Saturday, January 29, 2011

Who is Draining GLD?

Actual GLD Vault

There seems to be a misunderstanding in the gold market that when you buy or sell shares of GLD you are putting pressure on the price of gold. That selling shares of GLD into the exchange is somehow analogous to selling physical into the marketplace. Or that buying shares of GLD is somehow, somewhere down the chain, removing physical gold from the marketplace.

We often look at apparent correlation and assume a certain cause and effect. GLD is designed to track the price of gold. It is not actively managed to track the price of gold. Instead, it does so through opportunities that arise whenever it doesn't. Imagine GLD as a big lump of gold just sitting there in Town Square. The price of gold is "discovered" elsewhere and shares in this big lump just trade based on that elsewhere-discovered price. If the share price is too high, then an opportunity exists to sell your share and buy "gold" elsewhere. Likewise, if it is too low, there is an opportunity to sell elsewhere and buy into this lump on display.

Occasionally, lately, someone comes along and shaves a chunk off of the lump, reducing its overall size. And financial reporters and analysts everywhere are struggling to correlate the price of gold and the GLD holdings with some semblance of cause and effect:
The Street – Alix Steel

Gold prices were breaking even after another double-digit selloff Tuesday as investors dumped their holdings. The SPDR Gold Shares exchange-traded fund dropped more than 30 tons of gold on Tuesday.
Reuters

Traders in Asia reported strong physical gold buying, particularly from China, on Friday, but large bullion-backed exchange-traded funds continued to see outflows.
Reuters - Amanda Cooper and Jan Harvey

But investor sentiment towards gold has soured in the last few sessions, as evidenced by the largest one-day outflow in three months from the world’s biggest exchange-traded gold fund. Holdings in the SPDR Gold Trust fell 10.926 tonnes to 1,260.843 tonnes on Jan 24.
Funny. When we're talking about gold, an outflow to one person is an inflow to another, is it not? Randy Strauss at USAGold.com rightly responded to these silly reports with the truth [emphasis mine]:

RS View: Silly reporters. Instead of calling these “outflows” from the ETFs, it should be called what it is — a redemption of a basket of shares for physical gold by the Authorized Participants (e.g. bullion banks). Such share redemptions would actually be a bullish sign because it entails a reduction in the global supply of paper gold while at the same time signifying a preference by the redeeming party for having the metal over the ETF shares. That is, of course, unless the drawdown in physical gold merely represented the routine sales of the gold inventory that occur to cover the ETF’s administrative expenses.

RS View: I’ve said it before and I’ll say it again now, the reporters are getting it wrong when they equate outflows of gold from the ETFs with “sour” investor sentiment. What they need to work harder to understand is that these are NOT actively managed funds whose gold inventory is tweaked to ebb and flow based on public sentiment in the shares. Instead, the ETFs are more like a central coat-check room in which the various bullion banks have temporarily hung out their own inventories (i.e., meaning, their unallocated stock which they hold loosely on behalf of their depositors). And whereas the claim tickets (ETF shares) may freely circulate on the open market, any significant outflow of physical inventory is simply and primarily indicative of a bullion bank reclaiming the original inventory based on a heightened need or desire for physical metal in a tightening market — for example, to meet the demands emerging from Asia.

Here's another one. I found this to be an interesting post, even though the blogger is toeing the same line as the reporters above [emphasis mine]:

Gold Bubble?

Usually in a bubble, investors are holding a bag.

Investors have been net sellers of about 100 tonnes in the last 7 months. The IMF has disposed of another few hundred tonnes. Yet gold price is higher by around 10% in the same period.

To put this into context, since December 21st alone, 2.2M ounces have been sold from the ETF, basically a bit more than an entire quarter of production from Barrick gold (the world's largest producer). The normal run rate of global recycling plus mine production is approximately 2.95M ounces per month. So in the same period, assuming GLD was the only source of outflow, total global absorbed gold supply was 5.15M ounces. If outflows continued at the current rate, the GLD ETF (the largest investor depository of gold by far) would have no gold in 18 months.

Supply increased 75% in the short term to see price only fall 4.5%.

Someone else is doing the buying, clearly.

2.2M ounces is more than 68 tonnes... since December 21! Who is taking this stuff?

Now here's a bloodhound that might be on to a scent worth following. Lance Lewis, in his subscriber newsletter, follows what he calls "the GLD puke indicator" which tracks GLD physical gold regurgitations [emphasis mine]:

Just in case anyone missed it in last night’s letter, our GLD puke indicator that has nearly a flawless record at marking lows in gold triggered a buy signal yesterday after the ETF spit up 31 tonnes (and some blood) to trigger a 2.48% decline in its bullion holdings.

As we’ve noted before, one-day declines in the holdings of this ETF of over 1% have tended to be capitulatory in nature and have typically occurred near important lows in the gold price during gold’s secular bull market.

Consider that since the GLD ETF’s creation back in 2004, it has seen 1%+ one-day declines in its bullion holdings only 41 other times. When one goes back and looks at where these declines in bullion holdings have occurred, virtually all of them occurred “at” or were “clustered at” important lows in the gold price.

When we update this familiar (see above) chart for today’s 1%+ decline in bullion holdings, we can once again see where I have labeled the past eleven 1%+ declines in the ETF’s bullion holdings (plus today’s decline) with red dots and then placed a corresponding white dot below the price of GLD in order to show where that decline (or clusters of declines, as was the case in 2008) occurred relative to the price of the GLD, which is obviously tied to spot gold.

You will recall that we most recently used this indicator back on July 28th, 2010 in order to identify what was then the summer low in the gold price, and we used it again on October 7th, 2010 to recognize that a sudden 1 percent slide in gold from an all-time high was actually a just a one-day setback that led to new all-time highs being hit once again just a few days later.

The pattern you see emerge after today’s 1%+ puke, just as on those prior occasions, is that these “pukes” of bullion by the GLD ETF have always tended to occur at or very close to important lows in the gold price, and declines of over 2% have only occurred at MAJOR lows, such as the two major lows that were hit in 2008.

Note that one of those lows on September 9, 2008, which is the closest in size to today’s puke, also occurred just one day before a 5-day short squeeze/meltup of 30 percent in the gold price that kicked off on September 12, 2008. Perhaps the remaining shorts in the gold market will now pay a similar price for betting against a bull market?

Perhaps history will repeat and perhaps it won’t with respect to such a short squeeze, but given this indicator’s near flawless record at marking lows in gold, it's not to be ignored.


What we appear to have here is a severely tight noose around the supply of Bullion Bank deliverable physical gold at a time when the Giants are chomping it up! Bullion Banks have many means at their disposal to shuffle around a globally limited quantity of gold reserves and get it to where it needs to go. Especially when "important clients," like those in the East or Middle East, come calling for physical delivery or allocation.

Upon getting requests from unallocated depositors for either outright withdrawal, or more simply for transfer into allocated accounts, any Bullion Bank has options. Yes, it can seek to acquire (through borrowing or purchase) the requisite ETF shares for redemption of a "basket" in its special capacity as an Authorized Participant of GLD, or it can pursue alternate avenues such as buying gold on the open market or, better still, borrowing it from either its own unallocated pool of deposits or turning to other members in the BB fraternity to borrow the adequate quantity to cover the immediate needs. Whatever combo is deemed most efficient or cost-effective is what the bank will do.

But what if those other options are disappearing faster than a sack of currency left on the COMEX trading floor? If gold (in size) on the open market is scarce, the unallocated pool is spoken for (in other words, undergoing allocation) and the fraternity brothers are all suffering the same noose, what do you think becomes the most efficient and cost-effective option? Raiding the GLD reservoir perhaps?

Did you even know that you could take physical delivery from GLD? Apparently many didn't. I was just chatting (online) with one of my supporters yesterday, let's call him "Small Giant" (a term explained in my last post) because he is in that eight figure savings bracket that might find this information useful. On top of that, he makes his living assisting funds in their management of eleven figures.

So he says to me:

Small Giant [6:10 P.M.]: I think very very few people realize that you can convert GLD shares to actual physical
Small Giant [6:10 P.M.]: can't say I know of anyone who has ever done that

Okay, let me back up.

Small Giant [5:47 P.M.]: there is clearly panic in the ranks of the longs
FOFOA [5:47 P.M.]: The more it goes down, the bigger the pressure on physical. I think the draw down in GLD suggests other options for physical delivery in size are gone.
Small Giant [5:47 P.M.]: I agree
FOFOA [5:49 P.M.]: With $13 million, you could take possession of a basket of physical from GLD at a good price.
Small Giant [5:49 P.M.]: what is the minimum threshold?
FOFOA [5:50 P.M.]: 100,000 shares is a basket. Must be redeemed through an "Authorized Participant"...
Small Giant [5:50 P.M.]: wow this is getting very very interesting
FOFOA [5:50 P.M.]: Authorized Participants are: BMO Capital Markets Corp., CIBC World Markets Corp., Citigroup Global Markets Inc., Credit Suisse Securities (USA) LLC, Deutsche Bank Securities Inc., EWT, LLC, Goldman, Sachs & Co., Goldman Sachs Execution & Clearing, L.P., HSBC Securities (USA) Inc., J.P. Morgan Securities Inc., Merrill Lynch Professional Clearing Corp., Morgan Stanley & Co. Incorporated, Newedge USA LLC, RBC Capital Markets Corporation, Scotia Capital (USA) Inc., and UBS Securities LLC
Small Giant [5:51 P.M.]: so how would that work?
Small Giant [5:51 P.M.]: you buy 100K shares of GLD
Small Giant [5:51 P.M.]: then what?
FOFOA [5:53 P.M.]: You've got to go to one of those APs and have them create a basket for you. That gold is then transferred from the GLD allocated account into your broker's unallocated account. Then you redeem your basket and have your broker allocate the gold to you.
Small Giant [5:54 P.M.]: so it's really is that easy?
FOFOA [5:55 P.M.]: I'm working on a post tentatively called "Who is Draining GLD" using a lot of snips from the prospectus. The entire world of confused financial analysts is misinterpreting the GLD inventory reduction as if it is gold negative. But it is precisely the opposite. GLD doesn't buy gold when it's going up and sell when it's going down. Doesn't work that way. But that's what everyone thinks.
FOFOA [5:57 P.M.]: GLD might be the last reservoir for the giants to drink from. That's my Thought of the day. Because there should be easier ways to buy a tonne of gold.
Small Giant [5:58 P.M.]: u lost me
Small Giant [5:59 P.M.]: count me as a confused financial analyst

So after this chat I started thinking that I should write this post for other "small giants" out there that might be looking for tonnes of physical at a good, off-market price.

Does anyone remember the Jim Rickards comment I quoted in Open Letter to EMU Heads of State? Here it is:

"One point that does not get enough attention is the impact of size in the physical market. It’s one thing to say that COMEX is $1,100 per ounce and physical might be $1,200 per ounce for one metric tonne if you can find it. But what about 100 tonnes? 500 tonnes? Physical orders of that size are impossible to execute outside of official channels. Size of order is relevant in any market but I have never seen a market (short of a full blown manipulation or short squeeze) with as much price inelasticity as physical gold which is why the buy side overhang keep their intentions to themselves."

Now you are probably thinking, "why bother with GLD where a minimum "basket" is a whopping 100,000 shares (around 10,000 ounces) for $13 million dollars when you can take delivery of as little as a 400 ounce "LGD bar" from Eric Sprott's PHYS for just over a half million dollars?" If you thought that, then you are not thinking like a Giant. Read Jim Rickards' comment again. Giants like to keep their intentions to themselves. Why? Because they prefer to buy in off-market transactions – ones that do not influence the price of gold – in order to maximize the number of ounces they receive for their normally market-moving quantities of currency. They know that the size they want to convert would move the price, and then they would get less gold for their money.

Now let's compare PHYS with GLD and try to think like a real Giant for a minute.


The one day drain from GLD just the other day was larger than the entire PHYS ETF by more than 5 tonnes. So what would have completely emptied the Sprott warehouse was only 2.48% of GLD. The amount drained from GLD since Dec. 21st was 268% of Eric Sprott's PHYS. And what has it caused but barely a blip on the radar? Can you imagine the fuss (or price explosion!) if one single billionaire decided to clean out PHYS? That's right. PHYS represents maybe one real Giant. That's not exactly a "reservoir" for the giant class to drink from.

If you are a Giant, or even a Small Giant, you should know about this off-market opportunity to take giant amounts of physical into your possession at a good price. And you should know this before it is all gone. As my Small Giant friend wrote, "very very few people realize that you can convert GLD shares to actual physical." He didn't know until yesterday. But it's all there in the prospectus. It tells you how to do it, and who to contact to get it done. If one of the Authorized Participants refuses your business, just call the next one on the list. There are 16 of them!

I am reposting portions of the prospectus from the SPDR Gold Shares (GLD) website right here. It may seem like a lot to read, but trust me, this is a highly abbreviated version of the 46 page prospectus. This is actually from the reader-friendly "FAQ" section of the website, although some of it comes directly from the prospectus. This is all you really need to know!

From: http://www.spdrgoldshares.com/sites/us/faqs/

8.Can you take physical possession of the gold?
The Trustee, Bank of New York, does not deal directly with the public. The trust handles creation and redemption orders for the shares with Authorized Participants, who deal in blocks of 100,000 shares. An individual investor wishing to exchange shares for physical gold would have to come to the appropriate arrangements with his or her broker.

14.How is the gold price set?
The spot price for gold is determined by market forces in the 24-hour global over-the-counter (OTC) market for gold. The OTC market accounts for most global gold trading, and prices quoted reflect the information available to the market at any given time. The spot price can be found on: www.thebulliondesk.com.

The London Bullion Market Association (LBMA) has about 70 full members, as well as many associate members. Twice daily during London trading hours the ten market making members of the LBMA fix a gold reference price for the day’s trading. These prices are based upon the actual buy and sell orders for gold in the global OTC market. A good analogy for the London fix versus OTC trading would be to consider the London fixes similar to opening/closing prices for stocks and to consider the spot price for gold as the continuous market price throughout the trading day.

The COMEX division of the New York Mercantile Exchange (NYMEX) is a futures and options exchange that acts as a marketplace to trade futures and options contracts on metals, including gold. Gold futures contracts typically trade at a premium to the spot price. Further discussion can be found in the prospectus.

15.What is the relationship between the GLD Net Asset Value, the GLD share price and the gold spot price?
The investment objective of the Trust is for the value of the shares to reflect the price of gold bullion, less the expenses of the Trust’s operations.

The Net Asset Value (NAV) of the Trust is determined by the Trustee each day that the NYSE Arca is open for regular trading. The NAV of the Trust is calculated based on the total ounces of gold owned by the Trust valued at the Gold London PM fix of that day plus any cash held by the Trust less accrued expenses. The NAV of each GLD share is the NAV of the Trust divided by the total number of shares outstanding.

The gold spot price is determined by market forces in the 24-hour global over-the-counter market for gold and reflects the information available to the market at any given time. The Indicative Intraday Value per GLD share published on the www.spdrgoldshares.com website is based on the mid-point of the bid/offer gold spot price adjusted for the Trust’s daily accrued expenses.

The NYSE Arca is an electronic exchange which displays orders simultaneously to both buyer and seller. Once orders are submitted, all trades are executed in the manner designated by the party entering the national best bid or offer. The buy and sell offers are posted on NYSE Arca in price order from best to worst and if the prices match up, they are ordered based on the time the buy order or sell order was posted (earliest to latest). These prices reflect the supply and demand for shares which is influenced by factors including the gold spot price and its impact on the NAV.

20.How is gold transferred to or withdrawn from the Trust?
The Bank of New York Mellon, as trustee of the Trust, or the Trustee, and the Custodian have entered into agreements which establish the Trust’s unallocated account and the Trust’s allocated account. The Trust’s unallocated account is principally used to facilitate the transfer of gold between Authorized Participants and the Trust in connection with the creation and redemption of Baskets (a “Basket” equals a block of 100,000 SPDR® Gold Shares). The Trust’s Authorized Participants are the only persons that may place orders to create and redeem Baskets and, in connection with the creation of Baskets, are solely responsible for the delivery of gold to the Trust. The Trust never purchases gold in connection with the creation or redemption of Baskets or for any other reason. All gold transferred in and out of, and held by, the Trust must comply with the rules, regulations, practices and customs of the LBMA, including “The Good Delivery Rules for Gold and Silver Bars.” The specifications of a London Good Delivery Bar are discussed below. The Trust’s unallocated account is also used to facilitate the monthly sales of gold made by the Trustee to pay the Trust’s expenses.

Except when gold is transferred in and out of the Trust or when a small amount of gold remains credited to the Trust’s unallocated account at the end of a business day (which the Custodian is directed to limit to no more than 430 ounces), the gold transferred to the Trust is held in the Trust’s allocated account in bar form. When Baskets are created or redeemed, the Custodian transfers gold in and out of the Trust through the unallocated accounts it maintains for each Authorized Participant and the unallocated and allocated gold accounts it maintains for the Trust. After gold has been first credited to an Authorized Participant’s unallocated account in connection with the creation of a Basket, the Custodian transfers the credited amount from the Authorized Participant’s unallocated account to the Trust’s unallocated account. The Custodian then allocates specific bars of gold from unallocated bars which the Custodian holds, or instructs a subcustodian to allocate specific bars of gold from unallocated bars held by or for the subcustodian, so that the total of the allocated gold bars represents the amount of gold credited to the Trust’s unallocated account to the extent such amount is representable by whole bars. The amount of gold represented by the allocated gold bars is debited from the Trust’s unallocated account and the allocated gold bars are credited to and held in the Trust’s allocated account. The process of withdrawing gold from the Trust for a redemption of a Basket follows the same general procedure as for transferring gold to the Trust for a creation of a Basket, only in reverse.

The Custodian updates its records at the end of each business day (London time) to identify the specific bars of gold allocated to the Trust and provides the Trustee with regular reports detailing the gold transfers in and out of the Trust’s unallocated account and the Trust’s allocated account. The Trust’s website includes a list of the gold bars held in the Trust’s allocated account. The list identifies each bar by bar number, brand, weight, fineness and fine weight and is updated once a week.

21.Who are the Trust’s Authorized Participants and what is their function?
Authorized Participants are the only persons that may place orders to create and redeem Baskets; the Trust does not deal directly with individual investors. Authorized Participants must be (1) registered broker-dealers or other securities market participants, such as banks and other financial institutions, which are not required to register as broker-dealers to engage in securities transactions and (2) Depository Trust Company (DTC) participants. Each Authorized Participant must establish an unallocated account with the Custodian in order to be able to process the gold transfers associated with creating and redeeming Baskets. Authorized Participants can place an order to create or redeem one or more Baskets on every day the NYSE Arca is open for trading. The Trust issues new Baskets to Authorized Participants in exchange for their delivery of gold to the Trust upon a creation and transfers gold to Authorized Participants in exchange for their delivery of Baskets to the Trust upon a redemption. In creating or redeeming Baskets, Authorized Participants may act for their own accounts or as agents for broker-dealers, custodians and other securities market participants that wish to create or redeem Baskets. An order for one or more Baskets may be placed by an Authorized Participant on behalf of multiple clients. A list of the Trust’s current Authorized Participants may be found in the Annual Report or Prospectus of the Trust most recently filed with the Securities and Exchange Commission.

22.What is an unallocated account?
An unallocated account is an account with a bullion dealer, which may also be a bank, to which a fine weight amount of gold is credited. Transfers to or from an unallocated account are made by crediting or debiting the number of ounces of gold being deposited or withdrawn. As gold held in an unallocated account is not segregated from the bullion dealer’s assets, credits to an unallocated account represent only the bullion dealer’s obligation to deliver gold and do not constitute ownership of any specific bars of gold. The account holder is entitled to direct the bullion dealer to deliver an amount of physical gold equal to the amount of gold standing to the credit of the account holder. When delivering gold, the bullion dealer allocates physical gold from its general stock to the account holder with a corresponding debit being made to the amount of gold credited to the unallocated account.

The Trust’s unallocated account is only used for the transfer of gold to and from the Trust’s allocated account.

23.What is an allocated account?
An allocated account is an account with a bullion dealer, which may also be a bank, to which individually identified gold bars owned by the account holder are credited. The gold bars in an allocated account are specific to that account and are identified by a list which shows, for each gold bar, the refiner, assay or fineness, serial number and gross and fine weight. The account holder has full ownership of the gold bars.

The Trust’s allocated account is only used for holding the allocated gold bars of the Trust.

26.Is the Trust’s gold ever traded, leased or loaned?
Gold held in the Trust’s allocated account in bar form or credited to the Trust’s unallocated account is the property of the Trust and is not traded, leased or loaned under any circumstances.


And from the latest 10K filed with the SEC, here is the list of the current Authorized Participants [emphasis mine]:

Authorized Participants may act for their own accounts or as agents for broker-dealers, custodians and other securities market participants that wish to create or redeem Baskets. An order for one or more Baskets may be placed by an Authorized Participant on behalf of multiple clients. As of the date of this report:

BMO Capital Markets Corp.
CIBC World Markets Corp.
Citigroup Global Markets Inc.
Credit Suisse Securities (USA) LLC
Deutsche Bank Securities Inc.
EWT, LLC
Goldman, Sachs & Co.
Goldman Sachs Execution & Clearing, L.P.
HSBC Securities (USA) Inc.
J.P. Morgan Securities Inc.
Merrill Lynch Professional Clearing Corp.
Morgan Stanley & Co. Incorporated
Newedge USA LLC
RBC Capital Markets Corporation
Scotia Capital (USA) Inc.
UBS Securities LLC

…have each signed a Participant Agreement with the Trust and may create and redeem Baskets as described above. Persons interested in purchasing Baskets should contact the Sponsor or the Trustee to obtain the contact information for the Authorized Participants. Shareholders who are not Authorized Participants will only be able to redeem their Shares through an Authorized Participant.


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

Also, following Lance Lewis' "puke indicator," one could be forgiven for suspecting that the Bullion Banks have some way to temporarily "pound" the price of gold down on the COMEX in order to buy back ETF shares during a "good price window" with the intention of redeeming those shares into deliverable gold for clients that purchased it at a higher price. Perhaps it would take, what, a month or so to churn such a profit from a Giant delivery? Reminds me of that fella Jim Rickards spoke of on King World News:

Jim Rickards - Swiss Bank Client Denied His $40 Million in Gold

Jim: “Correct and upon request to move the gold...the bank demurred, the bank said, ‘Well, no, not so fast’ and he said, ‘What do you mean?’ Anyway, long story short I could see that taking a day or two...This took thirty days to complete delivery. Now if the gold is sitting there it shouldn’t take thirty days. Oh, and by the way I should add that the individual had to threaten to go public, in effect say I’ll call Reuters or I’ll call King World News or I’ll call Dow Jones and let them know that you don’t have the gold, you’re not good for it.”

Eric: "And he had his lawyers get involved?"

Jim: “Correct, and through all of that eventually the individual did get his gold, but this is something that should have taken two days, three days, a week at the most, although I would say even a week is a long time. But it took thirty days, and it took lawyers, it took threats of publicity, it took a lot of pressure to do that, which my inference is that that gold was not there. The bank had to scramble, go out and find it somewhere before they could make good delivery.”

I wonder when that was. And I wonder if GLD "puked" any "baskets" around that time.

Someone is draining GLD of its gold. Someone is taking in millions of ounces and tonnes of physical gold at off-market prices while the paper bug cheerleaders call it "dumping" or "offloading" the gold. Again, one man's "outflow" is another man's pickup truck (or dump truck as the case may be) backed right up to the loading dock at the GLD depository.

As of 2008, some analysts estimated there were still 15,000 tonnes of unallocated (un-spoken-for) gold floating around the Bullion Banking system. Of course some of that is still there, along with a decreasing supply from the mines and a scrap supply that, after rising since 2006, appears to have plateaued in 2010. You can continue to go after that diminishing flow "on market" by playing the paper game like Dan Shak. But one day soon, it will all be spoken for. And you don't want to be left holding only paper on that day. And if the BBs are raiding GLD like it seems, that 15,000 tonnes may be closer to 1,200 tonnes than you or I would be comfortable knowing about.

Jim Rickards wrote about 100 tonne and 500 tonne lots being impossible to come by "outside of official channels" meaning off-market prices. But from what I can tell, there are still twelve 100 tonne lots or two 500 tonne lots available through one of the 16 dealers listed above. The instructions are all there. This isn't like the private sector trying to buy gold from the public sector, like Sprott being turned down by the IMF. This is the reverse! Go for it, I say. Why not?

And for those of you GLD fans that think you will simply hold onto your shares until the bitter end, I have a warning for you. These Giants don't need to over-bid your shares away from you. They can always buy them at the price of paper gold trading in London and New York. And there will come a point when you are watching the premium on physical coins jump from 5% over GLD to 50% on its way to 500% over the paper gold price. How long are you going to stubbornly hold onto your precious paper before you finally relinquish it to that last Giant's delivery "basket?" Remember, unless you've got $13 million, you've only got paper.

Sincerely,
FOFOA

205 comments:

1 – 200 of 205   Newer›   Newest»
Warren said...

So, the paper mechanism originally designed to guarantee cheap physical specifically for the purpose of 'flow' is in the process of being exposed as the river runs dry. Does that mean we continue to see declines in the 'spot price' as the paper markets seize up? [thinks] It's like one of those traps where the more they wriggle the more they get stuck. The next question would be how fast can that happen? Still looking at your graph where it goes down in a straight line (I am still trying to figure out how to explain that to the wife when it does occur). Please keep writing FOFOA, this is fascinating.

Jenn said...

Sixteen men on a dead man's chest for sure.

--Jenn

mortymer said...

Here is next from history lessons:

Council Directive 1998/80/EC of 12 October 1998, supplementing the common system of value added tax and amending Directive 77/388/EEC - Special scheme for investment gold. [Official Journal L 281 of 17.10.1998]

http://europa.eu/legislation_summaries/taxation/l31012_en.htm

It would be nice who proposed this directive. Any takers?

mortymer said...

...note the small hint at the end:
"In certain circumstances, Member States may designate the PURCHASER rather than the SELLER as the person liable to pay the tax (reverse charge procedure) in order to prevent tax fraud and reduce the costs of the transaction.

With regard to transactions on a REGULATED gold bullion market, Member States may be authorised not to apply the special scheme and introduce simplification measures."

Jenn said...

"In order to promote the use of gold as a financial instrument, this Directive introduces a tax exemption for supplies of investment gold."

@mortymer

I don't know how you manage to find these nuggets, but as always your posts are exceedingly insightful. Please keep them coming.

--Jenn

mortymer said...

2004: This year’s annual assembly of the European Association for Banking History was held in Athens. It was associated with conferences on the themes of Archives and the Culture of Corporations, and the Human Factor in Banking. A year after the meeting at the National Bank of Slovakia, the Greek Alpha Bank was joint organizer of the event.
The session of the EABH in Athens changed the statutes. The new name of the EABH is the European Association for Banking and Financial History. There was also a change in the leadership of the association. The former head of the European Central Bank Willem Frederik Duisenberg became the new chairman of the Executive Committee of the EABH in place of Sir Evelyn de Rothschild, who headed the association for thirteen years.

2006 Jean-Claude Trichet, President of the European Central Bank and chairman of the EABH, awarded the French-German Culture Prize by Pro-Europa 4 September

J said...

Wow..very interesting. I wonder if any frustrated giants will read this and now have a glimmer of hope.

It will be fun to watch if the giants grab their straws

costata said...

FOFOA,

From Monty Python's Holy Grail: The Holy Hand Grenade Of Antioch.

"And the LORD spake, saying, "First shalt thou take out the Holy Pin, then shalt thou count to three, no more, no less. Three shall be the number thou shalt count, and the number of the counting shall be three. Four shalt thou not count, neither count thou two, excepting that thou then proceed to three. Five is right out. Once the number three, being the third number, be reached, then lobbest thou thy Holy Hand Grenade of Antioch towards thy foe, who being naughty in My sight, shall snuff it." Amen."

http://en.wikipedia.org/wiki/Holy_Hand_Grenade_of_Antioch

Great post, Cheers

Bron said...

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

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

1. Buy GLD shares
2. Immediately lease gold and sell it (or just short futures).
3. AP is now long GLD and short unallocated gold or futures. Important to note they have no exposure to gold price movements.
4. Sit on the GLD shares and when investor bullish sentiment returns
5. Sell your GLD shares
6. Buy unallocated gold and repay your lease (or close out your short future).

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

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

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

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

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

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

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

What commentators miss is the OTC "dark pool". Consider that ETFs + Futures only represent less than 10% of estimate privately held gold http://goldchat.blogspot.com/2010/08/gold-leader-board-july-2010.html

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

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

Paul said...

nice one
I would love to see GLD evaporate

http://www.zerohedge.com/article/meet-man-behind-liquidating-hedge-fund-blew-gold-market

this "outflow" was probably caused by this one though ...

Paul said...

http://www.nytimes.com/2011/01/29/business/29paulson.html?_r=1&adxnnl=1&adxnnlx=1296314149-U2kDGCuCdf6Dw8x79SOT+g

Mr Paulson is buying a few baskets yes ?

sean said...

Here's a very informative article summarising the historical evidence for and mechanism of gold price suppression.

Chris Powell: And was Jerusalem builded here?Remarks by Chris Powell, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.
The Cheviot Asset Management Sound Money Conference
The Guildhall, London
Thursday, January 27, 2011
http://www.gata.org/node/9545

www.gregor.us said...

I'm surprised it was not well known among the financially capable, that baskets of the GLD ETF were redeemable in bullion. I remember that very distinctly at the time of launch. That said, there is no surprise the retail investor was unaware. For example, when USO the oil ETF was launched I wrote a long post at SI about the dangers of contango, and how that particular ETF was structurally set up to, essentially, eat itself through the erosion of forward rolling through contango. So, the retail investor as always seems characterized by many traits, but one of the most vexing is this: they never read the prospectus.

From a broader standpoint, the marshaling of gold or perhaps freegold is very much tied to views first expressed by Frederick Soddy in the 1920's, and the discipline of biophysical economics. Here's the short version: paper claims can outrun limited resources, thus forcing a period of reckoning between the two. For an excellent overview of Soddy's views, see this 2008 piece: http://www.nytimes.com/2009/04/12/opinion/12zencey.html

This is must reading for anyone playing in the fields of gold, or, as I have over the past 10 years--the fields of oil and energy.

Patrick said...

http://www.streetinsider.com/Insiders+Blog/Einhorns+Greenlight+Gets+Very-Long+Gold+%28GLD,+GDX%29,+Also+Likes+Solar+%28JASO,+WFR%29+and+Other+Energy+%28AYE,+PCX,+PTEN%29/4406678.html

I believe it was einhorn who swapped his gld shares for the actual stuff, which is now somewhere under Manhattan.

Googling this might give some answers

bruce said...

I think i'm missing something here.

I can see how the "unallocated" gold in the whole system that is being leased and such could cause tremendous problems.

But, unless the "unallocated" part of GLD is significant, then i don't see how this is a problem for GLD.

The post shows us how GLD has "unallocated" GLD, but what it doesn't say is how much of GLD is in this form, unless i missed it.

The problem is in all the unallocated and derivatives and such, and not in allocated, as i see it. The only way it is drawn down from allocated is if someone wants delivery, and has sold their GLD shares, as i read it.

If the banks can convert "allocated' to "unallocted" without someone selling 100,000 shares, then we have a problem. I didn't see that in the prospectus part you quoted, but maybe i missed it. Of course they can convert to unallocated to meet mgmt costs, but is that a loophole to willy nilly wholesale convert to unallocated?

Maybe someone could enlighten me, and i'd appreciate it if they did it without namecalling.

Patrick said...

Einhorn

http://seekingalpha.com/article/247974-david-einhorn-releases-q4-investor-letter-bearish-on-bernanke

he must have figured it out also

Ender said...

Nice try.

I am looking forward to the second half of this article explaining the Custodian responsibilities. It would also be nice to clearly define what is allowed to be held as a substitute for physical gold – or an equivalent investment vehicle. I would be willing to bet that you will find that paper contracts are considered ‘as good as gold’ to this fund. Also, I’m willing to bet that the custodians are not audited.

Giants would not overlook readily available tonnage. Evidence suggests that if real physical existed as the redeemable baskets, there would be no shares of GLD available for purchase.

If one looks into further, you may find that the banks responsibility for delivering physical has been offloaded to this fund. In other words, when the system failure occurs, those that think they have claim to physical will find that they do not. At the same time, any responsibility to deliver physical gold to the fund will simply be covered with paper.

There is gold to be found, but its value exceeds market. This discrepancy makes each bank evaluate every redemption battle. As you mention in the article above. It also leaves the giants in a position to have to take what they politically control.

My advice to small giants: Place a standing order with your physical gold dealer. Take delivery in multiple shipments until you’re satisfied with your holding. You should see a seven day fulfillment and reasonably good service. Follow the path that all us ants need to follow.

Remember, the market was cornered and still remains that way. GLD is a sideshow and is linked to the COMEX. What large blocks of gold that do move, move with intent that is outside the realm of a small giant.

Wendy said...

Thanks for the link Sean, if I had of read it a couple of days ago, it would have saved me hours of googling.

Wendy said...

Does anyone know if Another passed last year?

I REALLY don't expect an answer, but if I don't cast a line, I certainly won't catch anything!

Patrick said...

http://seekingalpha.com/article/149209-are-gld-and-slv-legitimate-investment-vehicles

Robert said...

Another great, great piece FOFOA! Thank you as always.

For a long time, decades, I bought and researched gold. Not as a pro, but I tried to learn as much as I could. Landing here at fofoa.blogspot.com REALLY opened my eyes. So much to learn about our pretty yellow metal.

I'm with Wendy just up-thread! We would like to know more of Another and FOA without betraying any confidences.

mortymer said...

Not from reliable source but the content is interesting:

"To deal with the world at large, there is another Chinese box called the Group of Ten, or simply the "G-10." It actually has eleven full-time members, representing the eight European central banks, the U.S. Fed, the Bank of Canada, and the Bank of Japan. it also has one unofficial member: the governor of the SAUDI ARABIAN MONETARY AUTHORITY. This powerful group, which controls most of the transferable money in the world, meets for long sessions on the Monday afternoon of the "Basel weekend." It is here that broader policy issues, such as interest rates, money-supply growth, economic stimulation (or suppression) , and currency rates are discussed - if not always resolved."

Wendy said...

I can't think of a good reason to doubt the source mortymer.

costata said...

bruce,

Did you see Bron's comment further up the thread?

Ender also made an insightful observation about the custodian "structure" of GLD.

I don't think anyone can answer your questions factually. The inner workings of the precious paper markets are opaque.

Return to Resistance said...

Thanks for the post FOFOA another brick added to my foundation of understanding gold and their derivative paper markets.

Bron said...

Bruce and Ender,

GLD only holds unallocated gold up to 400oz, if its balances goes beyond that it allocates into a 400oz bar.

And the fund can only hold 400oz physical bars, paper contracts are not held.

As to the audit, the firm that does it is www.inspectorate.com, an independent firm specialising in commodity auditing. GoldMoney I believe use them.

Bron said...

www.gregor.us

Thanks for that link to Soddy. Interesting that he comes to the conclusion of 100% reserve requirement via the concept of entropy.

I wonder if Soddy's policy suggestion to get off the gold standard was really about having a floating exchange rate.

I think Soddy would also be of interest to www.mises.org.

Wendy said...

mortymer: re:vat

Am I reading it correctly when I say that the small dealers had to keep a 5 year list, but the regulated market (lbma) didn't have to?

If this is the case I'll throw a red shield into the hat.

Wendy said...

Does anyone know what I'm doing wrong? I can't see comments 201-205 on the previous post. When I click on newest, it goes to the next page and says "posts 201-205" but there is nothing there??

J said...

"Free-Market Analysis: The civil unrest in Egypt is growing fiercer. Electronic communications have been shut down throughout Egypt and massive demonstrations have been planned for today. A changing of the guard in Egypt would be a massive political shift indeed, but what if the disturbances don't stop there? What if they ultimately spread to Saudi Arabia and end up bringing down the dollar reserve system?

We suggest this possibility because we believe there are larger forces at work in the Middle East. Could it be that the power elite itself is inciting these disturbances? Is the idea, eventually, to crash the dollar and set up a global currency in its place?

The dollar reserve system is propped up by Saudi Arabia's willingness to restrict the purchase of oil to dollars, a system that has been in place since US President Richard Nixon abrogated what remained of the gold standard in 1971. But the PE is notoriously unsentimental. The Saudi elite has grown enormously wealthy from its relationship with the US and now, perhaps, for the good of a new world order, it is time for them to go."

http://www.thedailybell.com/1717/Fall-of-Saudi-Arabia-to-End-Dollar-Reserve-System.html

or perhaps the Saudi elite will experience a huge windfall

S said...

max keiser partner saying she had lunch with PB in ME and buyer for 1200tons - via Twitter

FOFOA said...

Hello Ender,

I understand your complaints and I remember where they came from. But Bron is right. Digging into the GLD website it seems that SPDR has addressed a lot of the former complaints.

According to the FAQs, all of the 39 million ounces are held by the custodian (HSBC) in its London vaults, in numbered 400 ounce bars. Subcustodians are only briefly in possession of the Trust's gold when it is coming in. There is a list of all of the bars' numbers on the website. Bar numbers are updated each day by the custodian and updated on the website once a week. The Trust (Bank of New York Mellon) audits the gold in HSBC's vault twice a year in addition to the independent audit for SEC financial statement purposes.

These specific bars are not allowed to be leased, loaned or traded under any circumstances. The only time specifically numbered bars allocated to GLD are in the possession of another Bullion Bank is the brief time after a new basket of shares is created. Once this is done and numbered bars are newly allocated to GLD in exchange for new shares, HSBC seeks "to promptly transport any gold bars held by a subcustodian to the Custodian’s London vault premises."

HSBC can have only up to the weight of one single bar (up to 430 ounces) unallocated at the end of each day. Not much wiggle room.

I have no way to track changes in the GLD prospectus over the years, but reading some of the old critiques, it seems like they responded with changes, or at least clarifications.

But this does not excuse the dangers present in paper gold, which ETFs are. And this kind of gets to the kernel of my two latest posts. A lot of the criticism of GLD in the past, which I think you are echoing, was that the gold probably wasn't there, at least not in physical form. Images of paper certificates stacked on vault shelves and the like. But as I wrote in Freegold Foundations, "I don't think the issue is whether or not the gold in the ETFs actually exists, but rather, how many claims exist on that gold."

In the case of GLD, this is a problem from two sides. Unlike Sprott, who had to buy physical gold from the marketplace (since the IMF turned him down) to stock his ETF, GLD's gold bars originated as reserves in the mainstream bullion banking system. That is, they are essentially reserves on loan to the ETF from the bullion bank's fractional reserves. And the lending of anything always creates a synthetic supply. So, in essence, the entire GLD float is a synthetic supply of gold, 1,200 tonnes worth, to give the masses some "gold" that can be bought, stored, and sold on a computer screen with a few clicks of the mouse.

That's one side, a side that GLD does not share with PHYS, that the source of the bullion behind the share is a fractional reserve system with many claims that already existed prior to 2004. The other side is the lending of this "synthetic gold supply" that creates an additional synthetic supply of synthetic gold. When someone shorts GLD they borrow the shares from someone else. And that same share can potentially be borrowed again and again. You can potentially end up with several GLD investors holding ownership of the same share of GLD through this process.

Under normal circumstances, most holders consider the synthetic to be a perfect substitute for the original. Even a synthetic synthetic! Just like in commercial banking, most people don't worry about the distinction between bank deposits and cash-in-hand, primarily because the banks can get more cash from the Fed in a pinch. And herein lays the problem unique to gold.

Cont...

FOFOA said...

...

With any other ETF, "a pinch" is ultimately resolved automatically through the market, even when there are many times the "physical shares" circulating as synthetics. Even if everyone tried to redeem their shares at once (all sellers, no buyers), the dealer will call in the lent shares and those shorts will have to become buyers in order to return the borrowed shares. And with an overwhelming volume of a synthetic supply, this "short squeeze" will force some of the shorts into the marketplace to buy the underlying basket of whatever the ETF trades and submit it to the trust through the Aps, creating new "physical share baskets" to cover the previously "synthetic" supply.

This is not unlike the Fed's ability to print up wheelbarrows of cash "in a pinch." Nor is it far from Tulip growers or home builder ramping up supply to meet a synthetic demand.

But with gold it is different. The physical supply is relatively fixed and remarkably stable. Yet we have all these paper claims providing perceived ownership of the same slice of gold. And in the case of GLD, it's on both sides, thus the redemptions from the mainstream fractionally reserved bullion banking industry, a carryover from the old gold standard days, that lent its reserves to paper GLD investors in the first place.

"In a pinch" for GLD will likely mean that gold is going into hiding (or permanent backwardation if you prefer). You may have 5 investors that all think they own a piece of that lump in Town Square, and all they need to do is convert it to physical by either selling paper and buying physical or, in the case of a giant, through share redemption. But the fact remains that all 5 only hold the paper, and the 5 pieces of paper all represent the same chunk of gold.

5/3/98 Friend of ANOTHER

Gold is valued by the number of outstanding claims against it. Kind of like a house for sale with ten bidders. Each bidder thinks the house is in the bag because they have a valid bid ticket. Each one thinks he can have the house at any time, even though nine others want it to, because all I have to do is bid a little higher and take it! Insane, but that's what is going on! Somehow, the BIS and the major private gold holders know the total claims, as does Another. The Euro group is going to force those claims into real bids instead of just claims!


GLD may be a terribly small part of global gold. In fact, it is probably only ¾ of 1% of the above-ground stock. Which makes it remarkably suspicious that the BBs are apparently raiding this tiny reservoir for deliverable physical gold.

Sincerely,
FOFOA

Wendy said...

This might be of interest to some. It is very long, but you can scroll to the bottom, read the conclusions and decide for yourself if it's worth your reading time.

http://www.globalresearch.ca/index.php?context=va&aid=22993

FOFOA I cannot access the last 5 comments of your last post..... any ideas? I Appreciate any assistance. Who knows, maybe one contains the holy grail ;)

enough said...

GATA has just put up "who is draining GLD" on its website

Robert Leroy Parker said...

Question for fofoa and all. Is phys good for the small investor of under 400 oz. Is sprotts word the only guarantee it will truely track physical? Your thoughts please.

bruce said...

So, what you're telling us fofoa is that the allocated gold held by GLD is/may have been gotten through a lease or something like that and it may be called away. Right?

enough said...

Does anyone think being short paper gold via GLL {2x inverse gold bullion) etf and long physical is a win/win strategy. Im long physical gold large 35% of liquid net worth. So GLL offers hedge on a "bear raid" such as we've seen recently but I'm beginning to think it might be more than a hedge but a super win on both sides....any thoughts would be appreciated, thanks

Jeff said...

The author of this article has no idea what he is talking about.

The withdrawls from GLD are not being used by the central banks - they occur through an arbitrage mechanism that keeps the price GLD traking the NAV.

If there are a large number of buyers of an ETF relative to sellers, the ETF begins to trade at a slight premium to the spot price, and Authorized Participants (large broker dealers and banks) arbitrage the discrepancy out of the market by shorting shares of the ETF and buying physical Gold. The Authorized Participants (APs) deliver the physical Gold to the ETF, and the ETF issues the AP a basket of shares in exchange for the Gold. The amount of Gold and the amount of shares of the ETF increase. The APs cover their short with the basket of shares they receive from the ETF and earn a small and (relatively) risk free profit – what Wall Street refers to as arbitrage. This is why an ETFs like GLD has tracked the spot price of Gold so closely since it was formed in November of 2004. It is a very effective mechanism.

For the last six years, this effective mechanism has worked in favor of the Gold Price. High demand for ETFs relative to the spot price caused the collective assets of the ETFs to swell over 2,000 tons. Those 2,000 tons of Gold were purchased on the open market, and the ETFs effectively became one of the largest buyers of physical gold in the World and exerted upward pressure on the price (even though it was actually the APs who were actually buying the Gold). With the ETFs buying, it’s been really good to be long.

On the flip side, when there are more sellers of an ETF than buyers, the price of an ETF starts to trade at slight discount to the spot price. APs then arbitrage this discrepancy by purchasing shares of the ETF in the market and simultaneously selling physical gold. The APs deliver the shares to the ETF, and ETF gives them physical Gold in return and cancels the shares. The amount of Gold and the amount of shares of the ETF decrease. The APs use the Gold they receive to settle their previous sale of physical – and they make another risk free arbitrage profit. The arbitrage mechanism keeps the ETF price in line with the spot price, but decreases the amount of Gold held by the ETFs.

This may be what has been occurring since Gold peaked in December and we began to see signs that the economy was improving– there were suddenly more sellers of the GLD ETF than buyers, and as a result, over 73 tons (over 3.0bn) of Gold was removed from the trust and placed on the market through the same mechanism that placed that gold in the Trust, and the price of Gold began to move down.

If it continues, it is not bullish at all. It is very, very bearish.
It indicates that one of the largest sources of demand is now a source of supply.

The price WILL collapse.

Chico_hawk said...

Jeff, since you claim to know so much more than the blog author, where is your blog or body of work on the subject???

Or do you simply make half-cocked posts on blogs to distort & confuse for a living???

You have not rebutted anything that FOFOA has said, yet make a grand prediction that the price of gold WILL collapse, without any consideration given to central banks of China, India, Russia, Saudi Arabia, i.e., the real giants buying gold (while attempting to diversify from the ever-depreciating huge $US they hold).

And further to FOFOA's point, how many paper claims exist on the actual physical gold held by GLD ETF??

If someone owns GLD shares, most likely in street name, their broker (perhaps itself owned by a bullion bank), may lend those shares to someone else to sell (or sell them on their own), creating two paper claims to the same gold - read the fine print of your agreement with your brokerage....

Where is your consideration/discussion of these issues that FOFOA raised?

Your post is worse than hollow - it adds little to the understanding but appears to be intent on creating confusion & distortion.

ShockonT said...

FOFOA:

I'm not sure if you addressed this aspect or if there is any validity to it. Back in July of 2009 Adrian Douglas published a piece on the ability of the Comex to use shares of gold backed ETFs in lieu of physical gold to satisfy delivery requests.

http://www.gata.org/node/7586

Jeff said...

Chico_hawk-

The author does not appear to understand the creation/redemption mechanism, and neither do you.

The basket creation/redemption mechanism is an arbitrage that determines the amount of gold in the trust.

For six years, it ran positive. Recently, it switched. If it continues, there is no way for the upward momentum in gold to continue.

In a little over a month, GLD has lost 73 tons of Gold... Total ETF buying in 2010 was only 361 tons.
The redemptions represent almost 20% of total 2010 demand.

The authors claims that outflows from GLD are positive is false.

As of 1/25/11, there were 83 30 day periods since the inception of GLD in which redemptions from the GLD trust were above 25 tons (1% of annual mine production). The average decline in each of those periods was 2.94%

There were 46 30 day periods since inception in which redemptions were above 40 tons (1% of total annual production including scrap). The average decline was 4.79%.

If you remove the data points from the summer of '09 in which Einhorn withdrew Gold from GLD but it wasn't sold on the market, the average declines jump to 5.01% and 6.98%.

The removal of Gold from GLD is very highly correlated with decreases in price. It is not a positive signal. It is very negative. If the redemptions continue. The price will continue to decline.

Robert Leroy Parker said...

Peoples opinions on PHYS for investors under 400 oz?

Thanks

Patrick said...

Robert,

Why do you make things complicated ? Take your bike, ride to the bullion dealer..buy your gold yourself..; it's that easy..don't let others buy your gold...

Laszlo said...

RLP,
My opinion: "A bird in the hand is worth a dozen in the bushes." I prefer gold coins in my hand to paper promises, period. Sub-400oz (sub-$536,000), there is not even a PHYS promise for physical for us ants!
Tomorrow would not be too early to act on FOFOA's words to the wise, and trade the illusion of wealth for real wealth: physical gold in hand:
"And there will come a point when you are watching the premium on physical coins jump from 5% over GLD to 50% on its way to 500% over the paper gold price. How long are you going to stubbornly hold onto your precious paper before you finally relinquish it to that last Giant's delivery "basket?" Remember, unless you've got $13 million, you've only got paper."
To paraphrase our gracious host for the similar, mini PHYS sand box: Remember, unless you've got $536k, you've only got paper.

thedeadfauvi said...

You seem to know a lot about GLD. Links please.
And regarding your “Forecast”, what do you propose? Sell, sell, sell?

Your allegations remind me of a troll. Are you one?
And if - are you a paid one or working for yourself?

FOFOA is someone people trust, in case you doubt it. You have no chance here to disseminate the seeds of mistrust. And know something: Here people don’t give a shit about the “price” of gold. We are patient even if it takes longer than we’ve expected at the very beginning

Return to Resistance said...

Jeff -

Clearly you completely missed the point of FOFOA's latest article. The name of the article is "WHO is draining the GLD?" Not whether the draining of GLD is bullish or bearish to the price of Gold. There's clearly a lack of understanding between value and price. Many of FOFOA's articles touch on this subject in depth.

When the holdings of GLD are taken out of the trust it goes somewhere. So again, WHO is taking delivery of the metal. Obviously whoever is taking delivery sees value in doing that at the current price.

If the holdings of GLD collapse to zero it just means another paper proxy discredited and completely out of whack to the real physical price of Gold.

Jeff said...

WHO is taking taking delivery is irrelevant. A misunderstanding of how it works is.

GLD is not a PROXY - it owns allocated physical bars. There are audits and lists of the bars. It tracks the spot because of APs arbing the creation/redemption mechanism. That gold is being moved out of GLD because of an arbitrage - and it is being sold. Who buys it doesn't really matter.

What matters is that the arbitrage it is moving the price down.

73 tons out, and we're down around 7%...

What do you think is going to happen when the rest comes out?

The ETFs still own another 2000 tons.

Edwardo said...

Another angle on gold vis a vis events in Egypt.

http://www.zerohedge.com/article/tunisiaswiss-banksgold-%E2%80%93-what%E2%80%99s-next

mortymer said...

Jeff, do tell more. Do not feel discouraged. Let us measure facts not emotions. Your input is valuable and appreciated.

Paul said...

It will be bought Jeff

and since you seem to value price so much. what will happen to it when GLD is sold out ?

vamoose said...

i am willing to bet that jeff is jeff christian, whose bias has been plainly comical for years. this is king shill doing his thing.

oldinvestor said...

Total ETG gold=2,000 Tons. Total Gold above ground = 165,000 tons.

ETF gold = 1.2 % of above ground gold.

Wendy said...

Interesting discussion! Jeff if you beleive that the price of gold might collapse, where do you believe one should reroute their currency to?

Thanks

enough said...

I agree with Mortymer...Jeff your opinion is valuable and good for blog discussion. Dont let any name calling stop you from expressing your ideas

Jeff said...

You could have made the same argument about foreclosures only representing a small percentage of the 130mm housing units in the country -- but you would have been wrong. Price is set on the margin.

Annual gold supply is the marginal supply, and the ETFs are a huge percentage of it. They usually buy 10-15% of it. But not recently. Now they sell.


Annual Mine Supply = 2500 tons.

ETG = 80% of Annual Mine Supply.

Total Annual Supply Including Scrap = 4000 tons

ETG = 50% of Annual Supply

enough said...

I dont think Jeff is saying he expects gold to collapse. I thibk he is saying that physical outflows from GLD show weakness in the gold mkt as opposed to FOFOA's view that this outflow under certain conditions is physical gold positive. Not that he necessarily is predicting furthur outflows only what the recent outflows represent for the gold mkt

DP said...

Who is draining GLD? The short answer is "mainly the BBs".

Perhaps a more direct and interesting question is instead "Why are the BBs draining GLD?" As FOFOA says, gold doesn't disappear when it leaves the GLD vault, it just moves from one hand (or accounting ledger) to another. Just because it is apparently "unwanted" among GLD paper shareholders, that doesn't mean it is net "unwanted" among gold market participants.

Who owned the gold, at least morally, when the BB decided to swap their unallocated gold for shares in GLD? Technically it was the property of the BB, but morally it was really the property of the creditor, the purchaser of the unallocated gold that they assume is there for the taking at any time like currency depositors at a regular bank. If that creditor decided to take delivery from the BB from their unallocated account, or even to simply convert the holding to an allocated account at the BB still, the BB will need to locate sufficient physical gold to achieve that. Redeeming some GLD backets back to physical and "retaking delivery" (a ledger entry in many cases I'm sure) back into their unallocated pool, seems like it is a response to heightened demand for physical (or perhaps a preference for allocated rather than unallocated) by the BB clients, rather than necessarily a lack of demand among GLD shareholders generally.

I feel the inflows/outflows at GLD are largely just BB housekeeping noise, and should pretty much be ignored.

The bigger issue seems to me to be that probably most (all?) of the gold in the vault at GLD belonged to someone else when it came to the vault, at least morally.

Chico_hawk said...

Jeff said "WHO is taking taking delivery is irrelevant"

even though the "WHO" part is the subject of the very post you chose to respond to, ironically, you may appear to be partially correct, since if the buyer was not China, India or some other long-term buyer, it is theoretically possible that the buyer may not represent "strong hands" and thus become a source of physical supply in the short term, putting downward pressure on the spot price.

On the other hand, if the buyer was China (or similarly large and bullish on bullion), then I think it is reasonable to conclude that the future supply of physical gold WILL BE reduced by the 73 tons physical acquired by the buy(& hold)er.

given that you have to redeem a minimum $13M worth of GLD shares to even get physical gold, I think it is pretty reasonable to suggest that the buyer(s) were at least "small giant(s)" & not traders, so the "WHO" part is in fact irrelevant.

FOFOA's key point however, which you, perhaps conveniently, have chosen to ignore is that given the fractional reserve practices of the bullion banks, it is very likely that there are multiple paper (i.e., share) claims on each bar of physical gold held by GLD (via lending & GLD short sales by the bullion banks, etc.)

If several large holders of those GLD paper claims decided to acquire the underlying physical at or near the same time (perhaps in a panic induced by the Tunisian/Egyptian/Swiss chain reaction scenario raised above?) GLD would not have enough physical to satisfy those claims...which means they (or their bullion bank sponsors), in order to avoid complete collapse, would have to go out, find AND BUY at whatever the going rate was, physical to satisfy all those GLD paper claims.


And if they couldn't find or acquire sufficient gold to satisfy ALL the paper claims, that would then trigger collapse of paper gold AND cause an all-out panic into precious physical at exploding prices (expressed in fiat currency)

Your narrow & singular focus on short term GLD redemption & its apparent impact on the recent price of gold and consequent prediction of "price collapse" is imo, misguided.

FOFOA suggests that the window of opportunity to actually own physical (at current paper prices) may soon close, due to the very fact that buyers of size are unable to locate sufficient quantity of physical in the broader market & thus may be turning to the GLD ETF to acquire physical.

As more buyers become aware of the counterparty risk associated with holding GLD shares, certificates, unallocated accounts, etc., they will increasingly want physical, which will drive the marginal demand & price for the physical much, much higher, while paper claims to GLD will collapse...


I do find it interesting that you changed your prediction from your previous "the price WILL collapse" to "the price will continue to decline"

By the way, what is your investment of choice these days? would it be the $US, Euro, Swiss Franc, Apple, Google, Citigroup, Bank of America, Goldman Sachs, JP Morgan??? ;-)

Return to Resistance said...

'who buys doesn't really matter' - I think the fact that it takes a minimum of $13 million to purchase a basket implies that smart money (GIANTS) is off taking physical from GLD.

"it (GLD) owns allocated physical bars. There are audits and lists of the bars." - Very misleading statement. Straight from the prospectus under the "Risk Factors"(Pg.11 of Prospectus)
- "Neither the Trustee nor the Custodian independently confirms the finess of the gold allocated to the Trust in conection with the creation of a basket... If the Trustee nevertheless issues a Basket against such gold, and if the Custodian fails to satisfy its obligation to credit the Trust the amount of any deficiency, the Trust may suffer a loss."

(Pg. 11 of prospectus) - the ability of the Trustee to monitor the performance of the Custodian may be limited because under the Custody Agreement the Trustee has only limited rights to visit the premises of the Custodian for the purpose of examining the Trust's gold and certain related records maintained by the Custodian."


Why is language like this in the propspectus if they have audited the gold in the Trust?

Jeff said...

Here is a link to the audit and gold bar lists:

http://www.spdrgoldshares.com/sites/us/gold_bar_list/

The point of my comments is that the majority of Gold that comes out AND goes in to the ETFs does so because of an arbitrage mechanism. Only 50-60% of the Gold that is mined and produced from scrap is made in to jewelery or used for industrial/dental applications each year. The rest of it winds up in bullion, and over the last several years 2000 tons of it wound up at the ETFs because of the creation/redemption mechanism.
While there are instances of holders redeeming GLD shares for physical (Einhorn in 2009), that is not how it typically works. The APs work to keep the price of ETF tracking the spot. When it doesn't, they arb the ETF, resulting in deposits or withdrawls from the ETF. There has generally been high demand for ETFs over the last six years, so that arb has resulted in 2000 tons of Gold being deposited in to ETFs.

It's going the other way now - mostly on the back of an improving economic picture (3.2% GDP growth in 2010, anyone?). If it continues, it represents a massive shift in the Gold supply and demand dynamics, and a potential catalyst for a collapse in the price.

Edwardo said...

Jeff, may not be a troll, but he's absolutely a dupe if he subscribes to officialdom's bogus 3.2 percent GDP print.

Jeff said...

From the article:

"To put this into context, since December 21st alone, 2.2M ounces have been sold from the ETF, basically a bit more than an entire quarter of production from Barrick gold (the world's largest producer). The normal run rate of global recycling plus mine production is approximately 2.95M ounces per month. So in the same period, assuming GLD was the only source of outflow, total global absorbed gold supply was 5.15M ounces. If outflows continued at the current rate, the GLD ETF (the largest investor depository of gold by far) would have no gold in 18 months.

Supply increased 75% in the short term to see price only fall 4.5%"



Annual Gold production is around 4000 tons - or around or a 128mm ounces --- over 10mm ounces a month --- NOT 2.95mm.

GLD did not increase the supply by 75%. The actual increase to supply was much smaller -- and why we did not see a larger fall in the price.

Ext said...

First off this blog post has been greatly improved from hearing Jeff's point of view and explanation. The GLD is an instrument that tracks the spot price and gives people outside of the market accurate exposure. As far as the outflow of physical from the fund as the price drops then yes, of course someone is taking delivery on that and accepting the trade. For them it is a bullish bet on gold obviously, but that doesn't mean that the price is not going down. As for Golds secular bull case that FOFOA is making, yes, this does mean that there is large interest in physical gold still and that is a positive for longer term improvement in the spot price, which will in turn affect the total quantity of gold that GLD holds when it runs up again.

FOFOA said...

The arbitrage opportunity is there for anyone, not just the APs. It is an all paper arb. A "synthetic arb." Even you can borrow shares and sell GLD short if the price is too high relative to the NAV. You can hedge that position with a paper long elsewhere. The arb that keeps the GLD price tracking spot can be done completely in paper, even if it is done by the APs. The paper gold price could rise to $5,000/oz. while the GLD holdings dropped to just a handful of baskets. This is entirely possible. It would represent a general preference shift in the West from paper into physical.

To think that the flow of physical in and out of the Trust is being driven by the number of monkeys willing to sit on paper gold rather than the number of Giants wanting allocated physical is quite naive. One would have to be completely oblivious to the reasoning behind this entire blog to even consider that view. Read the top bar. Who is ANOTHER?

To think that the price of gold in 2004 needed the ETF as a source of demand, and for the last 6 years, is even more naive. Why is the price of gold rising? Who is ANOTHER? From "Dilemma":

And let's take a quick look at the results thus far:

Tuesday, January 1, 2002 - ***"E-Day" Launch of euro notes***
(with reserves of about 12,500 tonnes of gold)
Friday, February 8, 2002 - *** GOLD ABOVE $300 ***
Monday, December 1, 2003 - *** GOLD ABOVE $400 ***
Thursday December 1, 2005 - *** GOLD ABOVE $500 ***
Monday, April 17, 2006 - *** GOLD ABOVE $600 ***
Tuesday, May 9, 2006 - *** GOLD ABOVE $700 ***
Friday, November 2, 2007 - *** GOLD ABOVE $800 ***
Monday, January 14, 2008 - *** GOLD ABOVE $900 ***
Monday, March 17, 2008 - *** GOLD ABOVE $1000 ***
Monday, November 9, 2009 - *** GOLD ABOVE $1100 ***
Tuesday, December 1, 2009 - *** GOLD ABOVE $1200 ***
Tuesday, September 28, 2010 - *** GOLD ABOVE $1300 ***
Thursday, October 14, 2010 - *** GOLD ABOVE $1375 ***


The physical portion of the paper gold market is cornered, plain and simple. Too many dollars out there in the world, not enough physical at these prices. It is opinions like the one that believes physical supply is subservient to the popularity of paper GLD that enable the physical to flow out of the West at ridiculous prices.

The APs do not need to work hard to arb the price of GLD. The market does most of that for them. And when they do, it can be accomplished in paper. As for the physical, they are more concerned by the giant sucking sound at their bullion desks than maintaining an appropriate number of physical baskets in the paper Trust. The Trust is just a coat check room for the Bullion Banks, like Randy said. A place to park your unallocated deposits and sell them for dollars that can then chase an ROI, knowing that the gold will still be there for you to buy back any time it is needed, because you are an Authorized Participant with special rights to the gold.

Cont...

FOFOA said...

...

The physical portion of the global paper gold market is cornered by the number of dollars and the desire for physical by the world's producers in Asia and the ME versus the amount of physical available at this price. The gold that went into the Trust came from the Bullion Banks' unallocated reserves when they lost the carry trade and leasing operation incomes. It was the spare (excess) reserves at the time, perhaps no longer spare. It did not have to be bought on the open market like Sprott's gold. These are the Bullion Banks. They had more than 15,000 tonnes on deposit at the time, floating around unallocated, with a lost purpose thanks to the CBGA and the rising price of gold.

"The oil states had already (almost inadvertently) cornered the gold market."

"What of the LBMA mess? Gold is cornered. Plain and simple. No complicated theories, no options problems."

"Gold bullion is being accumulated and cornered on a worldwide scale not seen before! UNDERSTAND THIS: The people who are buying do not expect the price to rise until the CBs slow their selling."
[Ahh, see: the CBGA and the timeline above]

"No Central Bank will sell its 50, 100, 200 million ozs gold when 600 million is needed! I ask you, how can currency price gold? Indeed, no price will work! You think any form of "paper gold" will stand this fire? Can we do battle with lions?" [Again, see the CBGA]

Understand these quotes, where they came from, and why I included them here, and maybe you can start to see the perspective presented in my post. Or believe that the outflow of physical from GLD portends the collapse of the world's need and desire for a physical reserve asset and get the heck out of gold. Your choice.

Sincerely,
FOFOA

Jeff said...

"To think that the price of gold in 2004 needed the ETF as a source of demand, and for the last 6 years, is even more naive."

Really? I think you've lost it.

Here's a quote from James Burton, the former CEO of the World Gold council, who created GLD:

"“Our primary mission was to find every button we could push to stimulate demand,” Burton, 59, said in an interview in London. “We also knew that we had launched something that we could not control.”

It appears in the article following bloomberg article:

http://noir.bloomberg.com/apps/news?pid=newsarchive&sid=aTiDUAOynrT8

FOFOA said...

@Jeff

Really? Well, if the WGC said it, it must be true.

"The author of this article has no idea what he is talking about."

"I think you've lost it."


That's awfully trollish language, Jeff. You'll forgive me if I cease feeding you any more attention.

@All

Regarding the aforementioned bar list, I'm not quite sure what to make of this. Probably nothing. A mistake? Someone making corrections over the weekend? Or dump trucks lined up outside? Anyway, Rob Kirby of KirbyAnalytics.com emailed me this last night after reading my post. It seems that the bar list on Thursday had all 101,081 bars listed. On Friday, it had dropped to 98,584 bars, but another 65,838 bars are mysteriously missing from the new list. Like I said, it's probably nothing. Anyway, here's the email I received. I present it for discussion purposes only. I am certainly not claiming this is big news:

"Chris / Bill / FOFOA:

An anonymous friend passed this along to me Saturday.

The Jan 27, 2011 GLD bar list claimed 101,081 bars and they were ALL listed with the last bar on the list being 120537 JOHNSON MATTHEY BRAMPTON 385.525 385.409 9997 on page 1806

[I do not have a pdf of the Jan 27 list but I can get it]

The Jan 28, 2011 GLD bar list [linked here] claims to have 98,584 bars but actually only lists 32,746.

With the last bar on the list being 95241 JOHNSON MATTHEY 380.325 380.249 9998 on page 586.

Client Gold Stock Holdings – Jan 28, 2011
Client Account Name: BANK OF NEW YORK MELLON - SPDR GOLD TRUST
ld Allocated A/C Holdings As Of C.O.B: 28/01/2011
Total Allocated Bar Count: 98,584
Total Allocated Gross Weight: 39,588,813.950
Total Allocated Fine Weight: 39,532,237.132

Total Unallocated Balance: 28.720


This GLD is being operated in such a diabolically hap hazard fashion “WHO KNOWS” what they really own and why do they even bother publishing a bar list?

Best,
Rob Kirby"

FOFOA said...

Here are a couple reviews of this post from others who must also be clueless, unlike Jeff:

Jim Rickards: "A really outstanding explanation of how GLD works & technical arbs between GLD & physical"

Chris Powell: "FOFOA yesterday offered some brilliant observations about the gold exchange-traded fund GLD"

enough said...

@ Jeff..I defended your right to your opinion in prior but now you have turned as rude and disrespectful as some of the remarks aimed at you....I'm generally a watcher. Too many smarter people than me here so I try to learn and absorb as much as possible. That's one the reason I like to read comments section on this blog. The other is it's a respectful environment

FOFOA said...

To All,

I want to clarify that I am only talking about GLD and gold here. Nothing else. Commodity ETFs, including SLV, are not operated and managed against the same fundamental forces as gold. Gold is different, which is what this blog is all about.

Sincerely,
FOFOA

FOFOA said...

Hello Jeff,

Are you Jeffry Chmielewski, Seeking Alpha contributor? The one that wrote this on Dec. 10?

"The largest private buyer of physical gold in the world is the GLD trust. The trust was formed in 2004 by the World Gold Council to create demand for the excess gold production supply that existed and get the price of gold up. And in that regard, it has been tremendously successful. Since inception, it has purchased 1,300 tons of physical gold...

Inflation fears are over hyped as the velocity of money has slowed.

As a opposed to other precious metals, Gold has almost NO industrial uses. The largest sources of demand are jewelry production and investment purchases.

The GLD trust is open ended, so it is constantly issuing and redeeming baskets of shares by transacting in physical Gold.

Profit taking, lower inflation expectations and an improving economy could lead to the GLD trust to begin selling physical on the open market.

The removal of the largest buyer and the introduction of more supply to the market may cause a decline in the price of gold....

My theory is this - - there is a decent probability that the GLD trust could become a seller some time in the next twelve months. I don’t know what might cause it – it could be profit taking, it could be lowered inflation expectation, it could be an improving economy, it could be taxes, it could be anything. But it if it happens, and it is sustained, gold prices could move down significantly from these levels. And given that the implied vol is in the low 20s and the cost of puts is so low, you can buy Dec 130 puts for around $10 bucks – or a 7.5% premium. The breakeven even is around $1250 in Gold… If you think there is a chance that it drops below $1250 in the next 12 months, I think the trade is a no brainer.

Disclosure: I am short GLD"


And also this comment last Thursday under Largest Ever Gold Outflow From GLD:

"Wow.

Over 68 tons in outflows from GLD ($3bn) since Gold peaked in December and the Gold bugs still believe it is good for the price."


I can now see your perspective more clearly. Your December theory seems to be coming true (assuming this is you). But I honestly think you could benefit from reading a slightly different perspective as presented by Another and FOA. It is a much broader view. I say this with all sincerity as I see now that you are not a troll, but a Seeking Alpha contributor.

Sincerely,
FOFOA

David said...

FOFOA - thanks for the brilliant post! Also, I appreciate your replies in this comments section....

DY

Wandee said...

Jeff:
What disproves your theory to me is having watched GLD operate over many years I could never understand how they could obtain the huge amounts of gold they said were added to the trust. At times maybe over 100 tons/mo. No other buyer it seems could obtain that amount of gold without great difficulty and patience. Certainly noit from the comex, IMF sales if they're lucky or privileged. So how could GLD possibly and uniquely obtain those quantities on the open market without explosive moves in the price? The only plausible explanation is that propseed here. That the BB use their unallocated gold and/or other gold they have physical access to and just change tags on the bars as it moves in/out of GLD. It would be way too risky for them otherwise as a fast and volatile market would kill the arbitrage.

Jeff said...

"So how could GLD possibly and uniquely obtain those quantities on the open market without explosive moves in the price?"

Gold was at $440/oz when GLD was created. Now is is at $1340. It tripled - there is your explosive move.

Also look at a graph of the Gold price to GLD tonnage...

FOFOA said...

Hello Jeff,

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

Perhaps the price of gold would have exploded sooner or with more force, as predicted by Another and FOA, had it not been for the automatic price suppression GLD provided, and the temporary cover it provided for the Bullion Banks upon the renewal of the CBGA in 2004.

Like I said, it is Another perspective that I have been writing about for 2 1/2 years now, but was first written about 13 years ago at the links I provided.

Sincerely,
FOFOA

Edwardo said...

"Gold was at $440/oz when GLD was created. Now is is at $1340. It tripled - there is your explosive move."

Oh dear, someone thinks a triple over a five year period is an explosive move. The chart at the link constitutes an "explosive" move.

http://finance.yahoo.com/q/bc?s=RES.V&t=1y&l=on&z=l&q=l&c=

Joel said...

FOFOA,

That last post to Jeff had me in stitches. BUSTED, talking his own book, lol. You were entirely too kind, though--a much better man than me. By the way, what exactly is a troll?

I did find the discourse illuminating, however. I think it is very telling that banks are redeeming for physical, and agree with you on it being a positive physical sign. But I still can't see clear as to how the ETF buyers will be shorted their physical gold in the end. The banks must redeem shares when they take their gold back, so fewer outstanding shares, fewer tons of gold needed. If lots of giants take the physical out, yes, the fund may end up with little gold left in the fund. But it will also have fewer outstanding shares in the fund as well! They cannot redeem fewer shares for gold than what they reclaim in physical. I know your giant said the the ETF didn't manage the fund by buying and selling gold as they bought and sold shares, but that can't be entirely true. Yes, the arbs perform the function for them in a big way, on a daily basis, but at some point in time, GLD HAD to buy physical gold on the open market to cover the shares they sold to people who paid in cash and didn't pay in gold like the banks. It is the ONLY way the NAV of their gold would track the NAV of the fund, right? Tell me what I am missing, here. It seems to me the only way a shareholder would get hosed is through custodial shenanigans, which is a risk, but it would be a crime that could not be paid off with currency, and would not be caught up in a bankruptcy because it is not an asset of the bank. Like you, I would rather be looking at Kruggerands. But I don't see such a big chance of default on the ETF side. What I think is more likely is that as the physical starts to tighten, the fund will eventually have to stop selling shares because of their inability to maintain an equal fund/gold NAV by buying more gold. Thoughts?

Tyrone said...

On GLD, my simple perspective has always been that it satisfied demand without having the supply.

And I always come back to this...
In 1933 people were denied Gold in exchange for paper.
In 1971 the world was denied Gold in exchange for paper.

GLD is paper Gold. What is next?

Wendy said...

defaults Tyrone? ;)

Jenn said...

Physical defaults -- Yes. Paper defaults, No. Cash is endless.

--Jenn

Robert Leroy Parker said...

Regarding my PHYS question earlier which was dismissed as foolish. Seeing as sprott has no ties to the bullion banks as his gold was purchased on the open market, why automatically dismiss the fund? People can only claim physical for their shares and each share is fairly represented is it not? Are you claiming sprott to be a fraud like gld?

And one obvious advantage of his fund is that i dont have to drive 75 miles to the nearest reputable dealers if i want to buy/ sell in person.

FOFOA said...

Hello Joel,

"Tell me what I am missing, here."

Re: Getting "hosed" - You will get hosed by the runaway premium on physical. You won't be able to convert at the GLD share (paper gold) price unless you hold 100,000 shares. I personally watched the premium start to run away around 10/9 - 10/10/08 although it obviously didn't run all the way at that time.

Re: Arbitrage - The Trust is not in the business of buying and selling physical. It is also not in the business of taking your cash. If you want to create new shares, you need to buy the gold first and then submit it to the Trust through an AP. The Trust never needs to buy or sell physical gold to stay on track. Like I said, it could theoretically have one basket left as the price runs through $5,000/oz. If you're coming in with cash, you buy shares from the market. If you're coming in with gold, you buy in through an AP. This is not like a mutual fund that expands in size as the money comes in and shrinks as cash is redeemed.

Sincerely,
FOFOA

FOFOA said...

RLP,

See the first part of my reply to Joel. PHYS is not a fraud and neither is GLD. PHYS simply tracks the price of paper gold, not physical, just like GLD. It is not physical gold because it does not have all the unique and discreet properties of physical gold, including infinite divisibility and privacy. It is only divisible down to a 400 oz. chunk in the way that matters come crunch time. If you own 400 ozs. of PHYS, then God bless you and good luck. Will it track the price of infinitely divisible physical gold in a pinch? Not until after you redeem your 400 oz. lot of shares for the real thing, assuming that goes smoothly during crunch time.

Sincerely,
FOFOA

Jenn said...

Hi RLP:

"Regarding my PHYS question earlier which was dismissed as foolish."

I certainly don't dismiss your question as foolish. I own PHYS, but this is an insignificant portion of my portfolio. If you prefer not to buy physical -- PHYS is one option, but as with any paper vehicle there is no guarantee. The ounces I hold in my sock drawer are under my control and as such provide me the most possible security. After all, it's already in my hands. But if you'd prefer not to take physical, IMHO PHYS and GoldMoney are the next best thing.

--Jenn

mortymer said...

Jeff, your comments are still appreciated.
They are of course correct from the spot you stand on. Many obviously view it same way as you for same reasons. FOFOA & others have a slightly different point of view which seem so far to be correct as well. Let me explain...
You put a lot of your reasoning into "economy is improving" -> gold is leaving GLD and/while price goes down.
Next time you go to restaurant, ask owner about business, ask the floweriest, the shoe seller how is it and what is their prediction.
You think a lot, try a theoretical possibility that economy is not improving and therefore the gold is being withdrawn. Tough job but try it. You may come to other conclusions.
I ask, is the interest rates on normal so we can really say that economy is improving?
Maybe it seems for you now, on surface, but at what cost?

Robert Leroy Parker said...

Thanks for your reply Fofoa. I suppose my view of some paper as good will not change until freegold occurs and Sprotts fund is only worth the paper its printed on.

On a totally different note. Does that picture of the gld vault ever remind people of the movie Sergeant Bilko, where they use giant mirrors to make the inventory appear larger than it is? I immediately thought of that the first time i saw it.

Butch

Wendy said...

Butch,

When i want physical gold at a reasonable premium, I either drive 600 km or have it mailed for $25.

I choose to hold the metal in my hand, so I don't mind the inconvenience. If I were to choose an ETF it would be sprott's.

Thank you all for an entertaining and informative day.

After a week off work, it's back at it tommorrow..... TFGod to be back at being paid to NOT think, my poor little brain needs a break!!

Goodnight to all.

costata said...

FOFOA,

"Once the number three, being the third number, be reached, then lobbest thou thy Holy Hand Grenade of Antioch...."

Told ya so! ;)

Ext said...

Yea great and informative posting. At the end of it if you are like me and have no problem with paper exposure then you are set.

costata said...

Ext,

Are you attempting sarcasm? If not, "set" for what? Is "Ext" short for Extermination?

Cheers

mortymer said...

[Offtopic; @ Costata: you have today and excellent mood, what´s up? Pls check this one:
(An animated sketch, and then to a strange moonlike landscape. Eerie science-fiction music plays in the background.)
.......Voice Over (John Cleese): This is the planet Algon, fifth world in the system of Aldebaran, the Red Giant in the constellation of Sagittarius. Here an ordinary cup of drinking chocolate costs four million pounds, an immersion heater for the hot-water tank costs over six billion pounds, and a pair of split-crotch panties would be almost unobtainable. (cut to a budget-day-type graphic, with a picture of the product and the price alongside) A simple rear window de-misting device for an 1100 costs eight thousand million billion pounds and a new element for an electric kettle like this (picture of electric kettle) would cost as much as the entire gross national product of the United States of America from 1770 to the year 2000, (graphic of American GNP) and even then they wouldn't be able to afford the small fixing ring which attaches it to the kettle. (graphic of an electric kettle showing all the separate pieces detatched from each other, arrow points to the fixing ring)
http://www.montypython.net/scripts/algon.php]

DP said...

“Our primary mission was to find every button we could push to stimulate demand,” Burton, 59, said in an interview in London.

But demand for what exactly?

Not demand for more Kruggers in a GLD holder's sock drawer or buried under the floorboards. Not demand for more bullion necklaces pre-packed in a wife's suitcase, ready to leave the country at a moment's notice.

Demand for a paper claim to gold that is stored somewhere the buyer will never see or touch it. Gold that already belongs to someone else, morally. Gold that they won't have to pay storage on, but their paper shares will be clipped and clipped to cover administrative expenses until there is nothing left anyway. Who would buy this thing except someone who intends to be nimble and trade in and out to scalp a short to medium term profit?

This quote of Burton, taken in a certain context, speaks volumes about the objectives of the WGC.

The BBs have put in their unallocated gold, which they have already sold many times over to unsuspecting buyers. If/when they need to retrieve this gold, they will have no problem with paying a few percent to persuade the other shareholders, mostly scalpers, to part with their shares. If you have sold this same gold to 50 people earlier, meaning you have already made 4900% profit on it before it entered the GLD vault, it's not really going to be a big deal to you as a BB to bid 100% over market for any and all supply of shares that come on offer until your requirements are filled. And there WOULD be a mountain of offers, you can bet on it. Strong hands don't buy paper.

Saul said...

I'm going to take a bit of everything here. I think that Jeff has a point that the Arb mechanism is used to track the price and has a consequence of growing/shrinking the GLD reserves. It could also influence the price, fair enough.

I also thing that for a giant, with a lazy $13M rattling around in the bottom of glove box somewhere, this is a good way to get gold by the tonne, on the sly. Perhaps this avenue is being used more recently than ever before. The old way was to stand for delivery at the COMEX, but the threat of settlements in cash probably turned a few giants off that whole deal. When you want gold, you want gold, not more paper. You may not want to wait much either.

This is a good post because it's made me think about the GLD and how it might behave in the end-game. Are we seeing the start of this now? Certainly the bar list doesn't inspire a lot of confidence. It seems like it might in fact be a huge "gold laundering" scheme.

I certainly agree with FOFOA that there are a lot more claims on gold than gold that exists. The factor may be 50 to 1. The thing is, only when there is an easy way to account for who has claim on a piece of gold will this problem be visible. Taking physical possession is the only way to ensure your claim, and in the race to the exits, it pays to be early. When this gold run starts, it will be epic. Biblical.

On saying that, will it be days, weeks, months, years or gulp - decades before this happens?

And what of the black swans in this - like government interference? Oil priced in Gold? New and much bigger wars? Food shortages? Riots? Earthquakes, Volcanoes, Human sacrifice, Cats and dogs living together? I know FOFOA has covered many of these, and I ponder on his posts.

To me, there seems to be quite a bit of randomness in the order of events in the future of ours.

costata said...

Saul,

You wrote (and in these words fully understood and complemented our host):

"This is a good post because it's made me think ....."

Cheers

mortymer,

"excellent mood, what´s up?

FOFOA is tackling the contentious issues, but in a contemporary way. One can only be a student for so long. Then after a long period of study the student needs to emerge as something else. A teacher perhaps?

Then it is important to think about what it is to be a teacher. A Trail Guide, perhaps? Someone who "makes" you think?

Laszlo said...

Jenn,
"The ounces I hold in my sock drawer are under my control and as such provide me the most possible security. After all, it's already in my hands. But if you'd prefer not to take physical, IMHO PHYS and GoldMoney are the next best thing."
It all depends on your geographic location and outlook. Should you prefer non-US, non-bank storage of your coins under your exclusive sovereign control, there is something between the sock-drawer (with its obvious safety draw-back) and the cheap ETFs: DasSafe.com in beautiful downtown Vienna Austria, offering non-bank, LLoyds-insured "Anonymous & Non-anonymous Safes". By the way, GoldMoney accounts are reportable financial accounts. Last time I checked, DasSafe was not, in case curious. There is a shortage of ant-sized boxes, but an abundance of giant-sized boxes. ;) To each his own. As to be expected, you get what you pay for, one way or Another. With physical, you already got it, all paid-for. Good luck with all else.

Bron said...

My comment below is posted on my blog http://goldchat.blogspot.com/2011/01/fraud-on-gld-holders.html for those that want to follow the hyperlinks.

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

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

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

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

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

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

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

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

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

Bron said...

cont...

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

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

FOFOA seems to be sure of this because he thinks that the bullion banks somehow have a special right to the gold in GLD, see this comment:

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

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

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

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

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

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

One final comment by FOFOA:

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

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

Jeff said...

First, I am not the Jeff from above. I would like to apologize for his behavior though, on behalf of Jeffs everywhere.

In addition to the GLD story I often wonder who is buying all the uptake from online pawn shop Cash4Gold. As a private company their financials are not available online but I believe their business must be slowing as evidenced by reduced marketing presence. Local gold dealers confirm that scrap gold jewelry selling is drying up, and most selling now is in the form of bullion.

www.gregor.us said...

I don't see any advantage to taking delivery of physical gold via the GLD ETF vs. taking delivery at the COMEX in NY, or at the exchange in London. One of the managers of Passport Capital in SF took delivery from the COMEX a few years ago, simply to dispel the assertions such delivery was not possible, and there has been no failure at the COMEX--not yet, at least. Thus, if one wants to use either of these two methods to take delivery of physical, risk would increase not with the dealers or the exchange--but instead with time. In fact, I would think even the most mainstream analyst would advise a client not to hold, for example, December 2015 gold contracts as counterparty and exchange risk over that timeline is just too high.

One looming problem that is less discussed is whether or not a large buyer of physical really wants to take delivery into the United States. As the OECD remains the epicenter of the post credit-bubble collapse, and as policy changes can occur with elections, it would seem that taking delivery of a large amount of gold bullion into the US might not be wise.

Jeff said...

gregor.us,

COMEX is made to trade the price of paper gold, not to make 100 ton physical deliveries. If the giants tried at COMEX they would be settled out in cash and politely told to source their gold in the physical market themselves.

Anyone who believes that very expensive oil (in Euros) might be a trigger for Euro freegold will be interested to know that Brent oil just surpassed $100 per barrel. And we all know that freegold would make oil cheap in euros. Just something to think about.

littlepeople said...

FOFOA
You said:

"PHYS simply tracks the price of paper gold, not physical, just like GLD. It is not physical gold because it does not have all the unique and discreet properties of physical gold, including infinite divisibility and privacy. It is only divisible down to a 400 oz. chunk in the way that matters come crunch time. If you own 400 ozs. of PHYS, then God bless you and good luck. Will it track the price of infinitely divisible physical gold in a pinch? Not until after you redeem your 400 oz. lot of shares for the real thing, assuming that goes smoothly during crunch time."

Agreed. If you own less than a 400 oz. share of PHYS, and you "cash out" then the PHYS owners (Sprott) can keep the gold that backed your position, assuming they do not need to sell it to cash you out. Furthermore, what if capital controls or other such government intervention causes PHYS and/or GLD to go bankrupt? Then, all bets are off.

Bron:
You say that the BBs won't "steal" the gold in GLD. No, they will pay whatever price in fiat that is necessary. Since JPM and GS are essentially the Fed, it won't be a problem for the BBs to cough up $100,000/oz. for the physical. It's real easy--poof, there it is!

It is legal stealing, as opposed to illegal stealing. This issue s the essence of why physical gold in your own hand is the only way to go in a financial world that is collapsing upon itself. GLD was another structure designed to put off the inevitable implosion of fiat currencies due to debt overload. I agree with FOFOA that GLD was designed to deflect demand from real physical into an easy, paper-gold alternative. The fiat system, the fractional-reserve system and the paper-gold system are all based on trust. The people (general public) trust that the PE will always do the "right thing." And, they will, so long as doing the "right thing" does not impinge on their ability to maintain wealth and power.

bruce said...

If the allocated gold held by GLD could have claims against it and not be there when it's needed, how do we know that if we buy a bar of gold a court might not come after us and say we have to give it back because someone else had a previous claim to it?

littlepeople said...

Jeff
You said:
"COMEX is made to trade the price of paper gold, not to make 100 ton physical deliveries. If the giants tried at COMEX they would be settled out in cash and politely told to source their gold in the physical market themselves."

True. This is exactly why the COMEX is essentially a sham operation when it comes to gold (and silver).

Any exchange worth its salt has to be able to deliver the commodity it allows to be traded. The COMEX holds nowhere near enough gold or silver to make delivery of the promises held by the BBs that trade there. The CFTC allows JPM to hold a gigantic, concentrated short position in silver, and HSBC is allowed similar positions in gold. Because they have direct conduits to CBs, they have limitless access to as much fiat funding as needed to put a damper on the paper gold price.

When gold and silver were demonetized, there was a structural need to make these precious metals look like commodities as opposed to money in competition with fiats. Now that giants, small giants and ants have come to realize that gold is indeed money, COMEX will have to shut down "trading" gold before it is seen to be the sham it actually has become.

littlepeople said...

Bruce:
The physical would not have gotten into your hands had there been legally enforceable claims on it. Of course, rules can change, and maybe that's what you are thinking. In that case:

"What bar of gold, Your Honor? I don't have any gold--I am very altruistic, and gave it away to the poor months ago . . ."

Ditto for confiscation attempts. "That gold was given to the poor a long time ago; after all what good is a lump of gold--you can't eat it."

Robert said...

I am almost at a loss to explain why so much hyperventilation re the GLD, PHYS, etc.

Most of us here already have or are working on getting physical.gold.now. Those of us who are ants / shrimps anyway.

But, were I to be a Small Giant (great wish) in the market for gold, well OK, then it is important to understand the mechanism of getting gold out of the GLD.

Me? I am not worried about Baskets, PAs, etc. Looks a little delicate the GLD is, no?

...

littlepeople:

You can also say it was stolen from you. Or that you lost it a boating accident (my favorite)!

On the other hand, I have to admire your altruism and generosity in giving it to the poor!

insteadofablog said...

@FOFOA

This has been one of the best Freegold articles yet. You're on a roll.

Since this post dealt a lot with the idea that there isn't a lot of physical gold to go around, a question keeps coming to my mind:

What is the minimum amount of gold the average person should hope to own when Freegold arrives?

I know that the answer to a closely-related question (what is the best amount of gold the average person should own when Freegold arrives?) is "as much as possible," but I wonder if there is a floor of sorts, under which you would feel "poor" in a Freegold society.

If estimates are accurate that there are only 5 billion ounces of gold above ground and 6 billion people, then there is less than 1 oz. of mined gold for every person on the planet. Might that imply that in some sense, 1 oz is approx. the "natural egalitarian basis"? While I'm not implying that we all must have the same wealth, I believe that a truly freed market will tend towards less wealth disparity. On the other hand, psychologically 1 oz. seems like such a small amount. But perhaps that's precisely the point! It certainly would feel nice though to know that after just my first oz., I've effectively secured a future and the rest is gravy.

So what do people here see the minimum gold to own to feel that you aren't caught with their pants down?

Pete said...

@insteadofablog

Interesting question. I won't go into the 'obviously it depends' junk.

I would think that even though there are 5 billion ounces, it is not realistic to say that is just under 1oz per person. Some of those ounces will 'never' (realistically) be exposed to public markets.

Remember how some previous FOFOA articles explained that rich family wealth is maintained over time? It is stored...grown even. Those people will never (in a realistic time period) be down to their 1 oz of gold.

So i'd say that the realistic 'typical citizen' average would be more like 1/2oz or even 1/4oz of gold. How much gold jewelry do people own? What about their children? Etc.

Oh, and of course, which country you live in is vital. Some countries will have very little gold available to their citizens (on average, per citizen), yet others will have plenty. I expect this will probably even out over time due to the nature of freegold, but will tend to gravitate towards the 'savers'.

That said, if I had to pick a number, then I would want a minimum of say 10oz.

Of course, 10kilo's would be nice ;)

Mike said...

Hi All,

anyone care to comment on china's CB adviser yesterday mentioning to obtain silver also for its reserves?


China Should Buy More Gold, Silver for Reserves – Chinese Central Bank Advisor

People's Bank of China adviser Xia Bin told the Economic Information Daily today that China should steadily increase its holdings of gold, silver and other precious metals. In an interview with the paper Xia said that “holdings of gold and silver can help establish the yuan as an international currency by increasing China's "final payment capacity." He advised buying precious metals on the dips and while gold and silver are marginally lower today, the remarks are another long term positive for the gold market.

Only last month, Xia made similar comments saying that the People’s Bank of China should diversify their massive $2.7 trillion foreign exchange reserves away from US dollars and increase their gold reserves as a long term strategy in order to help internationalise the yuan. The Chinese wish to make the yuan an accepted international reserve currency and establish it as a currency that will be used for payment and settlement in international trade.

China’s gold holdings, at 1,054 tonnes, remain miniscule compared to the over 8,000 tonnes held by the US Federal Reserve (gold only accounts for 1.6 percent of China’s massive currency reserves). With the supply and demand equation already tight due to international investment demand and central banks having become net buyers rather than net sellers, even a small amount of diversification out of their US dollar holdings and into gold should lead to much higher gold prices.

The reference to silver was important as it marks the first time in modern times that a central bank advisor or official has spoken about diversifying currency reserves into silver. It shows how the Chinese view silver as money rather than as simply a commodity to be consumed. Indeed, the Chinese like most of the world, used silver as currency for most of their history.

The comments may signal the start of a growing shift from seeing silver purely as an industrial commodity to seeing silver more like gold – as both an industrial commodity but more importantly as a store of value and as money. As Milton Friedman pointed out, the major monetary metal throughout history was silver, rather than gold.


http://www.zerohedge.com/article/gold-bar-premiums-17-year-high-hong-kong

David said...

Well said Pete. According to Mike Maloney, there is just 1/3 of an oz of gold "available" per person.

As for the quantity in which one should strive for, Richard Russell says 3000 oz (gasp) would mean ultimate wealth. While 3000 oz is non-attainable to most, I think if you can acquire 100 or 200 oz, you're doing very well.

But even if one could only afford 1/10 oz, you're doing much better than 90% or 95% of the world population.

DY

costata said...

insteadofablog,

According to Credit Suisse aggregate worldwide "wealth" is indicated to be around $200 trillion in total.

"To be among the wealthiest half of the world, an adult needs only USD 4,000 in assets, once debts have been subtracted. However, each adult requires more than USD 72,000 to belong to the top 10% of global wealth holders and more than USD 588,000 to be a member of the top 1%."

http://www.zerohedge.com/article/detailed-look-global-wealth-distribution

Look at some of the "financial assets" that count as part of the "wealth" estimates in the report.

"Your wealth is not what your money says it is!" (h/t A/FOA)

If a large amount of the paper wealth burns then the weighting of hard assets in the total wealth estimate would obviously be much higher. This suggests to me that if you have the bulk of your assets in tangibles then you would automatically move higher on the wealth "scale".

I realise that this does not address your question directly but I found the report provided us with a useful "reality check".

Cheers

costata said...

Mike,

I saw that piece on Xia Bin's comments. One thing struck me as odd. A month ago he talked only about increasing China's gold reserves. Now he speaks of "gold, silver and other precious metals".

I notice that some of the silverbugs have seized on this article as evidence that Beijing is about to dive into silver and chase the price sky high.

Perhaps they are right or perhaps this is meant to muddy the waters in order to take the focus off gold.

Jason said...

yeah, I wonder what fOFOA thoughts are about this bad news for silver, since i am sure he is in the process of clearing his silver

Jason said...

also, china did it before, where i read in an article few months ago that SAFE had no intention in adding any gold to its reserves due to its volatility, and later on, it seems they have changed their minds,, i dont think you can takes what they say literally, its what they do behind closed doors what counts

FOFOA said...

Hello Insteadofablog,

Thank you!

You ask, "What is the minimum amount of gold the average person should hope to own when Freegold arrives?"

All that gold out there, that 5 billion ounces or whatever it is, is going to be in someone's sweaty palms at the moment of revaluation. If you trust someone else to do a better job than you with the proceeds of such a massive transfer of wealth, then, by all means, be egalitarian now, before the reset. But if you want to be really generous, it seems to me the best way is to get as much of that wealth transfer as possible into your possession and then give it away after revaluation. Like I said, each ounce you don't buy will be in someone else's hand (perhaps someone less charitable than you?) at the time of revaluation. And like this post implies, it's all being gobbled up as I type.

Bron,

I am working on a response to your post, so stay tuned!

Sincerely,
FOFOA

dwarvesden said...

The debate over whether withdrawal of shares from GLD is bullish or bearish cannot be resolved here. If a "giant" took physical possession of the entire amount, it means the "giant" thinks the price was right to get his hands on a big chunk of gold.
If the withdrawal of shares were done by 1,500 different share holders, it means they wanted FRN's to allocate elsewhere. Maybe they wanted to buy Egyptian internet stocks, or just pay their taxes on all of their gains on their Junior Mining stocks.
Or maybe they think the price is going to fall further. Do you think they are right in that?
If someone here can predict the near-term price action of gold, your time would be more profitable on the trading floor than here.
At a certain point it may be advisable to turn gold (or silver) back into currency, perhaps when we near the end game, that is if a stable and sound monetary system is in place. Otherwise, you would just spend it.
I agree that paper can be risky. And stashing some gold or silver gives you the first of the "Four G's" necessary for survival. But, I need more than just survival. So do a little gambling/trading. Hope noone here objects to that.

insteadofablog said...

@FOFOA

Thanks for the reply. However, I think you may have answered the second question better than the first (where I was already clear that the answer is "as much as possible"). I also didn't mean to imply that I don't want to buy more than my "share" of gold. I was simply trying to figure out if there was any good way to tell now how much gold someone would need to own minimally such that they could say to themselves, at the moment freegold takes hold, "I didn't miss the boat!" I was merely suggesting the 5/6 ratio of ounces to people as a heuristic starting point to prime the pump, so to speak. The thought there being that the value of 1 oz. gold to people would adjust such that it would, by definition, be a "decent amount" of wealth for someone to have on average. Am I thinking about the dynamics the right way?

Jason said...

I wonder whether the government decides to impose a 90% net income tax on the profits derived from the precious metals sales,
say you buy gold today at 1335, and you decide to sell in in 2015 at its re-priced value, say 25000/oz, that leaves you with 2300$ net.
looks pretty encouraging to me and worth the risk

FOFOA said...

Hello Bron,

As I read your post it was frustrating because it feels like you are projecting onto me a position which is not my position. It is a position I see a lot, but it is not mine. And I see you bending the meaning of my words to fit this position you think is mine. The title of your post is repulsive to me as it casts down upon my name (which appears in the first line under the title) the allegation of fraud against GLD, something I never alleged. I even specifically wrote that GLD is not a fraud… here. Go on, search my last several posts for the word fraud. It isn't in any of them. In fact, unlike some people, I am saying all the reported gold actually is in the GLD warehouse.

Okay, I suspect you will be surprised to find out that I agree with a lot of what you wrote, except insofar as you are painting a false and conspiratorial position on me. So I guess the only thing for me to do is to laboriously run through your post and point out where I agree with you, where you have misrepresented my meaning, and where you are wrong.

First, on the use of the phrase "loan to the ETF" I suppose I could have expressed my meaning better than that. But in my defense I did bold the word essentially on purpose to try and head off the use of my statement in the construction of a straw man. I suppose a "market-price reversible swap" is more on point with my meaning than "loan."

And to this point, you write, "If Authorised Participants borrowed physical (or used physical backing their unallocated liabilities to their clients, which is the same thing) and delivered that to GLD, there is no claim or encumbrance by the original lender to the Authorised Participant on those bars held by GLD."

Absolutely! I agree with this statement. But if the APs have any unallocated liabilities without full reserve physical backing then this is, de facto, exactly what they did. And it is what they did. Calling this a "naked short" like you do shows how much you are misreading the situation. Is your own bank "naked short" physical currency? Does it have liabilities that exceed the number of physical notes and coins? Of course it does. That's what banks do. And it's what Bullion Banks do with gold.

Unallocated gold liabilities in the mainstream bullion banking community are backed by a fractional pool of physical gold in the BB's possession. (I realize this is not the case with the Perth Mint.) Some of that pool was Allocated to GLD reducing the fraction of reserves actually backing the unallocated liabilities. No wonder the Bullion Banks aren't correcting the reporters that are wrongly correlating redemptions with negative sentiment! No wonder! It's a run on the banks that is happening, and the reporters' misinterpretation is assisting the banks in managing their reserves.

As for diverting demand, it is better for the fractional reserve BB system that those 400 oz. bars stay in 400 oz. bar form in the HSBC vault to which the APs have a preferential ability to access, than to be shipped out and melted down into Krugerrands or some other coin the ETF shareholders would have bought had there not been an ETF. The ETF diverted demand in many ways, this is one.

It is true that, if the music totally stopped today, they couldn't forcefully yank those golden chairs back from GLD and hand them over to their uncollateralized creditors. Any more than a GLD holder of less than 100,000 shares could get his hands on one of those chairs.

Cont...

FOFOA said...

p.2

But the AP does have the special ability (yes, that's what I meant by "special rights") to redeem GLD shares for gold on behalf of its unallocated creditors should they ask. This would be the "reversible swap" (at market price) that I mentioned. And yes, the AP would have to settle the appropriate number of GLD shareholders in currency in order to do this. Which really only becomes a "special right" once the price of physical gold starts running away from the paper price. The "right" to convert paper to physical at the paper price during such a "theoretical Freegold separation" would be quite "special" indeed, wouldn't you say?

I am not questioning the basis of Allocated gold in the system… when it is allocated to a specific "end user." But I am questioning the basis of proclaiming allocation to GLD as being the same as a GLD shareholder owning allocated gold. It is not. To the shareholder, the gold is Unallocated in full reserve. The problem comes when the price of paper and physical gold diverge and the small shareholder has no path to redemption, unlike the AP and its Giant clients.

Also, I am not questioning anyone's integrity. I am questioning the system itself as it holds camouflaged risks to the small investor who is led to believe certain full reserve paper investments will track the price of physical in Freegold, which is a physical only price discovery market. Will Gold Money track the price of physical? Or will it trade at a discount to the real thing? Will anything other than physical gold itself track the price of physical gold in a physical-only market? Good questions. I don't know the answers but I do know one way to avoid the risks.

You asked me how much I think the GLD ETF is net short in the market right now. I don't know. I don't have that information. I think it is probably not that net short right now, which is specifically why I was careful to use the word "potentially" twice in this comment where I wrote:

"And that same share can potentially be borrowed again and again. You can potentially end up with several GLD investors holding ownership of the same share of GLD through this process."

I don't know the present short situation of GLD, but I do know that other ETFs have been known to go as much as 500% net short. This is possible without any naked shorts in the way that I described. And it can usually be unwound, except in the rare case of gold going into hiding as described by FOA, or permanent backwardation as described by Fekete. So what is not a credible threat to any other ETF, or even to GLD most of the time, short selling, is a big threat to GLD come Freegold.

How many shares of GLD are borrowed and sold short right now? It doesn't really matter as far as I can tell, unless and until the premium for physical starts to run away from the price of paper gold, which GLD is. At that point, you may encounter a dangerous spike in the net short.

But shorting does allow for an expandable supply, just like lending or fractional reserve banking expands on any reserve, and the entire issue of GLD is in street name only, so it is all available for shorting. And for those of us interested in a stable and reliable global financial foundation based on physical gold price discovery, GLD is just one more vehicle contributing to the problem. And for this reason, it will not survive the transition to Freegold.

Cont...

FOFOA said...

p.3

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

I don't know why you thought I wouldn't like that. I actually agree with it. Why do you think I am speaking to both the Giants and the shrimps in this post? I am encouraging both the Giants (unallocated creditors) and the shrimps (unallocated shareholders of GLD-allocated gold) to get Allocated ASAP. For the shrimps this means buying physical into your possession. For the Giants it means an Allocated account.

I'm not saying that the gold can just disappear from beneath the GLD shares. I'm saying that the GLD shares will not track the price of physical during the systemic transition I expect. The GLD shareholders can sit on their shares from here to eternity if they like. And some may well do that. Because those shares will only be redeemable for currency at the paper price of gold unless you have at least 100,000 of them. That is the risk to the shareholder! If you don't believe in Freegold and that the end of fractional reserve bullion banking is coming, then invest in GLD. Simple as that.

Can you imagine an "Egypt-like situation" in the West, where perhaps the markets are closed for a week or more? Think about all those anxious GLD shareholders that will be waiting impatiently for the markets to reopen so they can sell their shares for cash to carry down to the local dealer praying there are still a few scraps left. There is nothing to keep GLD from trading far south of its NAV in a panic situation. And then the APs can just scoop up those shares at a panic discount and redeem their only remaining reserves so as to satisfy a few important (and angry) unallocated creditors, the kind you don't want to default on.

As for the "get out clauses" and "losing the gold," I have not even gone there. So please don't paint me with your conspiracy brush. I made one single comment a week ago where I wrote: "This is where I have written in the past on this blog that if the potential windfall is big enough, I wouldn't even trust my own sister with such a temptation, let alone a stranger, a corporation, a bank or a government operation." If you took that comment personally, and that is the source of your implication that I am alleging fraud and questioning people's integrity, well, then the whole point of my blog is clearing your head with a nice margin.

You write, "If you think that it is likely that bullion banks would steal Allocated gold, I would then argue that if a bullion bank was to consider engaging in such fraud…"

Again, I have not written anything about bullion banks stealing gold or engaging in fraud. Those are your words, not mine. I am writing about completely legal activities. I am coming at this from a systemic perspective, not a conspiracy perspective. Please do not project that viewpoint onto me. Thank you.

You write, "I think it is a more believable thesis that any short covering, fraud etc is more likely to occur in the over-the-counter "dark" market first, leaving the visible ETFs to maintain the façade that everything is OK."

Agreed on the "darkness" of the OTC market. But again, where have I alleged fraud? Everything I am describing is the perfectly legal activity we like to call "banking" or more specifically "bullion banking" that poses, in my opinion, a systemic risk (because it is gold we are talking about), as well as a risk to small investors who have been led to believe that certain paper investments will be as good as physical gold during a systemic restructuring.

Cont...

FOFOA said...

p.4

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

This is what I meant when I said reading your post was "frustrating." Yes, my post was about GLD. And I try to be very careful about the toes I step on. But if you read my comments carefully, you'd see that I would not recommend PHYS either, unless you have $536K in order to take physical delivery. And even then, I see risk if you wait until Freegold to redeem. That you would simplify my message to, "GLD is bad because bullion banks involved" is really frustrating.

Lastly, you defended the World Gold Council's honor in creating GLD. You imply that the WGC was only trying to help the gold bull market (limp?) along in 2004, and that they certainly don't want the gold price to drop.

I agree they don't and didn't want the gold price to drop. But I think they also didn't want the gold market to implode with nuclear force. I think they are focused on all aspects of the gold market, including the structural integrity of the Bullion Banks' fractional reserves given that the CBs have removed their physical backstop. I think that a controlled price rise was more preferable to the WGC in 2004 than an uncontrolled explosion.

This is no conspiracy theory. It is simply good business. Look, any paper proxy for gold is a poor substitute for specie in hand in the eventuality that physical premiums go haywire, and ultimately when all offers to sell gold for paper are withdrawn. The small investor is in even worse position holding paper in a vehicle that allows redemptions by the big money only.

The gold bull market is a function of investment demand. Investment demand results from financial and monetary volatility and unrest among other things. The gold bull market is a phenomenon of its own. It doesn't and didn't need the help of the WGC or ETFs. ETFs do not create demand. They divert demand. The gold bull market owes nothing to GLD, the WGC, the Perth Mint, FOFOA or any other investment vehicle or writer. It is an unstoppable locomotive running on the power of gravity. Hop on or get out of the way.

Sincerely,
FOFOA

Chico_hawk said...

Dear FOFOA

Thank you very much for patiently taking the time to share your considerable knowledge & insight on gold.

The way you painstakingly explain a complex subject matter so that even laypersons like myself can understand is very much appreciated.

I'm just a very small minnow in a great big sea, trying to find his way & survive without getting swallowed up, and I have found your blog most helpful.

I don't know what else to say other than thank you again for sharing so selflessly.

chico

Wendy said...

insteadofablog,
I represent the average person, I own 10 ounces of gold and 430 ounces of silver and lesser amounts of cash on hand, and digital currency. I wish I owned more gold, and I might yet, however most of my earned income is spent on meeting expenses.

I know there is not one answer to your question...... I am comfortable in the knowledge that I will not have to "spend" or "trade" my metals in the forseeable future.

My advice would be buy what you can afford without the intention of "EVER" selling!

I know when SHTF I will have something other than paper to relay upon, I won't have as much as many, but I will have more than most!

Jason,

I wondered that myself at times. The gold I own is in the form of 1 ounce bars, I have considered, and I might, converting them to the forn of legal tender ...... canadian maples or the US equivalent. I don't know the legalities, but I would guess that one could leave the country with a very little dollar value of "legal tender" a go to another country for conversion if required.

I would appreciate others Thoughts on this idea.

Wendy

SS said...

How do you think Britain will do? We have even less Gold after Brown's genius.

Pete said...

@FOFOA

From your P2 comment above:

If giants are the only ones that could really redeem GLD shares for actual bullion when FreeGold arrives, wouldn't competition for physical gold push the price of GLD shares near to the price of physical gold?

An example:

Let's say GLD is trading at $10,000oz equivalent. Physical gold on the market is trading at $30,000. If you were a giant and wanted cheap gold, could you not simply buy some GLD and redeem it? It seems like an arbitrage opportunity, albeit a risky one?

I understand that anyone less than a giant that is holding GLD shares will be high and dry, unless a giant wants to purchase them... but wouldn't the competition above ensure that GLD's price tracks the price of physical, somewhat?

I'm sure there would be a risk premium.

However the main issues I would foresee with the above trade are:
1) giants may not want GLD shares
2) GLD 'could be' leveraged in paper
3) others 'may' have claims on the bullion held by GLD
4) when FreeGold arrives, some pretty wacky stuff might happen (like the exchange might be shut as per the example you gave)

I'm not endorsing GLD, just speculating on what might happen.

Pete said...

From my comment above:

"but wouldn't the competition above ensure that GLD's price tracks the price of physical, somewhat?"

Of course I mean, while GLD still has any gold left...

Wendy said...

Briton will die with the US because briton made itself one with the US............. the captain wil go down with the US ship of SHIT=QE to infinity?

dwarvesden said...

Wendy: First of all, you are way above average IMHO. The average US citizen has zero gold, and maybe a few silver coins squirreled away. About .8% of citizens here have PM investments.
No-one can predict the end game scenario if/when the international monetary system, based on the dollar as reserve currency, breaks down. I have some 100 Trillion Dollar notes from Zimbabwe that may give one an idea.
Traveling to another country may not be much of an option. What country would be safer? When the dollar goes down, it will most likely create the "domino effect " and other currencies will collapse with it. Out of the ashes may arise a new monetary system, based on real money, but in the meantime, no fiat currency would be safe.
Recently, during the run-away inflation spiral in Argentina, many used gold chains for currency, it having a convenient divisibility feature. There are some today who are accumulating gold jewelry, anticipating restrictions on taking gold in the form of bullion out of the country. I bought some bezels to turn gold coins into pendants to wear around ones neck. You can buy bezels to make charm bracelets out of 1, 2, 2 1/2, 5 gram Swiss bars.
I've seen bracelets and necklaces made out of 1/20th ounce links that could be worn as you board your flight. And recently did a test on a trip to and from Europe with Eagles mixed in with Susan B's as change in my pocket. No Problem!!
I'm in the same league as you. Getting my survival kit ready, and trying to get ahead of the game with meager resources.
But Gold is only one of the four G's needed for survival. The second, of course ends with uns, but that's for domestic use only.
Can't take it on a plane

dwarvesden said...

GLD etc. etc.

Know Im new here, so my previous post was probably ignored, but i have one question to those endlessly beating this poor dead horse. What possible reason would there be in investing in any etf or gold trust? You cannot beat the gain in holding physical for the long term. I you want to trade/gamble etc short term, go to the stock market: Junior Miners, and trade your hearts out. I've made a bundle there, and will make a bigger bundle this year, with favorable tax consequences. No tax consequences on the physical for me. BTW: I don't report gains from garage sales either

Bron said...

FOFOA,

Seems a bit of a misunderstanding of my blog for which I apologise. I was not saying you were alleging fraud by the title I picked, and will add a question mark to the end of it.

Also, the references to "you" in "if you think" and likewise are directed at the reader, as in "if you, the reader, think".

I'll change my blog post to reflect this so there is no confusion.

I'll respond to the other points when I get home.

Jenn said...

Hi Wendy-

I am SOOOO right there with you. Reading your post I have similar allocations and similar aspirations and you have mentioned the most important points for sure.

@dwarvesden

"What possible reason would there be in investing in any etf or gold trust?"

Simply point. will you recognize the fire alarms as they will sound very different than thta accompanied by a red flashing light in any given local corporation and when those lights go off -- will you have time to take action?

--Jenn

Jenn said...

It seems Blogger is not agreeing with me this evening.

"Simply put. Will you recognize the fire alarms as they sound given the very different pitch than those accompanied by a red flashing light in any given corporation? And when those lights go off -- will you have time to take action?"

--Jenn

dwarvesden said...

Jenn:

Exactly. Major savings is all in gold and silver, in my strong hands. (though it is a relatively small amount). But we do have time to gamble a little, even the Mayans give us until Dec 2012.

And if we are attentive, there will be warning signs, the nimble should be able to exit the casino. Just don't have too much on the table.

Return to Resistance said...

I left some comments earlier in this thread quoting certain sections of GLD's prospectus that would imply GLD is a fraud. After reading Bron's post and FOFOA's reply that may not be true.

I would just like to point out that there are legal activities that are moral and legal activities that are immoral. I think a perception has been offered to GLD shareholders into thinking they own the equivalent of physical gold without the hassle of acutally having to store it. I pointed to those sections of the prospectus to point out that there is counter party risk in owning GLD which isn't a risk when owning physical gold in your possession.

I can only say I have talked friends and family out of GLD and into physical as they had this perception. David Einhorn of Greenlight Capital is another who switched from GLD to physical. I can only guess he also saw those counter party risks.

Anyway, on separate note I wanted to point out that in spring/summer of 2010 at the height of the euro crisis PHYS traded at a 20% premium over its NAV. I'd be interested to hear some opinions on this - Does this type of action foretell how these two proxys would behave when the paper starts to burn? Could PHYS be used as an early warning sign to run into the physical?

oldinvestor said...

Hi Wendy,

I think there are two issues you have identified.

1.. Transporting gold. I do not think that transporting gold should play a part in the form one holds it in. Many people have posted on physically transporting gold across borders. I personally think that if one thinks this is necissary, by far the best way is by mailing it, either by ordinary mail, UPS, or Fedex. The vast majorety of internet gold sellers ship by these ways, and there seems to be no problems.

2. What form of gold to hold. I personaly think, and FOFOA has posted on this, is that the best form to hold is the form that is the most widely recognised and the most widely trusted. Personaly I think that these are the common bullion coins, Maple Leafs, Eagles, and Krugerands.

dwarvesden said...

Return to Resistance:

If you go back to the 79-80 scenario, the premiums on the physical skyrocketed in a very short period of time. They could go to multiples of 100% in a short squeeze. And I wouldn't want to be standing in line when that happens, cause a lot of institutions won' be able to deliver. Or if the currency drops like a rock, by the time you get your FRN's, they won't be worth a Zimbabwe dollar.

Have you ever watched dominoes lined up fall? Things could happen fast

I don't understand why some think holding or storing actual gold/silver is a hassle.
A safe Deposit box is cheap, a safe in a wall or closet isn't that expensive, just don't show it off.

dwarvesden said...

oldinvestor:

Have to disagree with you here. First of all you have to have someone to send it to. And the mail system is anything but safe, especially in a crises environment.
I ordered some small denomination bars from the Turkish mint and they never made it out of Istanbul.
If we're talking about a crises, the thieves will be coming out of the woodwork. If you were in Cairo today, would you feel confident in mailing some gold from your neighborhood post office?

dwarvesden said...

Read this all, and get your PHD in gold and the banking system




Chris Powell: And was Jerusalem builded here?
by cpowell
Remarks by Chris Powell, Secretary/Treasurer
Gold Anti-Trust Action Committee



http://gata.org/node/9552

mortymer said...

Q1: Do CBs like competition?
Q2: Are CBs bothered about the GLD & other gold ETFs surviving transition I wander?
C: Once somebody somewhere put a comment that PHYS shares is like a "new currency", backed by the reserve the fund has. But does ECB allow its reserve to be diluted? Besides anyone anywhere can buy PHYS shares. Is that good or bad? Is this "new currency" taxed? So what will be the smart move then? -> To take the real stuff off and exchange into a currency where there is 0% tax.

SilverPaine said...

With respect to taking delivery of Gold and Silver it is not convenient for many people and there is concern about the safety of holding it. Also for people like me there are precious few places to convert gold into fiat should I want to do that from time to time, assuming fiat remains currency.

I think the concern of holding 'paper' gold is that your chosen investment when/if the SHTF may prove to have only a fraction of the sold paper, and that you may not be able to force redemption into metal or find a buyer of your paper at any price. It only takes a loss of confidence in your particular paper vehicle to start to bring this on.

I for one partake of the Perth Mint's Certificate program and own gold and silver this way. Having confidence in the government guarantee and statements by some (Bron?) and basically the literature of the Perth Mint that their metals are not leased, lent etc... are unencumbered and that they ensure they have the physical gold and silver sold.

I also use their PMGOLD as traded on the ASX which basically appears to be the equivalent of their Perth Mint Certificate - unallocated. In that it is easily redeemable for physical, cash or you simply trade it. This liquidity is quite useful.

I would only take physical possession if I thought I couldn't trust the particular paper vehicle. If you are going to need to use for 'spending' then you need the ability to convert piece into fiat. Unless some think that metals will be used as currency.

golden tube said...

Here is something I find strange to do with Gold/Silver ratios

The original Gold Dollar from 1849 to 1889 contained .04837 oz of fine gold
The silver (trade) dollar at upto 1885 contained .78761 oz of silver
Therefore the ratio was 16.28 (silver dollars) to 1 (gold dollar)
When the Morgan dollar came in the ratio dropped…
Silver Morgan dollar contained .77343 oz of silver
Ratio was now 15.98 (silver dollars) to 1 ( gold dollar)
So the average was 16 silvers dollars equals 1 gold dollar
So if you had 1 gold dollar in your left pocket and 16 silver dollars in your right hand pocket , you had the same buying power in each

Fast forward to this morning where spot price of gold is ( in this example)
Gold $1338.37 per oz and Silver $28.28 implying a GSR of 47.32 to 1 ( as expressed in OUNCES )

Now let look at the melt price of an old US Gold dollar and a Morgan Silver dollar (I’m not allowing anything here for numismatic additions)

Based on the above spot prices
1 Gold dollar =$64.74 melt
1 Morgan dollar = $21.83 melt
Gives a Ratio of 2.96 silver morgan dollars = 1 gold dollar
However based on the historical gold/silver dollar ratio of 16 silver dollars = 1 gold dollar could it be argued that the Gold 1 dollar melt price should be 16 x the current Silver Morgan melt price ie $349.28
Or
based on the historical gold/silver dollar ratio of 16 silver dollars = 1 gold dollar could it be argued that the Silver Morgan 1 dollar melt price should be 1/16th x of the current Gold 1 Dollar melt price ie $4.04
Or
any number of ratio combinations in between

so in theory someone would only have to give 3 Silver Morgans to get 1 (original) Gold dollar , ( again I’m ignoring all numismatic values/add-ons here)
but in fact in the real world ( ie ebay for example) we are not far off that ratio, give or take, three morgans can be purchased ( or bartered ?) for the same amount of FRN’s as 1 original Dollar Gold coin
and 60 morgans (60 x $1 coins = $60) can be purchased for the approx same amount of FRN’s ( or bartered ?) as an original $20 liberty coin, $60:$20 = 3 to 1 ratio

So from the Constitution going forward, the ratio was 16 (silver dollars ) to 1 (gold dollar); 16:1

And today the approx real life ratio of old silver dollars to old gold dollars is 3:1, as $
denominated

And finally we get
currently, the silver / gold ratio as expressed in (spot, paper ?) ounces is 47:1 (rounded)


any help / extra research appreciated

golden tube said...

BTW i think i'm correct in that 16 to 1 ratio came out of the belief that all the silver in the world was 16 times the weight of all the gold in the world. mined or not, consumed or not

Pete said...

@ silver lovers

We're pretty much over the whole silver thing... aren't we?

Read this, and the comments pls:
http://fofoa.blogspot.com/2010/12/kicking-hornets-nest.html

radix46 said...

Perhaps we could make the Kicking hornets nest the official silver discussion thread, kinda like a sticky and just send anyone who wants to discuss silver to it, leaving the rest of the blog for the discussion that the majority here want?

golden tube said...

my post is really about Gold not silver

oldinvestor said...

Dwarvesden,

Re; shipping gold,

“Have to disagree with you here. First of all you have to have someone to send it to“.

I think that anyone shifting their life and wealth to another country would have as part of that process established some kind of base there previously, even if nothing more than establishing a drop box mailing address.

“And the mail system is anything but safe, especially in a crises environment.
I ordered some small denomination bars from the Turkish mint and they never made it out of Istanbul“

.The only way that someone can steal gold from the mail is to have knowledge that that particular parcel out of millions contains gold. I can think of several ways that could happen.

One is that there is someone inside the mint or other gold source that is either diverting some of the packages, or is working in collusion with someone on the outside. The other is that there is some indication on the packaging or return address that alerts someone that this package may contain gold. I would think that a private person mailing gold could obviate these two factors.

In any time of crisis, you have two main choices when moving gold. You can carry it on your person, and trust a major portion of your wealth to any number of nameless officials to both know the fine points of the law, and abide by them.

Or, you can entrust it to the mailing system’s normal delivery of millions of parcels every day. Diversified into a number of parcels obviously.

I know which choice I would prefer. But each to their own.

SS said...

I think that we will go into a crashing deflation,something much worse than ever seen before.I was heartened to read that valu-trac are bullish (or were in 2006) that Gold would thrive in either an inflation or deflation.It doesn't seem to me that Gold will fall in real terms whereas houses still will.I'm British and still own several houses.I'm wondering FOFOA,I'm 10% in Gold and 2% in Silver the majority of which is with Bullionvault and the rest with Goldmoney.Does this sound about right?

Bron said...

FOFOA,

Firstly, I'll have to be more careful in how I write. My post was really mixing up responding to specific quotes of yours but then veering off on to related concepts/positions that are not yours. My exploration of the idea that APs would fraudulently take GLD gold or “GLD is bad because bullion banks involved” was directed at the simplistic anti-GLD ranters not looking to the subtleties and not at yourself. One of the problems with writing rather than speaking face to face I think. Anyway, on to the discussion.

“Market-price reversible swap” makes more sense, I read “essentially lent” as implying some obligation to return the physical. With regards to the “naked short” I was talking from a financial point of view, whereas you are using the term in the sense of physical.

To clarify the distinction for our readers, let us consider a bullion bank with a physical ounce asset backing an unallocated ounce liability to its clients. If that bullion bank then lends that physical to a jewellery company who use it in their operations, then the bullion bank now has an ounce claim asset backing it unallocated ounce liability. From your point they are short “physical” but I would also note that the bullion bank is not short “financially”, that is they are not exposed to any movement in the price of gold.

Yes they are exposed to the risk the jeweller does not return the physical at the end of the lease. Probably more importantly, they are exposed to liquidity risk. I think this is the sense that you use “short” and is reflecting the issue of “maturity transformation” (see http://unqualified-reservations.blogspot.com/2008/09/maturity-transformation-considered.html for an excellent explanation of why this is a big problem).

My use of the word “short” is for situations where the bullion bank exchanges (or sells) the physical backing its unallocated ounce liabilities for cash. This creates a financial risk as there is a mismatch between the denominations of the liability (ounces) and the asset (dollars). When you used the phrase “sell them for dollars that can then chase an ROI” this implied to me a financial short and that was what I was addressing.

I now understand what you meant by "special right" when you say “once the price of physical gold starts running away from the paper price”. I will have to disagree with you on this to some extent. Now by that I'm not saying GLD does not have its risks or that any not-in-your-hands gold is better than in-your-hands gold, but I have, maybe naively, a stronger belief in arbitrage and greed.

Let us consider your scenario where the markets have been closed for a week, during which no doubt the price for physical gold has risen. On market opening I agree we are likely to see much selling by retail investors who no longer have any trust in the markets. They are wanting cash so they can buy physical gold. Their selling pushes the price of GLD down.

Now you state that “the APs can just scoop up those shares at a panic discount”. This I'm not so sure about. The prospectus lists 16 APs, only some of which are actually bullion banks (with their angry) unallocated creditors):

BMO Capital Markets, CIBC World Markets, Citigroup Global Markets, Credit Suisse Securities, Deutsche Bank Securities, EWT, Goldman, Sachs, Goldman Sachs Execution & Clearing, HSBC Securities, J.P. Morgan Securities, Merrill Lynch Professional Clearing, Morgan Stanley, Newedge, RBC Capital Markets, Scotia Capital and UBS Securities.

Bron said...

p2 cont

I find it hard to believe that all of these will conspire to agree to hold off on buying GLD until a significant discount appears. Arbitrage traders in each firm will be watching GLD drop relative to the physical price of gold. As it goes to $1 to $2 discount per ounce etc, the traders will be thinking “if I don't take that discount and lock in easy profit now then one of the other APs will and I'll lose the profit”. With 16 traders I find it hard to believe that one will not jump first, providing offers to buy and thus arresting the decline in GLD's price. What does Newedge care about JP Morgan's angry unallocated customers and why let them get GLD gold at a big discount to save them and deny yourself a profit?

Now I will concede that for my scenario to work all of the 16 APs have to have access to physical in the OTC market, which may not be the case for the smaller players. But then when you say the physical price is diverging from GLD's price, this implies that there is market for physical at a price and thus would it not be more easier for the 16 APs to acquire physical compared to retail investors, given their connections in the OTC market?

As you say we are talking about systemic failure. I suppose I'm nit picking, but is not systemic failure a situation where gold goes into Feketian “hiding” in which case there ceases to be a gold price? What I'm saying is that up until that parabolic breaking point, while gold is still being sold for cash, the backstabbing greedy profit motive of the 16 APs will ensure GLD's price stays in touch with the physical gold price. That is my answer to your question “Will anything other than physical gold itself track the price of physical gold in a physical-only market?”

For readers who don't find this particularly helpful or are not comfortable assessing these risks, I would suggest taking FOFOA's advice:“I don't know the answers but I do know one way to avoid the risks.” - that is, buy physical!

The ability of non-APs to borrow GLD shares and then sell them short I think we are in agreement on and is another problem with GLD, or to be fair with stock exchanges in general it seems.

Bron said...

p3 cont

Finally, I take some issue with your statement that “or some other coin the ETF shareholders would have bought had there not been an ETF. The ETF diverted demand in many ways”.I partly disagree with this, but I also partly disagree with those who think GLD's tonnage is “additional” demand. The truth is in between both in my opinion.

There is no doubt that a fair portion of investment in GLD would have occurred anyway, either into other funds (eg Central Trust), Allocated account or cash and carry coins and bars. In this sense all GLD does is make this investment more visible than it would have been. Unfortunately commentators obsess about GLD simply because it is visible and ignore the other 28,000t or so of privately held gold (not to mention Asian demand in “jewellery”, which is really investment in nature).

However, I do believe that the creation of stock exchange listed gold products has increased demand for gold by making it easier to get exposure to gold. Buying it through a stock broker eliminated the perceived inconvenience to some investors of having to go down to a coin shop and then worry about where to store gold.

As to the WGC, in my dealings with them I don't agree with your view that “they are focused on all aspects of the gold market, including the structural integrity of the Bullion Banks' fractional reserves given that the CBs have removed their physical backstop.” They are a miner trade group. Their focus was on physical offtake and thus obsessed about the metal behind GLD being Allocated gold. Funny when you consider that the legal structure introduced, in my opinion, some holes that negated the “security” of the Allocated gold backing.

I can't say anymore except that I'd guess I'm one step closer to them than yourself (note: the first exchange traded gold product in the world was the Australian Gold Bullion Securities, the second was the Perth Mint's ASX code:PMGOLD, the WGC naturally took some interest in these Aussie upstarts). Unless of course you are close to the WGC, but then that would be revealing a bit too much? :)

Mike said...

costata,

thanks for your insight. i think until China mentions silver in their balance sheet/reserves that this wont matter much.

maybe like you've mentioned in the past that they are trying to get enough silver so they can be the number 1 exchange sometime in the future.


Robert/Jenn,

The way i see it is holding any physical Gold ETF for us small guys who dont have 13 million or 500k is a waste.

A/FOA said that Gold in your hand or allocated will be all the leverage you need and no paper gold will survive in the end.

But if you do have money in say your 401k or RRSP and you can't take it out (well you can but you'll just be taxed a lot) then just buy a few large cap miners like FOA had mentioned.

dwarvesden said...

SS

If your houses are paid for, they are safe from the bank. However in a depression, you may receive no rent.
But you will still owe taxes. Go to Detroit and see how safe real estate investments are: Houses selling for under a $1,000 Detroit has a mini deflationary depression in housing. Sort of like mini black holes. Depression will be world wide however, nothing mini about it. There will be no Islands of tranquility, unless you own such an Island. And if you do, you better have gold to trade for the resources unavailable on such island
There are plenty of 20th century examples, and a few in the last 20 years, in Europe, Africa, South America. etc where gold and silver were used as money in a hyper-inflationary environment.
Most "experts" predict hyperinflation will precede a deflationary depression. So you need to prepare for both.

The Perth mint thing is interesting, but you still must get the gold in hand b4 the crisis hits.

oldinvestor:
You failed to answer the most important question: Would you want to be sending your gold off at the local post office in Cairo today? I guess I should use a stronger word than crisis. How about panic...upheavel....revolution.....

Are you aware of how close the US came to a revolution in the thirties? It was all about money, banks, wall street speculation, financial collapse, etc. And in 1933 you better not have been caught shipping gold bullion around

Hope you are ready.

On
silver....It's been used as real money as long as gold. Turn your nose up at it, and you may not be able to get any change back

dwarvesden said...

Silver Paine:



You mentioned difficulty in exchanging gold for FRN's....
I live on a ranch 9 miles from the nearest town (of 2,500 people). There is no coin shop there, but there is one tiny jewelry store with a sign on the window: "We buy gold"
.. There is a teller at a local bank that gives you the bullion value of coins (out of her pocket)

Maybe I live in a time warp

SS said...

I always liked Jefferson's advice: 'first by inflation and then by deflation'.I think it's all deliberate.No sensible person is fooled by 'the paradox of thrift' once they know about it,imo.The people behind the scenes want our 'stuff' and they have planned long term how to get it.All the houses are paid off.

Mantis said...

One GLD fund exists, but in practice, there are really two: one GLD for they who can afford physical delivery, and another GLD for those who cannot. When considering this topic, ask yourself which GLD you mean.

"Time will prove all things."

GLD is not the "wealth of ages."

DP said...

@SS: I'm British and still own several houses.I'm wondering FOFOA,I'm 10% in Gold and 2% in Silver the majority of which is with Bullionvault and the rest with Goldmoney.Does this sound about right?

1) If you're looking for personalised financial advice (wouldn't that be nice!), I understand that the Donate button to the right could be helpful in greasing the wheels. ;->

2) GoldMoney buy and sell to customers based on the published paper price of metal. It is not market-based, so you take their price or leave it. This is in contrast to BullionVault, which is a private market among clients. Both are essentially unallocated 100% reserve operations. To my mind, the pricing at BullionVault is more likely to track physical market prices, since the prices are set by the clients, not by the platform and tied to the paper price as in GoldMoney's case. There is, however, no substitute for a bird in the hand. Both GoldMoney and BullionVault will allocate and deliver to you in units of 400oz bars, so if you're a Small Giant or above, then you can reach out and touch it sometime, otherwise you're not really much differently positioned than GLD shareholders (particularly in the case of GoldMoney).

3) I'm also British, and I sincerely hope that your properties are low-value rentals, ideally DSS level? If you've got a bunch of premium pads for young executive couples, especially those city centre new-builds made out of low-grade Lego in recent years, I think you'd better look out. I've been following the various auction catalogues for some time, and not only have the guide prices steadily tracked down, many properties are remaining unsold and reappearing auction after auction.

Caveat emptor indeed. The money is made, or lost, when you buy not when you sell.

Rui said...

That was a fine round of silver bashing last week and padding each basher in the back only to have China, one of super giants out there, getting on the record over the weekend and setting the matter straight that silver is a monetary reserve to them. Great timing, folks.

China isn't just talking apparently. The very fact they net imported 110 million Ozs of silver in 2010 shows they're talking the talk and walking the walk.

So what do you bashers do now? Are you gonna "follow the foot step of a giant" or backpedal on it?

Perhaps you could forward them FOA's "1000$ gold VS 0.5$ silver" theory or whatever sensational GSR this blog is capable of producing to talk them out of it. Tell them silver is "soft", "unstable", "too heavy"(this one cracks me up the most) or what not. Obviously the Chinese are not smart enough as you guys to realize they could buy silver at far cheaper price after FreeGold is initiated, yes/no? HOHOHO...

Well feel free to treat my post as trolling and keep dumping your silver into that wide open dragon mouth. China would appreciate it.

Michael H said...

golden tube,

Your post about the gold:silver ratio is very confused regarding oz pricing vs. melt value.

"So if you had 1 gold dollar in your left pocket and 16 silver dollars in your right hand pocket , you had the same buying power in each"

INCORRECT! You would have 16 dollars purchasing power in one pocket and 1 dollar in the other. Because the coins are not all the same metal weight, as you yourself stated. If you had 1 silver dollar in one pocket, and 1 gold dollar in the other pocket containing 1/16th the weight of gold, you would have the same purchasing power in each pocket.

"Gives a Ratio of 2.96 silver morgan dollars = 1 gold dollar "

Note the relationship: 16 * 2.96 = 47.3.

"However based on the historical gold/silver dollar ratio of 16 silver dollars = 1 gold dollar could it be argued that the Gold 1 dollar melt price should be 16 x the current Silver Morgan melt price ie $349.28 "

NO! Because the Gold 1 dollar has 1/16th the gold content as the silver 1 dollar has silver content.

"And today the approx real life ratio of old silver dollars to old gold dollars is 3:1, as $ "

Again, because the current gold:silver ratio has increased from 16:1 to 47.3:1, approximately a factor of 3.

Jeff said...

Rui,

No need to troll. FOFOA has several posts addressing silver; have you read them? If yes and you still don't like the answers you could start a Freesilver blog, or something along those lines, explaining why silver is the next monetary reference point. Or you could keep your wisdom to yourself and buy up as much silver as possible. They say the best revenge is living well. Good luck.

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

DP said:
1)” If you're looking for personalised financial advice (wouldn't that be nice!), I understand that the Donate button to the right could be helpful in greasing the wheels.”



Good one, but if I may append please don’t insult FOFOA with “lunch money” as he gets all the free hamburgers that he desires at his part time job of “flipping-burgers” at McDonalds.

JR said...

China, a totalitarian regime with a history of silver usage by its people and a Central Bank with lots of Silver and not much Gold, has been encouraging its people to save in silver to help sterilize inflation (the regime sells silver to people for yuan) and encourage wealth growth by its people in the face of its destructive currency policies, thereby maintaining social order and control. China pushes the diea that silver is undervalued vis-a-vie gold.

China has even passed a decree encouraging Chinese savers to buy silver (which it sells), claiming it is overvalued vis-a-vie gold, and banning the export of silver to further these ends and increase its reserves.

Consistent with these goals an "official" says China should continue to increase its silver reserves in addition to continuing to increase its gold reserves.

China's domestic silver price is also set higher than international market price, and there is still lots of demand for silver due to historical reasons/yuan mismanagement reasons.

So it appears the Chinese G wants to keep buying more to continue to arb its people, control inflation and keep social unrest down.

What else?

Laszlo said...

SilverPaine,
Regarding Perth Mint certificates, have you actually read the often-mentioned Western Australia government guarantee covering your metals: The guarantee is for payment in local currency, not metal. How would you feel about an eventual paper currency settlement nominally compensating you for the opportunity loss during the grand Freegold revaluation? Like legal theft of purchasing power perhaps? I think: No pain, no gain. Non-giants simply need to take delivery and find practical method for safe storage. Any second-best substitution could be very distant second-best. This is winner takes all game, no ribbons for also-runs?

Pete said...

@ JR

Good comment, that is exactly how I read it.

Although I didn't consider the arb vs Chinese citizens.

Glad to see someone else is able to see through that news and not instantly think 'silver standard!'.

Besides, if Chinese citizens buy gold, there is more chance it will leave the country through speculation. And when you're a country that is a net importer of gold, urgently wanting to increase reserves, wouldn't you want the gold to be in the hands of the Govt or 'those in the know' rather than speculators?

Leave silver for the speculators.

And as you say, such a great way to mop up inflation. Silver isn't in the CPI.

Diamond Jack said...

While I personally do not own gold, I do have a dear friend who is quite resourceful in his accumulation of the noble metal. Recently he purchased 15 grams of placer gold from a small mining operation. Purchased on ebay for an average price of 36.35 per gram, inclusive of shipping. This is fine gold flake, easily hidden in a flower pot or garden spot, left there to rest until needed. Only 5 percent of above-ground gold is in it's natural state so at this point in time there is often a premium paid for nuggets even tho they are not pure gold.

My dear friend is not worried that his gold will not be recognized for what it is. When the time comes, we will all be better educated to the various forms of physical gold. Got pans?

Pete said...

@ Diamond Jack

That price your friend gets his gold is about 20-25% off the spot price, from my reckoning.

But it is not melted/refined?

How does he know the purity?

Also, I would think it is just as easy, if not easier, to hide a 1/2oz coin in a pot plant instead, if that's what he likes to do.

The premium paid for nuggets is (again my understanding), a collector premium. This would bring us into the debate of numismatics vs bullion, which essentially ends in the conclusion that collector items are nice, but don't hold their value when measured by weight and fineness...and there is always the issue of finding a buyer who will recognise the 'collector' value premium. I can't see said premiums going up in value at the same rate as purity will with the onset of FreeGold.

That said, any gold is better than none (other than Pyrite of course).

Mike said...

Rui,

i think you will bust a nut with this headline lol

http://www.zerohedge.com/article/us-mint-sells-absolute-record-64-million-ounces-silver-january-50-more-previous-highest-mont

even though i have silver, i don think its wise to put the biggest percentage of your holdings in it, gold should be the biggest and silver a small position like 2-5%.

i am happy that silver is rising because that allows me to trade it for gold while supplies last at the margin level.
next target if it ever comes is 40-35.

SS said...

DP,

So you buy the bars and then store them at home or do you use a private vault? What about goldline.co.uk? They will store allocated gold for clients.

Wandee said...

Here's's my .02 on the end game for GLD. When the LBMA/Comex start going limit up in gold for whatever reason, and we know there are many, the physical gold market will shut down and GLD will be unable to function. It will be closed/dissolved! The remaining shareholders will get cashed out in $ at the last spot price. The gold will go to the "Giants", BBs, CBs and such.
Bottom line is if you hold GLD to the end you will be a bagholder not a goldholder.
Are we near the end yet?

Wendy said...

Are we near the end yet?

From JSmineset.com

"......The total open interest remaining in gold is now down to 463,700 contracts. To put things into a bit of perspective, the peak in open interest was 650,764 back in November of last year. Interest is down nearly 190,000 contracts in the last 9 weeks! That gold has only fallen some 6% in the face of this huge exodus of speculative money is remarkable. It tells me that the short side of the market (the bullion banks and the swap dealers) has been aggressively covering shorts at a rapid rate......"

8o}

Joel said...

Hey Rui,

I like owning some silver for easier trading purposes in a crisis, but I wouldn't get too excited about a silver based monetary system based on Chinese purchases. They have bought record amounts of copper as well. Should I be saving pennies? (sarcasm). They are buying up commodities like Imelda Marcos in a Sax Fifth Avenue shoe department. Rare earth metals, copper, silver, gold, you name it. I agree with you, they are not stupid. I think they see our (US) debt Ponzi scheme clearly, and know their dollars will soon be worthless.
You know, cigarettes and booze have always been great currency in hard times too. I look for them to be loading up next on Camel non-filters and Jack Daniels Black Label. Now that I think of it, President Hu's eyes WERE a little bloodshot when he showed up for his meeting with Obamanation...

Wendy said...

All:

Are you kidding me? In 2 1/2 hours NO ONE has anything constructive to add???

I'm lookin at the "creepy map" and it says that many are clicking "refresh, refresh and refresh", but nobody is talking!!

The Arab world is on fire, or at risk of igniting, certainly we must have ideas about how this might relate to the global economic nightmare!

If you don't have an opinion..... how was your day??

My day was frankly boring and cold as hell. My biggest achievment was figuring out WTF was up with the termostat in my lab.

It was 10C this morning, and the day ended at 25C. Well I figured something out, I'm just not sure what!!!

BLAH BLAH BLAH

someone else can pick up the torch now??

Wendy said...

goodnight!

Bron said...

DP: “GoldMoney buy and sell to customers based on the published paper price of metal. It is not market-based, so you take their price or leave it. This is in contrast to BullionVault, which is a private market among clients.”

Interesting point. Being simplistic, GLD, GoldMoney, BullionVault and Perth Mint unallocated are effectively the same – physical gold stored in bulk backing client liabilities 100% but without specific identification of the bars to any one client. Within the context of this discussion, the differences are (also being simplistic):

Storage: GLD metal is with bullion banks; GoldMoney and BullionVault with non-bank Via Mat; Perth Mint is not a bank and stores the metal itself.

Pricing: GLD has many market makers, so price should be competitive; BullionVault has an open market so good pricing but I think really only one market maker to ensure prices are fair during stress times; GoldMoney and Perth Mint are the price setters, so you have to trust them to offer a fair price (ability to take delivery and sell to someone else is thus important).

Delivery: GLD is 10,000oz so for average investor, effectively none; BullionVault is 400oz minimum; GoldMoney has arrangement with a UK bullion dealer, limited range; Perth Mint you can take in anything we make.

Legal: GLD prospectus a lot of issues; BullionVault and GoldMoney I think are pretty strong here with good Governance; Perth Mint is all inhouse except audit, so no chance of finger pointing if problems.

The above a simplistic obviously and the various trade offs between the non-gold-you-hold options are a personal choice/assessment. But it is also worth keeping in mind Dwarvesden’s comment “but you still must get the gold in hand b4 the crisis hits”.

That brings me to Laszlo’s comment “The guarantee is for payment in local currency, not metal. How would you feel about an eventual paper currency settlement nominally compensating you for the opportunity loss during the grand Freegold revaluation?”

The Freegold revaluation situation you are talking about, if I understand FOFOA correctly, is primarily fractional gold vs physical gold. Perth Mint is not fractional. But I could understand that in such a situation trust levels have broken down and people want gold in their hands, but in that case you wouldn’t be looking to sell your Perth Mint Depository account for cash (do to what with, buy physical?) when you can just simply ask for conversion/delivery of your account directly into the physical you crave. I’m not sure then that invocation of the Government Guarantee for “paper currency settlement” would be required.

Keep in mind that the Perth Mint refines and manufacturers approximately 300t of gold a year into coins and bars. We aren’t just some custodian stuck with 400oz bars which clients want in smaller coins and bars and thus may have problems getting the physical to them if our third party supplier fails (if that option is even available). The only other business I know which has refining, minting and storage rolled into one operation is the Royal Canadian Mint.

The reason I’m here reading FOFOA and discussing these issues is because the scenarios of mass selling or physical collection are important issues to the Perth Mint, we know clients entrust gold with us to protect them from extreme situations and it is part of our prudent nature to ensure our business can handle those situations. Actually, I wouldn’t mind FOFOA speculating on the likelihood of Perth & Canadian mints (or refineries in general) surviving Freegold and/or what our role during and after would be.

Mantis said...

Fed passes China in Treasury holdings

http://anatocism.blogspot.com/2011/02/acute-cranial-rectitis.html

costata said...

Wendy,

By way of contrast the lowest temperature in Sydney last night was just over 26 degrees C.

Yesterday it got up to 40 C and today it peaked around 37 C.

All Newbies,

If this hot spell persists for a few more weeks everyone will be nervously looking at the bushland around this town. The fuel loads in some of the forests are huge.

While we are talking weather ... As I'm sure everyone knows a Cat 5 cyclone is about to clean North Queensland's clock. Wind gusts are predicted to hit 300 klm per hour. The last time they had a Cat 5 was 1918. The population, industrial, commercial and agricultural development then was probably only 5% of the present scale.

Storm surges will be hitting beaches, estuaries and river mouths over a 1,500 klm stretch of coast. Think tsunami scale in some low lying areas near the epicentre.

And speaking of lying, (just to make life interesting for the recent QLD flood victims) the Insurance companies are now delivering a life lesson to their policy holders called: "Read the FINE print." AKA, "Oh, didn't you know, thanks to our outstanding legal team, we are one of your counter-party risks too!"

Trying to time the Freegold-RPG transition, observing and discussing events as they unfold is a fascinating intellectual pursuit provided you are like Robert DCRB and you have your target level of physical gold.

Black Swan events cannot be timed or accurately predicted. They are, like the weather, inherently uncertain rather than risks that can be managed.

If you have hit your physical gold target by all means trade and speculate to profit in currency. If you book a profit and there is gold to be had, hurrah. If you are building a pile of currency thinking that gold will be available when you want it you may be in line for a life lesson called: "Read the BIG print."

(Archives, upper right side of screen.)

Rant over.

FOFOA said...

Hello Bron,

Since I see you here, I wanted to say that I am not ignoring you. I am withholding my response to your last reply because I may work it into a new post. I think our brief dialogue has drilled down to a good point that needs a bit of exposition. Don't want to give it away... so I won't. ;)

You write, "Actually, I wouldn't mind FOFOA speculating on the likelihood of Perth & Canadian mints (or refineries in general) surviving Freegold and/or what our role during and after would be."

I might just take you up on this. It's not often that someone offers their toes up to be stepped upon. It could take a little while though. It will certainly take some deep thought on my part, but if the outcome is good, do you think there might be an endorsement deal in it for me, something like Tiger Woods got with Nike? Doesn't have to be a currency deal. Barter is fine with me!

Sincerely,
FOFOA

Bron said...

I welcome your drill down. When I present an argument, it is always in the sense of a proposition rather than a dogmatic statement, even if it may come across the other way.

I seek out debate and challenge because I know I don't (no one has) have the ability to see all potential issues. Therefore I don't consider it toe stepping on stuff.

The issue of market meltdown/seize up may be seen as "out there" but I bring them to our internal scenario/forward planning discussions because these are important to many of our customers.

Isn't the problem with endorsements that the celebrity rarely uses the product the endorse? :)

radix46 said...

We have seen how the Euro architecture lends itself to a Freegold world, in respect to its gold reserves. However, how is the Euro to survive when the structure also creates such trade and market efficiency imbalances across its participating nation states?

How can the same interest rate be appropriate for Germany, Ireland, Spain and Greece at the same time? We have seen the massive damage that it has caused during the currency's infancy.

Will Freegold mitigate this somehow?

DP said...

Good morning, SS (et al).

I spent about 20 minutes earlier on, lovingly crafting a nice, lengthy and fairly detailed reply. Then Blogger lost it for me (again - I should have learnt by now to habitually write outside of Blogger then copy and paste in to post when ready... this is far from the first time this has happened to me! :-\ )

Anyway, the short version is I'm afraid what you'll have to go with now. Apologies if it's taken as my being "curt" by anyone... :-)

SS: DP,

So you buy the bars and then store them at home or do you use a private vault? What about goldline.co.uk? They will store allocated gold for clients.


I would, as a UK citizen, have a preference for sovereigns/half sovereigns, which I would take into my possession and then store them in whatever way I am comfortable - safe, under floorboards, sock drawer, safe deposit box, sealed inside a stud wall in your house somewhere, buried in a plant pot on the kitchen window sill, in a tub of cosmetic goo in the bathroom cabinet, in an ice tray in the freezer, whatever floats your boat. Somewhere you have touched them, and you can touch them again any time you might need or want to. Probably I would choose to spread them around different storage location options, to diversify my risk of theft. I would choose sovereigns because (a) they're UK legal tender and therefore do not attract capital gains tax, I would expect that to remain the case, (b) they're globally recognised so you can take them anywhere in the world and be able to exchange them, they're even the same diameter as a modern £1 coin so you can carry them discretely at the bottom of £1 coin holders in your pockets and luggage, below a couple of regular coins of course, (c) they're small so you won't have to worry about accepting such a massive pile of silver as your small change when you buy something... :) (No, we won't be having to accept silver as small change, we will have currency for that and in fact we will exchange gold for currency and then spend the currency on whatever it is we need to buy. But needing to hold as little currency as possible seems like a good thing, to me. Hence I would go for at least some half sovereigns for this reason. Also by the way the premiums seem to be generally smaller on halves for some reason, demand I assume.)

Moving on to goldline.co.uk, I had a look at their website and that is not an allocated arrangement. It also appears to have no reserve, they just say they will convert your paper gold/silver by buying it from you at the paper price and selling you delivered physical products from their stock at any time. This assumes they have stock when you wish to convert of course. Given that you are looking to buy now at the pre-Freegold prices, and they will likely have people climbing all over them to take any stock they have at almost any price when the time comes, I think you could find yourself low down their priority list when you need and want to take delivery, given that they are going to make a loss on satisfying you and they will make money satisfying new customers. This is just another private, fractionally (non?) reserved BB operation, to my mind.

That's my $0.00 - I hope something amongst it is useful to you.

ad said...

@radix

Here is a post by FOFOA which might help

radix46 said...

@ad,

Thanks for the link, but the post doesn't deal with the trade imbalances within the currency zone itself, which is the crux of my question.

How will the Euro survive (Freegold or not) when countries will be forced to leave due to unsustainable trade imbablances (within the Euro area) that cannot be rectified by anything other than fiscal adjustment, labour movement, cultural homogenisation etc? Germany has a massive internal (in the Euro area) surplus. Will Freegold allow Greece to compete on a level playing field with Germany's manufacturing might? I can't see it happening in my lifetime.

These things simply won't happen within the Euro area, not least because most of the people in Europe don't actually like each other very much and I mean the people, not the governments. This leaves a currency zone that is unable to adjust internally. I can't see how Freegold will change any of these 'real life' problems.

DP said...

@SS: Apologies, I have now identified GoldLine.co.uk's Allocated Account product on their website. Earlier I had only found their GoldSavers offering, which I mistakenly assumed must be what you were referring to. Very much my bad.

Yes, their Allocated Account ought to be... well, golden. If you can stomach the storage fees and you're OK with ending up having it all in 1kg or 12.5kg bars. That would be a lot of currency to have to take on hand in exchange when you want to buy something later. If you're taking 12.5kg bars, I hope you're planning on buying only some very big things in future! Perhaps the Isle of Wight or half of the Highlands? :~D

Pete said...

@ radix46

I haven't put much thought into this response, so apologies if it wastes your time.

The way I see it, FreeGold would simply enforce the fact that central banks cant print money without devaluing it against other countries currencies, and gold.

So, I assume that if they do, people will save more (ironically, the opposite effect of inflation), which is also not good.

I guess business as usual? Maybe trade imbalances will mean that less cars have to be produced by Germany to earn a living?

Paul said...

radix,

I am thinking along the same lines. as a dutch european I live in the context myself. It is hard to filter news from spin.
Would also appreciate thoughts about the stress caused by countries unnaturally chained to eachother. Is this like the goldstandard that was unsustainable like before WWII, or is this the forming of a long term political european union like the USA ?

Timingwise I am a follower of the economic confidence model presented by Martin Armstrong, but prefer some other economic conclusions than he presents at the moment, China will be key factor in all scenario's. I agree on that part, but I prefer Europe comming out on top at the end, mostly because I feel the rule of law would be better served over here. I could certainly miss and oversee some key factors there.
Hope might be blinding...

China is buying european (pigs) debt on scale, even under the table. and is dropping US debt. why ?
Germany doesn't want and can't back the euro by itself. China doesn't want to lose the market. China wants German technology it could not get before.
I see some interesting partnerhips forming.

I also imagine NATO imploding in the comming years, but it will take the younger generation of real-politicians to reach that conclusion. I don't see them yet.
Northern Europe is cultural adapted to the USA, they brought the welfare after WWII, it will take some time to get unadapted.
There is a EUR-USD war, but politicians over here are clueless about it. They still want their picture taken with Obama.

I think, at the end, key will be which economy will be best suited to get innovation running for the next phase without oil.

radix46 said...

Paul,
I like your analogy of the Euro being like an internal gold standard. Freegold greases the wheels of international commerce but does nothing to aid to address internal imbalances between people that are simply different. I see another mechanism being required to address this problem.

I can understand the big picture with regard to China, Oil, Freegold etc, but the devil is in the details.
If non-suited countries are forced together, there will be strife. Perhaps it has been determined that this strife can be contained and that the end (of Freegold) justifies the means. If that is the case, then perhaps we (in Europe) will simply have to get used to Chinese style totalitarianism as a sacrifice for a functioning monetary system.

In the end, though, this (the Euro) will fail, due to internal human pressures. People will not live under perpetual slavery and inequality, at some point it will blow up and it will be nasty. I could see a forced internal conjoining of countries in this manner leading to another European war.

Of course, there is no need for this to affect Freegold. Why does oil need the Euro? Why can't oil be transacted in revalued gold units? Perhaps the Euro is simply a mechanism for a transition period so that the world doesn't disintegrate during the prolonged death throes of the $IMFS and that the original sovereign currencies will be reinstated for those unable to live within the Euro system?

I suppose the outcome depends on the strength of the ideological fervour of the Marxists pursuing their political goals. War or national currencies.

Panelproli said...

A friend of mine working as a goldsmith in Hungary told me that it is very hard to get gold on the market (both local Hungarian market and “internationally”).
some other another (unrelated) person working as a Jeweler told me that he has the feeling that gold is drained from Hungary (and from the jewelery industry either).

thedeadfauvi said...

I very much appreciate the discussion about Freegold in Europe and I have a question.

Why shouldn’t European national currencies float around gold independently like the Scandinavian? Why do they need the ECB in Freegold? I really hope that the euro is only for the transition.

From what I can see the euro is becoming more and more hated on a daily basis in Germany.

And I also see more and more symptoms conditioning us for a currency reform after an anticipated inflation, which we already have (vegies, fruits, meat, energy AFAIS).

I don’t watch any teevee but I’ve seen a youtube video from ARD (Television channel)
where the reporter discussing financial crisis has shown an once of gold and while he explained some monetary aspects & history the conclusion was the outcome had to be gold whether the politicians have the “courage” or the crisis would “force” them. Our television is politically supervised and such a report is NOT uncontrolled!

Even the banks are no longer so much against gold. Mine has even arranged an appointment with a PM advisor for me. I haven’t seen him yet but I am curious to see what they “advise”J
All banks sell gold and there are about 100 online shops. To check best price one can bullion investor. de. Plenty of them accept international orders. I’ve heard of a dealer selling to China even. At my bullion dealer we’ve seen recently a group of people in their 70ties! For the time being premiums haven’t gone higher and there are no shortages.

ad said...

@radix

I think it answered the question. Isnt Greece wanting the privilege of being stupid as the recent video FOFOA posted describes?

In the post I linked above:

Now, in our imperfect world, we can borrow without being productive with the money we borrow. We can borrow for pure consumption!

This is one of the problems in the EU isnt it?

Under Freegold:

The interest was the productivity that the borrower added to the economy.

The price of borrowing money means keeping up with the average productivity of everyone else in a growing economy.


Are we not, as different people in one economy, governed by the dynamics you describe? We all use the same currency and our interest rate is set regardless of our capacity, productivity and skills.

Those of us who are productive earn more money than those who arent. I know that there are imbalances in how value is perceived i.e bankers and ceo remuneration vs everyone else for example, but generally those that dont work and add value do not get paid.

Paul said...

Europe fought for 500 years without economic cooperation. the whole point intended of forming EU was to prevent these future wars among eachother. everebody is better off in the end that way.

I think this realisation is strong and imbedded in the thoughts of this generation. I hope it will be enough. And I would not really know If I am correct there. I hope so, I do realise some thoughts are stronger than generations.

I totally agree there will always be a price to pay. no debt will vanish away by itself.
This price could be the big European split up and these wars comming back, could also be the loss of democracies as we know them through the introduction of more Chinese style ownermanship and government.
But I hope to see the further forming of a fiscal/political union the way the states did 200 years ago. It might be our only chance.
Through the forming of a better (green)union we could reform europe to lead the future. I see the technology and possiblility there. It is the mentality that is still lacking. people first have to understand their possiblities.

It is hard to see where this will lead as it is hard to see the people make the change.

What will happen to euro when EU members (partalllly) default on their debts ? Will that mean death for euro ? I have a hard time grabbing the whole picture ...

dwarvesden said...

Another link from the London Conference, presentation entitled: "Precious Metals as Money"

Apparently there is a Bill before the Mexican Congress to monetize silver.

I it passes you won't need anyone else holding you PM's for ya, cause gold would be next.

http://www.plata.com.mx/mplata/documentos/images/Hugo_Salinas_Price_London_2011.pdf

I wish I knew how to transport a link to this blog site, so you could just hit it

radix46 said...

@ad,

you wrote:
"but generally those that dont work and add value do not get paid."

I agree. However, this is only practical in a perfectly free market.

What if the jobs are in Bulgaria, but those unemployed are uneducated, unskilled people with no savings who speak only English, living in an inner city used only to receiving hand outs from the government? These people will not move to Bulgaria. Simple as that. I know educated, resourceful people that would not make this move due to cultural/family issues.

In reality, they will lobby the government for handouts. The government will lie, swindle and generally do what governments do and facilitate this inequality which will eventually escalate and manifest in the same old problems.

I still don't see how this monetary mechanism can even out all of these non-monetary issues, deeply ingrained into peoples' behaviour, expectations and culture.

ad said...

@radix

What an opportunity and privilege that one can go work in another country without having to have work permits, passports, harassment etc.

I have met Chinese and Somalian people in South Africa who speak no or a little English, running restaurants and small businesses or just working. How did they find premises, negotiate, advertise, open a bank account as well as getting a work permit without English?

My country is not a welfare state, you add value or you starve, simple as that. This is the real world, and thats how it works unfortunately.

Yes the US and Europe has a high standard of living based very much on the plunder of others resources, first by the gun and then by the $IMF system. Yes the people will revolt when/if that privilege goes but will get used to it in the end, no choice.

@dwarvesden
Here you go...

radix46 said...

@ad,
"Yes the US and Europe has a high standard of living based very much on the plunder of others resources, first by the gun and then by the $IMF system. Yes the people will revolt when/if that privilege goes but will get used to it in the end, no choice."

I am 100% in agreement with you here.
If people had the integrity to stand up to immoral governments and to not accept their lies, then this plunder would not have been allowed and this dependent underclass could not have formed.

But people here are intellectually lazy, morally bankrupt and shortly to be financially bankrupt.

Just because something should be a certain way, does not make it so.

In the end, the transition will be very painful and potentially bloody.

Perhaps Freegold will eventually lead to a much needed dismantling of the state too.

DP said...

@thedeadfauvi: Even the banks are no longer so much against gold. Mine has even arranged an appointment with a PM advisor for me. I haven’t seen him yet but I am curious to see what they “advise”

Fauvi, I for one look forward to hearing what they advise you to do...

DP said...

radix46: Perhaps Freegold will eventually lead to a much needed dismantling of the state too.

+1 and hallelujah brother!

But to my mind, you can omit the "Perhaps" from the start, maybe also the "eventually" in the middle. :)

Free gold? Yes please! said...

Hello,

I can't believe how lucky I am to have discovered this site! FOFOA, you are a giant!! The reader comments are also highly informative!

After absorbing as many FOFOA posts (and reader comments) as my brain can hold, I do have a quick question:

Over the past month I have started purchasing small gold bars (1 to 5 grams). Is it better/safer to make small purchases each month (dollar cost averaging) or make larger purchases a couple times of year (after a gold price drop)? I'm not smart enough to time the market and I'm afraid that right after I make a large gold purchase, the market will tank...

If any of you have a suggestion I would greatly appreciate it!!

enough said...

@ freegold? I think the answer to your question by the majority here would be to buy the minimum you feel comfotable owning as soon as possible for tomorrow it may not be available. That the $50 to $100 possible price decline is not worth taking the chance of being locked out. I now have 30% of all liquid net worth in physical gold bullion. Thats my minimum comfort level...cheers, Enough

thedeadfauvi said...

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phil said...

Freegold Yes Please

Take a look at Kitco. Its a great way to "dollar cost average". You can purchase a gram at a time, and when you have a full oz, you can have them send you a coin.

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