did not have the huge sloshing ocean of liquidity crashing into and out of our markets back then. That has all changed."

What did you think about the comment from ANOTHER that I posted above about the real big PHYSICAL gold trade going through the LBMA, not the COMEX? Does it sound accurate to you 12 years later?

Date: Sat Feb 14 1998 19:10
ANOTHER (THOUGHTS!) ID#60253:

Look to LBMA, for currency looking for gold! Compare the Comex average open interest with its average daily trading volume. Now use average daily trading volume at LBMA and convert to open interest in London, using comex ratio. Here you will find "real currency" in "paid for" gold derivatives ( not futures ) ! This money is now looking to convert to physical! It is caught in this paper with no way out!


More Trader Dan: "Those who purchase the actual metal in bullion form can simply take the gift provided to them when prices get nailed and add to their holdings. After all, you have no margin clerk involved here but are diversifying your wealth and buying a form of insurance against what the politicians and monetary masters have done to our country and our currency."

Bron, I would like to know who is trading physical on the COMEX. Do you know? How do we know that there is any physical gold changing hands on the Comex? Do we just trust their "transparency"?

You say that actionable backwardation "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."

What I want to know is who is actually giving up physical - in size - to the COMEX today? To be used as "registered" gold and delivered without a fuss? Or to be lent to the bullion banks at a loss? This physical gold is the basis of the gold basis, isn't it?

And what if the basis IS screwed? What "information value" we can take from this revelation? What actionable message can we deduce?

Sincerely,
FOFOA

FOFOA said...

(Continuing from above...)

Then, a month later, after his work on the new Yoda-Speak Generator was finished, ANOTHER returned to the forum...

ANOTHER (THOUGHTS!) (04/14/01; 18:08:54MT - #: 51887)
Thoughts!

We talk once again my friends. This forum, it grows strong for all ages and nature of peoples. Read they do, from all places on earth. I read and see the knowledge as written, but it be the knowledge we still must see that speaks with greater strength.

Walk the gold trails of my good friend, do I. On my feet are "strong sole" of thick leather, purchased with much knowledge of physical gold. These shoes not go bare before our journey is done. On trail I see your "thin sole" gold investments cast aside and scavenged by beasts.


ANOTHER (THOUGHTS!) (04/15/01; 18:58:39MT - #: 51943)
Mr Gresham (04/14/01; 18:44:54MT - #: 51889)

This dream of much dollar currency for gold is the illusion in the "Western Mind". Your men of "deep pockets" do probe for shortages, however, their wish for low supply is not to be found. Their pockets are full with "credit gold" and sad are they at currency price this brings. It is the fools game to corner paper gold printing press, no? Sir, I stand with no fools!


ANOTHER (THOUGHTS!) (04/18/01; 06:19:54MT - #: 52086)
Reply

Such demand be as 100 men with contract asking Spanish farmer for 100 basket of olives where clear examination in field display only 10 basket. Such good reasoning have these men, demand delivery and illusion of wealth to others be none! None ask full collection for fear of illusion to become reality, no? Perhaps, take what offered and wait next year. Better, sell claims for olives to Western investors with little eyes and clean shoes? Perhaps financial knowledge and sophistication of these paper sellers is more considerable than average fool.

(Me: These old posts from the regular forum can be located by clicking the USAGold Archive Search link to the right - then enter the date)

FOFOA said...

Mr Gresham (04/17/01; 10:33:51MT - #: 52041)
ANOTHER: WA, BIS

Was the Washington Agreement the most significant event in gold since you were last posting in 1998? Do you have any reflections on those events?

Who were the players that made the price spike upward so quickly in 1999, and how was it managed back down? (How were so many "fearless" shorts recruited so quickly?)

What is the BIS' role in the "currency war"? Is it somewhat trying to walk the middle of the road? Did the US members take their seats recently as an attempt to manage BIS' involvement, or does this express any measure of US control over BIS?


Randy (@ The Tower) (04/17/01; 13:37:02MT - #: 52046)
Mr Gresham, nice question (msg#: 52041)

--- "Was the Washington Agreement the most significant event in gold since you were last posting in 1998?"---

If I may be so bold, let me anticipate ANOTHER's answer with an answer of my own.

The most significant event in gold since the dollar's gold default in 1971 has been the successful launch in 1999 of a long-awaited new currency system built upon neutral (meaning, multi-national) management and, more importantly, a floating gold reserve structure that finally abandoned the now obsolete "fixed" gold legacy of the failed Bretton Woods structure.

With this new reserve structure, the prevailing institutional incentive from '71 to the end of the millennium need no longer be one of "price suppression" for the perceived market value of gold.

In this light, the most significant element of the Washington Agreement is seen to be NOT the amount of pre-announced gold sales, but rather, the self-imposed curb on gold lending operations by these European central banks. And if you think about it, this action with the Washington Agreement was nearly just a predictable inevitability from the moment the eurosystem committed to provide for freely floating gold reserves. The "tools" of the prior suppression are on the outs. Believe it. The WA simply announced the foregone conclusion in a package suitable for newspaper headlines.

Just as the value of the post-'71 paper dollar has long been propped by the international yet artificial "mandate" to hold these dollars almost exclusively as reserves (acting in tandem with the dollar settlement for oil and the overhanging debts of the "Third World"), through this new currency structure gold (and its price/value!) has now been "officially" set free to replace these dollar reserves (savings).

The reason this full transition has not already occurred is that institutional interest still exists to foster the smoothest practicable transition until that unknowable moment where the final remaining *SNAP* in the adjustment occurs.

Speaking for The Tower and personally, I continue to buy gold with excess funds because I prefer the real wealth of gold over managed paper (and digital) contract currency. As a bonus, the real wealth value of same gold will provide a pleasant benefit upon full completion of the transition in world currencies' reserve structures. (An understatement, to be sure.)


ANOTHER (THOUGHTS!) (04/18/01; 06:41:33MT - #: 52088)
Reply

Mr. Gresham,

One must weigh the mind of this Randy. It be heavy, yes? Do read the thoughts of the BIS for these same are printed review as #52046. Hold a mirror to these events for reflection. Such descriptions I discuss come next day.

Thank You
Another

(Me: to be continued...)

Bron said...

http://goldchat.blogspot.com/2010/07/follow-up-to-fofoa.html

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.

Martijn said...

Well Bron,

I am reasonably confident that paper and physical are bound together. To make that statement I rely on one thing - arbitrage

That sounds reasonable, but is it?

If I and a couple of friends were running a casino dealing in fake chips, would I arbitrage on the sale on of real chips in the back alley and collapse the reliability of my casino?

And as my casino drives down the price of real chips, would those other than me and my friends interested in buying them do so in large quantities and drive up their price? Why not take the low price as a gift, an acquire more over time?

It's in the quote about olives above:

Such demand be as 100 men with contract asking Spanish farmer for 100 basket of olives where clear examination in field display only 10 basket. Such good reasoning have these men, demand delivery and illusion of wealth to others be none! None ask full collection for fear of illusion to become reality, no? Perhaps, take what offered and wait next year. Better, sell claims for olives to Western investors with little eyes and clean shoes? Perhaps financial knowledge and sophistication of these paper sellers is more considerable than average fool.

Mark said...

What puzzles me the most is why there appears to be so much physical available at ~$1200. The online sellers, the coin shops, etc seem to have tons of coins and ingots in stock, selling at low premiums. Even in the wholesale market, there appear to be seller mandates in the tens to even thousands of metric tons - for example, see http://www.ecplaza.net/tradeleads/seller/5931638/gold_bullion_129_seller.html, and other offers on ECPlaza and other B2B websites.

If the price of gold traded "in size" by giants is in the 5 digits USD, one would think that, at a minimum, rogue agents of the giants would be buying up any and all physical at such ridiculously low prices. Is the cartel and the BIG TRADERs of the world so disciplined not to push up the price? That defies at least the conventional wisdom of how cartels operate.

Don't get me wrong, I am happy to buy as much physical gold as I can at these low prices. I buy that there is a manipulation of the paper prices (well, that's pretty obvious), and one day the paper gold suppression is going to break. I'm just puzzled that there is any physical at all.

Mark

S said...

Bron,

You assert that the spec and the physical are tied together but your analysis give short shrift to the central banks. There is the matter of the Washington Agreement/BIS/ECB injections and the spec knowledge that should the arbs press to far the BB and the CBs will step in with aplomb. The entire BW architecture relies on the watchtower.

How is it you know Libor is not reflective of real cost of borrowing? perhaps it is because of the basis? Are you certain that if the central banks stepped away from the market that Libor would go up? You might have a fight with Hugh Hendry on that point. And if you are unsure about libor how is it you are sure about gold basis? Both markets are afflicted with over leveraged derivative malignancies and central bank entanglements.

Gold holdings are deminimus amongst retail investors and as a % of market cap/investment universe. CNBS works everyday to ensure those retail investors remian oblivious to the monetary mechanism other than stocks for the long run.

In short your comments are unpersuasive

Martijn said...

Despite a supposed ruling under the freedom of information act, I am still unable to find new info regarding Brown's Bottom. I thought it should have been released by now...

FOFOA said...

Snip from Harvey Organ today:

"...The next few days will be exciting and we will need front row seats in order to ascertain what is going on.

I will do my best to give you a clear picture of events.

In another startling event, the following three months of gold all settled at the same price of 1160.40 which signifies zero contango. The July, August and Sept comex gold all settled at 1160.40

Gold is in short supply"


Here's a screencap.
And here's the live link.

FOFOA said...

Hello Bron,

A few distinct counterpoints come to mind as I read your Follow up to FOFOA. So I'm just going to number them and fire away from the hip.

1. This market efficiency (arbitrage/greed closing the backwardation gap) would seem to work fine at sending an accurate and credible signal as long as it was truly an arbitrage between physical (spot or near month) and paper (future month contract) gold. As you say, when backwardation develops an opportunity arises to sell spot (or near month) and buy far month gold. And the profiteering of this opportunity will actually close the gap, reduce and ultimately eliminate the (backwardation) opportunity.

The only force working against this "arbitrage/greed closing the gap" is the fear that you might not get your physical gold back, as you said. 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 think for this signal to work credibly the "spot side" of the arbitrage play would have to be actual physical, 1:1 leverage, with real physical at risk of delivery whenever gold is sold. If this were the case then the "closing the backwardation gap" would represent ACTUAL confidence in the "futures" system to always deliver physical and not (possible) manipulation.

2. 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."

In your statement does "paper" mean "futures", and does "physical" include forwards, ETF shares and unallocated warehouse receipts in addition to unencumbered real gold? If this is the case then you (like certain others) may be right. I have seen very few that define "physical" the way I think it should be defined. And COMEX is not one of them.

3. You say that because the basis represents a gap with two sides, that both sides would have to be manipulated, a tricky feat by any measure. But is this really true? The real trick is the "spot selling" (of supposedly physical gold) to drive the price down, close the gap and bury the backwardation. Contango can also be widened by overbuying futures while ignoring the spot market. This would be the trick in a spot market that was rising uncontrollably. You gotta keep the paper (futures) credible against a rising spot price.

It seems the bullion banks have many tricks up their sleeves for selling (supposedly physical) gold without ever having to deliver, which allows them the ability to leverage or fractionalize their actual reserves. In other words, they can inflict upward pressure on the contango by selling gold they don't actually have! It is often assumed this is being done to control the price, but what if it is also being done to manage the basis?

Do you dispute that the BB's sell gold they don't actually have? Or let's say, more than they have to deliver this month? Of course they do. Why wouldn't they when they know not every buyer will take (or can even afford) delivery? Does this selling affect the basis if it occurs mostly in the near month leaving the far months to the "free market arbitrageurs" to adjust?

Cont...

FOFOA said...

4. You mentioned the elastic rubber band nature of the basis. If gold were like other commodities with supply mostly coming from the mines and demand from industry then this fluctuation would be a function of seasonality and other supply/demand fundamentals. But when you factor investment demand and the large stock to flow ratio of gold this rubber band nature becomes a measure of confidence in the paper financial system.

This increases the incentive to control it above and beyond the mere profit that can be made from the gold market, especially once you realize this "metric" is being tracked. If you are a banker who makes an historically high salary churning other paper investments, the cost of "managing" the perception generated by the gold basis might be an acceptable loss leader. This process may have begun in late 2008.

5. Let's just look at this from a completely different angle. Let's assume a few things and see how it all looks. Let's assume there are generally four different "gold groups":

Group 1 is the Giants with large hoards of unencumbered physical gold, plus a few small investors like me and my readers. Together we are a group of very strong hands.

Group 2 is the small to medium "gold investors", which includes some paper gold and some physical, but mostly relatively weak hands. These are the "10% gold is good insurance" crowd.

Group 3 is the commodity side of the gold market, the mines (supply side) and jewelry makers (demand side). For our purposes, these are mostly weak hands because neither is in the business of accumulating gold as the wealth holding of a lifetime.

Group 4 is the bullion banks.

Now let's also assume that my above post is correct, that the "state of backwardation", or basically "gold has gone into hiding" is already well underway as REAL confidence in the system is now gone. And that the basis we are watching right now is just another part of MOPE.

Let's think about what this would mean for the real flow of real 1:1 physical gold, where is it flowing, where is it ending up, where is it staying put, what is actually happening behind the cheap facade? Making these assumptions, let's logically deduce the process and the outcome and then compare it with what we can actually see.

Cont...

FOFOA said...

Group 1 which includes us, most of the CB's, China, the ME "oil", the old money crowd, etc... is on the gold uptake. The bigger the money, the slower the relative uptake though, because you don't want to move markets, you simply want to accumulate. The smaller the money, the faster the relative uptake and the more impatient for a Freegold revaluation. As an overall group we are buying cash gold, not necessarily selling "futures" gold, but overall putting downward pressure on the gold contango. Upward pressure on spot and downward pressure on futures. Group 1 is a one-way flow for physical gold. It goes in and doesn't come out. The only gold coming out of group 1 is from those small investors that must occasionally liquidate portions of their savings for their day-to-day needs.

Group 2 is wishy washy because they don't quite get it. Slowly but surely over time, their physical gold moves to group 1. From weak hands to strong hands. Group 2 is a two-way flow (depending which way the technical breeze is blowing) but overall it is a physical gold "outflow" and paper gold "inflow".

Group 3 is net physical outflow. It is basically the servant to its group 4 master. As group 1 grows ever larger and stronger, "group 3-jewelry side" grows, if not smaller, at least less significant.

And Group 4 is the middleman for all the above groups. It is the market-maker. It makes its money "churning". It consistently pulls physical gold from groups 2 and 3 and then sells fresh paper gold to group 2. It gives cash loans to group 3 in exchange for fixed payments of future gold. But its biggest job is constricting, obstructing and discouraging the deadly flow of physical gold to group 1.

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?

I realize this is a non-quantifiable view of the market, especially with rigged metrics everywhere, but please feel free to dispute it on the same free-form level.

Sorry if I rambled a bit in this reply. It usually takes me a week to refine my rambling thoughts into something presentable.

Sincerely,
FOFOA

FOFOA said...

(Continuing from yesterday...)

After a brief return to the trail...

Trail Guide (7/8/01; 08:36:41MT - #: 57668)
I must go where "Ears do not bite"!

I don't believe it people, but I guess this was bound to happen!

I just spent several days writing a piece that explained our whole philosophy. This time in a clear positive manner that was easy to read. I had decided to stay on the GoldTrail page only and elevate our discussion into a real time dialog. Events are close enough to a conclusion to warrant this. After a ton of asking and asking I finally convinced Another to write with me in his true academic / professional voice. Great! No more editing for me.

So,,,, he gets today's forum from me and what does he read?
====================================

------ Journeyman (7/8/01; 06:40:37MT - #: 57667) Bet you never heard this story. Media control & Chomsky @ALL

------Chomsky's proof
By William Rivers Pitt The United States is unusual among the industrial democracies in the rigidity of the system of ideological control ---'indoctrination,' we might say--- exercised through the mass media. --Noam Chomsky -------------

-----------June 25, 2001
--In the early morning hours of Thursday, June 22, 2001, a man named Jared T. Bozydaj took to the streets of New Paltz, New York, with an Intrac Arms 7.62 semi-automatic assault rifle. He fired pointedly at police officers, wounding one officer named Jeffery Quiepo in the arm. The shooting went on for several hours before Bozydaj was disarmed and arrested.-----------------

--------Clearly this kind of control requires an extensive network of influence coordinated from some central "authority." If they cover-up (by failure to cover) this sort of thing, what about economic news such as the current major turbulence in Chile, Argentina and Brazil? Etc. ----------

-----Reminds me of ---another-- illustrious information guru. ---------------

---"Don't tell them ... then it will not exist ..." -Chief Nazi indoctrination "Information Officer" -----

======================
OK,,,,,,and if that was not good enough, here is one more! Go on,, read the whole post? A few items below:
========================

working-kirk (7/8/01; 05:49:57MT - #: 57664)

---Which bring me to the subject of Crack Whores.-------

-------If you are selling sex you can get a blow job between $10.00 to $15.00. A Fuck goes From $25.00 to $100.00. A blow job takes anyway from a minute to three, and sexual intercourse can take five minutes to 15.----------------

===============

OK,,,,,,, good job men! Perfect timing! On subject and driving home the quality of this venue! I complained in two of my last three posts about such discussion and most everyone here seemed to support a "freedom of speech" that included all of the above! Journeyman gets to associate Another with" indoctrination" and "Nazi" thought.

All right,,, good stuff J-man!

...

FOFOA said...

Well,,,,,, Michael,,,,,, Randy,,,,,,, All,,,,, For all my insisting to "him" that this venue was the correct place to build an understanding of our future world of gold,,,, I guess I was wrong? I got back a quick retort and firm instructions. Instruction I will follow till hell freezes over because I will not lose my connection to Another. He said simply "tell them right now our position and walk away, it's over"! And I can tell you when he says it's over,,,,, it is over!

So,,,,,,,,, MK, please understand that it's not old FOA walking away mad this time. The big guy said we are done. I'm back to discussing this in private with select people that want to hear it and debate it in private. I'll stay in touch with you and discuss as you may want? After all this work, I guess it's my turn to feel low now. What a bunch of garbage!

Good luck all, I did my best to plant the seeds of thought. Own the wealth of gold and they will grow for you!

You will now "watch this new gold market" without FOA or Another.

Your friend and hard worker,(smile).
Last post, Signed off!


USAGOLD (09/03/01; 17:21:29MT - #: 60749)
On "Floaters", and Part of a Private Note from FOA Printed with His Permission

I received the following from FOA by private e-mail:

Michael,

I cannot post now as that area of my system is already being reworked. In my earlier mail to you I mentioned several weeks, same thing goes for trail posts. As to your question concerning all the various Another posters floating around:

--- "Is this Another or just a good imitation"? ----

It's not him, just another floater trying his best.(smile) Another asked me to "walk away" from the old rough crowd at your main forum so people wouldn't associate their foolishness with us. If we decided to leave for good, you would not be reading me at the trail or getting this mail either. He would cut off all communications with the same permanence that was demonstrated at Kitco. Once gone it's over and he never goes back, that's his style. Besides, I can tell you (and those that know him already know this) that the last thing he would be doing is posting right now!

Have a nice labor day, this will be my last reply for a while. See you in a few weeks, my friend.

- - - - - - - -

FOFOA said...

MK: I hope this puts the speculation to rest. Anyone can go to our archives and cannibalize sentences from "Another (Thoughts!)" or "In the Footsteps of Giants" and make it look like a post from Another. If you want to read the real thing we invite you to go to the "Another (Thoughts!)" archives where you will find a wealth of information -- and it's authentic Another. . . .Those who are newcomers might find these enigmatic postings an eye-opener -- as have many before you. I do believe that when Another is ready to post again, he will do it here.

Also, what follows immediately below was contained in another private correspondence from FOA. Though a private communication to me, I felt it important enough to ask permission to post it here which he graciously granted. . . . .

- - - - - - - -

FOA: Looking back, Another was a true master of understanding people's thought processes. He knew that none of us, that's you, me or any of the rest of us raised inside a background of American financial understanding, would ever accept his position thrust; with him just spelling it out in the open. Especially when this whole financial / political transition has been taking place over more than a decade and a half. By the way, he started this some decades ago. So, he decided to ask readers and listeners to think for themselves; by presenting bits and pieces of the flaws in our "Western Thought" as others saw it and as it pertained to his world of gold and oil. Not wanting to prove anything, while asking us to prove everything for ourselves; as these long term events unfolded.

I understand that there are a large group of basic individuals that fully understand our line of what is happening and are buying gold. What I never envisioned was how many groups make up the gold trader crowd; all standing apart from the Physical Gold Advocates. Further, I never thought they would segregate into so many vocal tribes, each trying to advance their own minor position in the gold world and willing to step all over themselves and anyone else in the process. I find it all a real show/play to watch as it truly demonstrates the very human dynamic Western governments have used to distort modern gold thought. I now understand that Another did fully grasp just how distorted this chain of thought was and went around it all by waiting for events to completely destroy their concepts; instead of debating with a host of gold tribes.

In the end, physical gold will win out and prove to be the greatest wealth holding anyone has ever known. Unable to grasp that only a transition of political influence by old world players can break this modern American Western hold on gold, these tribes are vulnerable to the same government influence they long for. Their wealth will be portioned by those same Western governments as world political reality forces our American leaders to embrace a world "free market" in physical gold. While abrogating, thru taxes and windfall appropriations, all forms of paper gold ownership.

Today they chant; "we want our leaders to recognize gold again"! OH, it will all right and the impact such a recognition will have on these various paper gold plays will leave these gold tribes dancing around a midnight fire! (smile) If nothing else, the entertainment of watching them spew brime on each other will be quite an act to follow. If nothing else it will educate future investors as to where to look for reason. Indeed, the law of ages never changes as ones conduct in social interaction still identifies oratory as being worthy or no. People that relish rash interaction always find themselves surrounded by fools. Eventually broke fools! (smile)

...

FOFOA said...

USAGOLD (9/4/01; 10:52:32MT - #: 60775)
Interpreting FOA's Message. . . .

Gandalf, far be it for me to interpret (paraphrase) FOA line by line, but you ask a very important question by e-mail which I will try to answer here for all. I hope you don't mind, but I think the whole Table Round might gain traction by your good question and my attempt at an answer:

Your question had to do with "interpretation" of the message I posted last night. Here's my response.

MK: I think what he is saying basically is that there are many vested and competing interests in the paper gold market that Another was well aware of long ago and that he (FOA) did not factor into his own thinking until recently. Rather than take on all these competing interests in an endless rhetorical battle, Another has decided to allow events to do his talking for him. What he has put out for public consumption in the past is a guideline that will get the investor where he or she needs to be -- in the physical metal.

(I find this sentence particularly interesting as it shows Another's basic methodology: "Not wanting to prove anything, asking us to prove everything for ourselves; as these long term events unfolded." Those who have studied Western philosophy are very familiar with the Socratic method of leading the student to an understanding through a series of questions and challenges. The word "education" derives from the Latin "educare" -- "to lead out of" -- as in to lead out of ignorance. To lecture is one method of "leading out of" but for long lasting results educators have long known that the Socratic method -- if it can be employed -- is the most effective. One wonders if educators nowadays even think about such things. We hope that to be the case! Another apparently understands the methodology.)

The key paragraph starts with "In the end, physical gold will win out and prove to be the greatest wealth holding anyone has ever known." All these competing interests will feel the sting of the metal itself as an "old world" belief system manifests itself in the markets (perhaps the European financial establishment?). All will be forced by the implosion of the paper gold market (and the dollar as well) to understand the real meaning of gold-in-the-hand. All gold related paper will burn along with most other paper assets. This is my interpretation, Gandalf, of the message in its essence. Others may have a different interpretation but this is mine. We welcome further discussion and interpretation. MK

FOFOA said...

A little reminder...

Date: Sat Apr 25 1998 22:55
ANOTHER (THOUGHTS!) ID#60253:

When the US government does not take in enough taxes to meet expenses, it sells treasury debt to make up the difference. When no one bids for this debt at an "acceptable" interest rate, the Federal Reserve bank buys the debt, outright! It gives printed cash to Washington and then, "holds the new treasury debt ( bond ) as backing for the issued cash!

Everyone understands the implications of this. Or do they? In reality, when the US government needs money, it doesn't sell debt! It "TRANSFERS" the obligation of its citizens to pay future real production ( taxes ) as a "backing" for its newly printed currency! As this process has been going on for decades, it has built up a debt of "real production payments" that its citizens can never pay. Further, as the world reserve, this currency is held thru proxy "by every single person on this planet" that uses paper to trade anything!

costata said...

FOFOA,

Here are two extracts from your earlier comment. Paragraph 1 implies that you are referring to the gold stock as having "gone into hiding". Subsequent comments strongly suggest that this is what you meant.

"Now let's also assume that my above post is correct, that the "state of backwardation", or basically "gold has gone into hiding" is already well underway as REAL confidence in the system is now gone. And that the basis we are watching right now is just another part of MOPE."

Paragraph 2 is more explicit ie. you use the word flow.

"Let's think about what this would mean for the real flow of real 1:1 physical gold, where is it flowing, where is it ending up, where is it staying put, what is actually happening behind the cheap facade? Making these assumptions, let's logically deduce the process and the outcome and then compare it with what we can actually see."

If you are suggesting that the aboveground physical stock is now being held very, very close then it might clarify things if you were explicit that most of the stock is unavailable.

Therefore demand for physical must find satisfaction from either the flow of gold or a BIS "coup" that unlocks gold in volume (as in the 1997/98 Asian currency crisis).

(For the newbies, if this is correct forget any calculation about the gold market that involves the 160,000 m/t of gold aboveground. Absent intervention by the BIS the physical demand will have to be met from the "flow" ie. mine supply, scrap etc - around 3,000 to 4,000 m/t pa.)

FOFOA, if I understand your meaning correctly I agree with you. I would add that the only remaining "safety valves" for the investment demand pressure on the flow is jewellery demand and paper gold.

Martijn,

I understand your reservations about some of Harvey Organ's conclusions. As always, we have to think for ourselves.

IMHO the raw data Harvey provides and the content that he aggregates is valuable. Many of his explanations of process and trading terminology are very helpful for people trying to get up to speed on this stuff.

Jimmy said...

FOFOA,


You made it!

Also your article written by Antal Fekete, is publiced on The Daily Bell.


You would reach more readers, maybe become Soros one of your readers...


Congratulation!


Jimmy

Bron said...

My response - The basis does not lie! http://goldchat.blogspot.com/2010/07/basis-does-not-lie.html

I still have other comments to make, but one thing at a time.

costata said...

Bron,

Everything, and I mean everything, that is wrong with your view of these matters is encapsulated in these words you wrote (My emphasis):

"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."

Victim transposed to villain.

costata said...

Bron,

"(FOFOA) said “If gold stops bidding for dollars (low gold velocity), the price (in gold) of a dollar falls to zero. This is backwardation!” My (Bron) 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."

Agreed. No backwardation if unreality is accepted as reality ie. paper bidding for paper pretending to be gold.

Bron said...

My saying they are a manipulator is a bit of dramatic rhetoric. I probably should have said "unwitting".

The point is that all of us in this community who have taken responsibility to inform ourselves of the issues and take caution are in the minority. There are still large numbers of people out there who trust the system. That is all I am saying

Bron said...

FOFOA, you said GOFO "should never turn negative because that would mean it costs more to borrow gold than to borrow dollars"

Why not, shouldn't gold be more valuable? If we take your gold bidding for dollars idea then it is not gold going into backwardation but USD going into contango.

See http://goldchat.blogspot.com/2008/12/gold-isnt-in-backwardation-usd-is-in.html for a discussion of this. I'd welcome your take on this.

miked said...

Sorry FOFOA I must be very thick. I apologize if I am asking a stupid question. I don't understand the basic premise that negative GOFO means that gold is perceived to be more valuable than dollars.

In the same way depreciating currencies carry high borrowing rates, expectations of a falling gold price can lead to a high lease rate. (why would I keep my money in gold if I expect its price to fall?). Leasing it is the opportunity cost of selling it.

Are you arguing that the gold lease rate gets high because gold lenders are afraid of default? If so that is only one explanation for a high lease rate.

Jimmy said...

UK Stagflation - Now It Begins


Bank of England Governor Mervyn King has warned that high inflation will continue to erode earnings power through next year as the economy faces the threat of 'stagflation'.

miked said...

I just finished the rest of the article. Apologies for posting before the end, but I am still confused.

Since Goldman Sachs wrote about gold lease rates, the rate has been low/negative. The message is "we don't need to borrow your gold".

That doesn't sounds like a rigged market to me. It sounds like a perfectly rational response to an expectation of a higher gold price. Who in their right mind is going to pay a high interest rate to borrow gold when they expect the dollar price to be higher on the repayment date? Recently gold has been falling and lo and behold lease rates rise again. Makes perfect sense to me.

therootofgood said...

from the directors blog at the CBO... debt meme being seared...

http://therootofgood.wordpress.com

Blondie said...

Light Shed On BIS Gold Swaps Randy at USAGold comments on information released about the swaps in a new FT article.

"two central bank officials said some of the commercial banks also needed the US dollar funding and were keen to act as a counterparty with the BIS. The gold swaps began in December and surged in January...
...European financial institutions are awash with bullion and some are trying to pledge gold as a guarantee...
...institutions with access to gold were able to make use of it to generate dollar liquidity."

Blondie said...

Nassim Taleb:

"What we need is definancialization. What we need to do is break the financial community's grip on society. And you can do it very easily by transformation of debt into equity. Banks have an interest in building debt, but equity in society is vastly more stable than debt."

costata said...

Thanks for the link Blondie.

To ALL please read this extract from the article that Randy quotes in his commentary. Please read it at least 5 times.

"Investors have bought physical gold in record amounts during the past two years and deposited it in commercial banks. European financial institutions are awash with bullion and some are trying to pledge gold as a guarantee." (My Emphasis)

Now let's make this paragraph explain the legal position by substituting the words "Investors", "deposited it in", "bought" and adding a brief explanation of the legal status of a "deposit" in a bank*.

"Unsecured creditors of banks have paid for physical gold in record amounts during the past two years and unknowingly loaned it to commercial banks. European financial institutions are awash with bullion, held as a demand deposit (like ALL cash deposits) but treated as an unsecured loan, and some are trying to pledge gold as a guarantee."

If this is news to anyone let me make it clear. Gold deposited with a bank or brokerage** is a cash (currency) deposit even though it is not legal tender. Gold held in a safe deposit box is NOT a demand deposit in most legal jurisdictions. The bank is a custodian for safe deposit boxes.

If this article is telling the truth then the BIS may have found their latest "coup" and unlocked potentially huge tonnages of gold.

FWIW I would also love to know if "European financial institutions" means the "European subsidiaries of international banks". If so, the transaction could look like this:

1. Bank customer in, say USA, deposits cash with bank for purchase of physical gold.

2. Bank records loan of cash (gold deposit) from customer.

3. Bank swaps gold for cash (lends gold) held by Central Bank as intermediary with BIS or with BIS direct.

4. Banks sells gold swap (BIS loan) as securitised debt.

5. Bank goes bankrupt.

6. Gold depositor of bank is treated by the receivers as an unsecured creditor. (At most the depositor may be paid out in currency.)

7. Holder of securitised (gold) debt redeems gold for cash repayment to BIS.

Astute readers will, I'm sure, note the first four letters in the word "bankrupt". Banks invented this game too. It's called "creative bankruptcy", akin to an "insurance" fire.

*Reference: "Money, Bank Credit and Economic Cycles" by Jesus Huerta de Soto. (Available from the Mises Institute.)

**Morgan Stanley settled a class action a few years ago in cash, with no admissions, for charging customers fees etc on gold deposits while they did not have any gold on deposit in the customers' accounts.

Bron said...

costata, if those commerical banks are lending out their gold depositors' metal and there is a lot of that happening, then that is why the basis is not in backwardation.

Our issue here is to educate and make investors question whether the gold accounts they hold are true custodian facilities or fractionalised demand deposits.

costata said...

Bron,

"Our issue here is to educate and make investors question whether the gold accounts they hold are true custodian facilities or fractionalised demand deposits."

Amen.

FOFOA said...

Hello Bron,

This is very good. You have laid out the phases of distrust. You say we are just beginning the second phase. The thesis of my post was that we are well into the third phase, quite possibly beginning the fourth phase sans the basis tell. You say the basis doesn't lie. I say it could be lying.

Humor me for a moment and allow me to edit out the (true or false?) market signals from your descriptions and let's look at the phases sans the published metrics. [My notes in brackets]:

1st Phase

We start to see increasing investment in gold, 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".

[like maybe from 1999 through 2007?]

2nd Phase

[L]ongs.. still have belief in the system [and] are willing to take.. risk to make a profit. Gold is still held in the system but growth in reported balances is slowing.

["slowing".. like maybe COMEX registered inventory falling?]

3rd Phase

[L]ess 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.

[From Harvey Organ yesterday: "The GLD entity saw a drop in inventory of .9 tonnes of gold. This is probably paper gold circulating and not real gold as the Bank of England would not permit any of the real stuff to leave.

However the shareholders of GLD must be pretty worried. John Paulsen has seen a big 20% drop in the number of his shareholders as his number one holding is GLD."


July 21: "SPDR Gold Trust said its holdings fell nearly 0.5 percent to 1,308.128 tonnes by July 20 from 1,314.211 on July 15."

And from Izabella Kaminska's Is someone liquidating GLD?, here is a chart of GLD shares outstanding.]

4th Phase

Reported ETF balances are declining. [N]ot all is well. [Physical] Gold is being pulled and stored outside the system. The strong hands are in the majority, the squeeze is really on.


FOFOA: Viewed this way (ignoring the basis) would you still say "we are just starting in the 2nd Phase"? I put my GLD notes under your phase three because they are obviously anecdotal and not overwhelming. But technically, they would belong under phase four, wouldn't they?

Regarding The basis does not lie!, you said, "If you don’t like the conclusion, then you must find a flaw in my logic about the basis." This is me taking a stab at your challenge:

Your logic seems to be, "The basis is therefore reflecting reality, the reality that there are idiots prepared to accept paper gold."

But "idiots prepared to accept paper gold" describes dollars bidding for (paper) gold, not (physical) gold bidding for dollars. Which of these bidding directions is more important to the system? If your answer is the latter, is a bid for dollars from "paper gold" sufficient?

As stated in my post; "What the bullion banks do is they take a piece of gold and they inflate it... so it appears to be a SUPER BID for dollars." You are basically saying the basis reflects confidence in the system because "idiot" dollars are still accepting my "super bid". Is this a real gold contango?

(cont...)

FOFOA said...

...

In Gold isn't in backwardation, the USD is in contango you pointed out that the gold/dollar bid can be viewed both ways. But I think what was missing was the meaning of the 'gold bid for dollars' view. You touched on it:

"We are so used to talking of 1oz = xxx dollars when it should really be $1 = xxx ounces. Then you see that gold hasn't went into backwardation, but that USD has went into contango... In the USD vs gold situation, however, we are not talking about "equal" currencies - one cannot be created, the other can."

This is the key to the flaw in your logic, isn't it? Paper gold CAN be created making it "equal" to the dollar. Therefore a basis that relies on "idiots prepared to accept paper gold" does not reflect the level of physical gold's bid for dollars.

If we go back to Fekete's 2004 paper we find a good description of contango. Does it apply equally to the USD and to gold in our 'gold bidding for dollars' view? Or is one qualitatively different than the other?...

FEKETE: "The proper way to view the futures markets is a place where warehousing services are traded. Contango is the premium from which the warehouseman derives the fee for his services. If there is no contango, no warehousing is possible. Accordingly, it takes not two but three to contango: the producer, the speculator, and the warehouseman.

"This is especially clear in case of the monetary metals, of which a supply many times larger than annual demand for consumption exists. We have expressed this by saying that the stocks-to-flows ratio for a monetary metal is a large multiple (it is estimated to be greater than 50 for gold), whereas the same number for a non-monetary commodity is a small fraction (it is estimated to be less than 0.25 for copper)."


FOFOA: What is the stock to flow ratio of the USD? If the Fed is the "producer" of dollars, is the gold dealer "the warehouseman" when the dollar goes into contango? Is the stock to flow ratio of paper gold large or small?

FEKETE: "The large stocks-to-flows ratio reveals the willingness of people to carry the monetary metal, in spite of carrying charges, and defying government propaganda. The longs have a choice. Either they carry the monetary metal in inventory, or they replace it with a futures contract. In the latter case they sell the metal and invest the proceeds at interest (taking care that maturities match). In the normal situation arbitrage between the two ways of being long in the monetary metal will bring about contango."

FOFOA: And of course the inverse... in the normal situation arbitrage will bring about "backwardation" in the USD. And right now we have backwardation in the USD, so there must be a normal situation arbitrage between the "idiots" carrying the "paper gold" and the other "idiots" replacing it with paper contracts for future "paper gold", right?

FEKETE: "But the fact remains that under the regime of irredeemable currency it is possible to corner a monetary metal. It is true that cornering a monetary metal goes by another name: that of hyperinflation.........

The Basis for the Basis

First we raise the question of how the warehouseman knows what and how much stuff to put into his warehouses. Well, his guiding star is the basis, the term he uses for the difference between the futures and cash prices of the commodity. If the basis for corn is higher than for wheat, then the grain elevator operator will fill his elevator with corn in preference to wheat, regardless of prices. He will cover his need for wheat by purchasing wheat futures rather than cash wheat."


(cont...)

FOFOA said...

...

FOFOA: So, presumably, all things being equal, if the basis for dollars is higher than the basis for gold, then the gold dealer will "fill his elevator" with dollars in preference to gold, regardless of price. He will cover his "need" for gold by purchasing gold futures rather than physical.

Ridiculous, right?

Of course the dollar WANTS to be "equal" to gold like corn is to wheat. And the contango says as much, right?

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? When viewed from Fekete's perspective?

Sincerely,
FOFOA

FOFOA said...

Hello Costata,

Re your July 29, 2010 4:32 PM

I agree that Randy is SPOT ON! People should pay more attention to his posts (designated by RS View: at the bottom... HERE)!

Also I think I know the "BIS coup" (or coups) you speak of. The first was to destroy a half century-old global threat "without firing a shot," and it entailed the intake (to the BIS system) of large amounts of gold to make sure that threat stayed down. The second was/is to rid the world of an unnecessary burden. And it entails the opposite "gold strategy".

Ridding the world of the dollar reserve burden is accomplished through decentralizing gold ownership into the widest distribution possible. Not concentrating it in the hands of a few ($IMFS or otherwise) banksters. Freegold's highest and most stable value is with "gold in every hand".

Just look at the BIS' own gold actions. Their owned gold hoard has shrunk from 194 tonnes to 120 tonnes over the last 6 years, as has the entire Eurosystem's hoard over the last decade (from 12,576 tonnes down to 10,833 tonnes). Most gold movements in Europe have either been lateral reshuffling or dishoarding and encouraging citizens and other entities to start hoarding physical gold themselves.

I have written this before... if you were King of the World with 35,000 tonnes of gold in a world of 160,000 tonnes, you would gladly - happily - reduce your "stash" to 10,000 tonnes if that reduction came with a 50x revaluation. Trying to get ALL the gold into your hoard is a fools strategy.

And those "investors" who bought unallocated gold receipts were screwed the moment they made that decision, as ANOTHER told us years ago. They didn't need the BIS to take their (unallocated) gold away. The bankers or custodians would have easily done that on their own once the $-paper gold market imploded.

Perhaps, like FOA suggested, certain paper gold holders will ultimately be "paper-settled" with freshly printed euros at the Freegold price once the whole thing collapses. Paper credits that can be traded 1:1 with gold anywhere (at that time). The BIS taking control of "unallocated" physical via swaps with commercial banks engaged in selling unallocated accounts majorly supports this view IMO.

Perhaps the BIS will actually prevent this gold from bidding for (the banksters' scorched-Earth) US dollars. Preserving it to bid later on euros, once those paper positions have been settled with freshly printed euros. A non-inflationary, global-liquidity-providing, central banking print-fest the likes of which world has never seen. One that leaves gold at EUR X0,000 per troy ounce and that other reserve currency somewhere in the dustbin of history.

Sincerely,
FOFOA

costata said...

FOFOA,

Much to ponder. Thanks for your reply.

BTW if your scenario above is correct and the BIS swap was in fact with, say, one or more of the Club Med EMU members it would have the same affect of protecting the gold from creditors and bidders, would it not?

Cheers!

Bron said...

Good stuff, may be a delay in my response - seems I have spent too much time blogging and not enough quality time with my other half. My protests that backwardation and rubber bands and what not is all very important just get met with that look (you know it).

The Root Of Good said...

St. Louis Fed President Says Fed Should Monetize More US Gov Debt

Greyfox "It's the Debt, Stupid" said...

"Unallocated" gold kept at a bank or other finanical institution is no safer than paper gold on the Comex or LBMA. It is still just a paper promise for future delivery. After the fat lady sings you will end up with a wish in one hand and your pecker in the other.



...BIS Gold Swaps Mystery Unravelled, the source of the gold provided in the dollar swaps with BIS is coming from customers of about 10 European banks who are holding their gold at the banks in 'unallocated accounts.'

The gold used in the swaps came mainly from investors’ deposit accounts at the European commercial banks. Some investors prefer to deposit their gold in so-called “allocated accounts”, which restrict the custodian banks’ ability to use the gold in their market operations by assigning them specific bullion bars. But other investors prefer cheaper “unallocated accounts”, which give banks access to their bullion for their day-to-day operations.

http://jessescrossroadscafe.blogspot.com/

Jeff said...
This comment has been removed by the author.
therootofgood said...

Fed May `Ease,’ Though Form Debatable, Nomura Says

Bron said...

Response here: http://goldchat.blogspot.com/2010/08/social-construction-of-gold-reality.html

I will address some of the other points you raised, particularly around too strict an application of the concept of the basis to gold (a monetary metal) as it is really a concept for physical commodities. For example, the fact that gold can be leased means it does not have a warehousing cost unlike arbitrages for true physical commodities.

SatyaPranava said...

interesting post, looking at this some 2 months later. even though it was feigned hype, it was only 3 days away from the seasonal bottom. :)

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