Two years ago, Martijn went through roughly 1,200 days-worth of the regular USAGOLD discussion forum and compiled (most of *) the intermittent comments by ANOTHER and FOA, along with a few others, into a 436 page pdf. That pdf is available for download on Scribd here.
But lately, the discussion forum archive on the USAGOLD website appears to be MIA. ANOTHER (THOUGHTS!) and The Gold Trail are still there, but not the regular forum. All we have at the moment is Martijn's pdf which is not covered when JR searches for applicable quotes on Google.
So I put those 436 pages of comments into two (search engine-friendly) pages linked in the side bar right under FOA. Blogger couldn't handle 436 pages in one post, but it was fine with 218 (my new post length limit ;). That's why I had to split it into A/FOA Discussion Forums 1 and 2.
There are some great posts in these archives. For example, my 2010 post FOA on Hyperinflation came entirely from the discussion forum, as did FOA to Martin Armstrong. Here's another good teaser for what you'll find in these archives. It's a post I happened across just the other day when Michael H posted it somewhere else (thx Michael H!):
FOA (10/14/99; 9:20:06MDT - Msg ID:16318)
Comment
Strad Master (10/12/99; 23:48:43MDT - Msg ID:16216)
---- My first question, though, is this: If gold should rise to, say, $30,000 per oz as FOA predicts, how, at that time could one's gold holdings be unwound? For what? $30,000 in paper money? Or would the actual gold bullion become the only negotiable currency? If so, what good would a one oz. bullion coin be? It can't be cut apart into small pieces with a pair of garden shears. Beyond that, Goldbugs are notorious for holding onto their physical holdings long past the time of maximum return. ----
(((NOTE: Strand: I find it interesting that goldbugs have become "notorious" for bad moves when their present universe has only existed some 20 years? and the lady has not sang the song yet?)))
You continue:
---In fact, I'm sure that some older people who post at this forum have held gold through several (albeit relatively minor by comparison) upmoves in gold only to kick themselves for not having sold at or near the top.----
(((Note: I know people that have been buying through this entire span of time! True, they have timed their buying on a cost averaging basis, but that concept has made them almost even today. In the believe it or not department. Ask MK about "cost averaging" using a fixed dollar amount. Then I suggest you see the show "Rollover" with Jane Fonda. You would not believe how true it is!)))
Hello Strad,
I'm going to ramble on a bit, so I hope this helps your perspective.
Back in the early oil days I was very close to some of the largest oil men in the country. When in Texas we would visit at the country club and shared a lot of our perceptions. Usually over a poker table. Looking back, I find their (and mine) viewpoints had much in common with the gold outlook today.
When oil went from around $3.00 to $5.00 everyone that had local reserves thought they had made a fortune. You wouldn't believe how many sold off not only their storage barrels but their best (lowest cost production) reserves for cash. The feeling was that oil had just zoomed in price and would quickly go back down. The percentage gain on those leveraged assets was simply huge.
Then oil went up to around $8.00! Good god, we were so stupid to have sold. What a bunch of buying fools out there. Those idiots buying $8 are going to get killed. Everybody knows the major producers can pump for $1.00. Oh well, it just a political thing.
When oil hit $15, some of them knew they had missed out on a train to $20. But they still thought oil would one day return to around $5.00. So as not to miss out completely many of the early sellers jumped on the Natural Gas wagon, using everything they had gained from their first sale. At first this new move made money, big time. Then something funny happened, oil soared and later returned to a more normal $18 to $25 range, but gas plunged from the higher supplies. The "oil boys" turned "gas boys" lost it all. Even into today, gas has never returned.
Truly, they used the silver vs gold concept, thinking the more leveraged natural gas would out run oil and regain their fortunes. It made sense as gas (like silver) was more industrially useful and "CHEAPER". You might even say it was the "poor man's oil" (smile)! Also: Just like silver, gas proved to exist in much larger amounts that the "statistics" demonstrated. As its price "coat tailed" oil, it brought out the massive increase in production that wasn't needed as long as oil was available. Incredibly, this was the exact same story for silver. All the stories about people buying silver as gold went up saw them sell the silver and keep the gold because people just didn't need both of them. The same will happen when gold runs this time. People will keep the high unit cost gold in their vaults, use the digital currencies for trade and sell the silver as it floods out of the woodwork.
Onward:
You see, oil in the early 70s is like seeing the prevalent gold concept today. The perception was that oil could never go up from the $1.00 production range into the $20s (just an unimaginable increase to those in the business) because such a price would flood the world with production. It was thought that there was so much unfound oil in the world that every home owner would have an oil drilling rig in their back yard at $20+. Just as $10,000 gold will have people taking gold from sea water.
Here is where reality gets in the way of concept based on perceived conditions. Yes, the $20 and $30 oil did bring out the rigs and production soared. But, even at the higher prices, the world found uses for this great new gusher of oil. The same human traits that dictate that "you can never have enough money in the bank" also said "we can never use too much oil"! If all the oil reserves in the world could produce at $2.00 then the price would return to $2 plus a profit. But, we want and use all oil produced from fields that pump from $2 cost on up to $30. Gold and oil are not like any other commodity, because under the right circumstances, people find both of their qualities useful and can never get enough of them at any price. It seems we accumulate assets until we die?!
The "paper boys" try and paint a picture of gold like "old oil men" looked at values "back then". They were wrong and so are the "paper boys" today. The Smiths and Arnolds of the world try to convince us that the supply of gold is never used up and creates a glut as it grows. They say that unlike oil that is consumed, gold holdings have become a stockpile that refining cannot use up. I bet these guys would have also sold their oil reserves in the mid 70s also.
Where they miss the boat is in their assumption that people will get enough gold. Not if it's money, they won't! People do consume money just like oil, rather it's just in the form of "savings consumption". Gold, just like money has an "unlimited demand". Again, have you ever seen anyone that said "I have too much money and have no more use for it". "No, don't give me any more of that cash, I've got a glut of it now, go away"! Yea, right!
Often, we read where people say, "oh what am I to do with all this gold if it hits, $30,000?".
Funny how Bill Gates never says "what am I to do with all these MS shares". Well, you too will act like anyone with too much cash or assets, just stash it away until you need to spend it. The old "what will I do with all this high priced gold I can't get change for" logic just doesn't compute when dealing in reality? Ever see someone in a flea market rolling around a cart full of $100 bills,,,and frantically trying to unload it because it buys so much and they can't get change? Help me out here, am I not seeing something?
I'm afraid that even the very poorest of people have a better grasp of spending and saving value than some of the "big time investors" present about gold. (I'm talking about the brokers, Strand)
Onward:
Anyway: The amounts of gold in vaults today is nowhere near enough to represent the only circulating world money. It would have to be priced at $++++++ to do that. So, if mine production can continue, the world will take any and all they can produce. Be it 3,000 ton a year or 10,000 a year because the demand for money (even a parallel supplement money) is unlimited. Personally, I would take all of it (smile) and let the rest of you keep the paper.
The reality of this is that people hold cash in banks as it is lent out and earns interest. If no one lent their cash and just saved it (like gold) to spend in later years, it would take an enormous amount of paper money. This is why the US goes to great lengths to identify gold to the public as a commodity, not money. They want you to know that it must be sold as soon as it goes up. Trade it, don't save it. Most Western investors have bought into this and are going to pay dearly because of it. Again money demand is "unlimited". The same will be true for gold. As people begin to buy gold as a currency supplement, to be spent "as needed", the price could reach enormous levels.....and be seen just like oil......a useful asset you just can't get enough of.
On the road... ...FOA
Enjoy the archive!
Sincerely,
FOFOA
* I will note that I think Martijn missed a few comments. One that stands out is FOA's Brown's Bottom comment which I inserted into my copy. So I don't know how many others might be missing. Hopefully USAGOLD will put the full archive back online soon…
UPDATE:
A/FOA Discussion Forum 1
A/FOA Discussion Forum 2
220 comments:
«Oldest ‹Older 201 – 220 of 220"Do you still disagree with the statement given these changes?"
Yes, because I'm running various iterations of my toy model and it doesn't produce such a flow. I can produce a situation where net overall the buying and selling of clients is net and banks are net, but still result in a reporting banks discrepancy with no x2 flow between reporting and non-reporting.
Note also that just because overall BBs are net doesn't mean that all individual BBs are net.
My model isn't perfect and I want to refine it, but I think the interaction of 56 banks trading with each other is more complex than you realise.
I think the idea the BBs are naked short massive amounts is unrealistic, but I think "offset by derivatives in other correlated markets" is pretty close to unrealistic as well.
I'm going to have to leave this here and maybe I'll get time over Christmas to look at my toy model and come to understand the dynamics of 56 banks better and get back to you.
I the meantime, letting Joe think this is a 100% resolved issue, and then him misapplying it to say there is 10 times more physical demand than physical supply is not right. I can see an incorrect meme starting from that.
I hate stats, they are without a doubt the biggest lie ever invented. BTW I do not have a link to that!!
Hello Bron,
I think you are missing the point. I understand you are short on time, but perhaps you could provide a sample iteration of this, in the same format as the one above:
"Yes, because I'm running various iterations of my toy model and it doesn't produce such a flow. I can produce a situation where net overall the buying and selling of clients is net and banks are net, but still result in a reporting banks discrepancy with no x2 flow between reporting and non-reporting."
Also, I never claimed that the LBMA survey was showing "10 times more physical demand than physical supply". First of all it's not physical demand, it's paper "foreign exchange" demand for gold held and traded as a currency, and in the case of the survey it was only one quarter. I'm guessing that the next quarter demand was probably flat and the quarter after that a lot of that paper was probably unwound/sold. So it's not constant demand. It's that demand *shocks* in both directions are being absorbed more so by paper expansion/contraction than by simply letting the price take care of it. Like a shock absorber.
I don't think you are accounting for this "FOREX currency use" of unallocated gold which could easily overwhelm the gold market at current prices without such a shock absorber.
Sincerely,
FOFOA
BTW, Bron, I just let GBIJoe know about this thread so that he can come read it and see for himself that this issue is not resolved between you and me. I told him that in my earlier email anyway, but at least this will reassure him that we are still not in agreement! ;D
Regarding complexity, you wrote: "I think the interaction of 56 banks trading with each other is more complex than you realise."
The LBMA asked for reporting down to the individual trade, and the survey even reported the total number of trades (385,852) broken out into purchases (184,140) and sales (201,713). The daily average number of trades was 6,125 over 63 trading days among 36 reporting members. So each member reported, on average, 170 gold trades per day, averaging 81 purchases and 89 sales per day.
We can even calculate the average size of each transaction, although it will be off a little due to the interbank halving. The average individual sales trade was $38.4M+. And the average purchase trade was $40.3M+, or a little less than one tonne per trade.
This is the kind of complexity that I'm taking into account that I don't think your model is. Remember what I wrote in one of our emails last July?…
"The key difference between your random iterations and mine is that you are keeping the magnitude of complexity the same with each iteration. I was comparing different magnitudes of complexity. Whether we randomize the individual transactions or the choice of reporting banks doesn’t make a big difference because the point of my exercise was that the more complex the model, the lower the discrepancy.
You picked a specific level of complexity – 3,136 transactions – and then you reiterated that model and found that the average discrepancy (for your model) was .11% and the maximum was 2.96%.
What I did was to simply run 1 iteration on 3 different models of gradually increasing complexity. The fact that I randomized the reporting banks and you randomized the size of the individual trades is inconsequential. It’s also inconsequential whether we had 75% reporting or 64% reporting.
Your original model had 9 trades, so my three levels of increasing complexity were 63 trades, 126 trades and 252 trades. What we saw from a single iteration of each level of magnitude was this:
9 trades – 10%
63 trades – 5.6%
126 trades – 2.7%
252 trades – 1.69%
I’m calculating the percent a little different than you. I’m saying there X% more sales than purchases, and you’re saying there are X% less purchases than sales. That’s why you came up with 4.35% on the LBMA survey and I came up with 4.5%. But that’s not a big deal.
So your new model has a complexity of 3,136 trades as compared to my most complex model with 252 trades. What we find is that we’d expect a single iteration to yield less than 1%, or maybe around 1%. So it looks like this:
9 trades – 10%
63 trades – 5.6%
126 trades – 2.7%
252 trades – 1.69%
3,136 trades – 1%
The LBMA survey reported a total of 385,852 trades.
If you want to try skewing the reporting banks toward sales, that’s fine. But you need to run comparisons of increasing magnitude, not just iterations of the same magnitude. I’ll bet if you keep it realistic we’ll see the same results… it’ll still trend toward zero too quickly."
Perhaps you could expand on how you are taking into account more complexity than I realize.
Sincerely,
FOFOA
"So your new model has a complexity of 3,136 trades ... The LBMA survey reported a total of 385,852 trades."
That statement tells me you do not understand how the LBMA survey was constructed. If every bank reported the LBMA could only have got a maximum of 3,136 data points. The LBMA was not given 385,852 individual trades.
If a bank had sold 1oz to 100 clients and covered that with 10oz purchase from 10 BBs it would have reported this to the LBMA:
Sell to Clients - 100oz
Buy from Clients - 0oz
Sell to BBs - 0oz
Buy from BBs - 100oz
It doesn't matter how many trades or clients it did, it will only report 4 data points to the LBMA.
BTW, I had not thought about this "So each member reported, on average, 170 gold trades per day, averaging 81 purchases and 89 sales per day."
170 trades per day is impossible, that makes no sense to me when I look at how many individual trades we do with bullion banks per day.
Those "trade" numbers must, at a minimum, be net settlement with a counterparty. For example, if a BB bought 5 times from client A and sold 6 times to client A on one day, that was reported as 1 sale trade.
On average each BB having net settlements with 170 of its clients/other BBs each day makes more sense.
I am going to have to write to the LBMA about that survey.
Hello Bron,
Of course the banks didn't report each trade to the LBMA. The banks essentially performed their own internal survey and then reported the aggregate numbers to the LBMA.
"That statement tells me you do not understand how the LBMA survey was constructed."
Um, okay. If you say so. Your statements likewise tell me that you do not understand the points I'm making. So there! ;D
The point is that 385,852 is how many trades (or net daily settlements with individual counterparties as you pointed out) are reflected in those aggregate numbers we see on the survey. Each trade (or net settlement) is presumably the result of some counterparty's independent decision(s) and subsequent action(s). So the coordination of actions essentially rests at the (resolution) level of the trade (net daily settlement per counterparty), which was, on average, around $40 million.
The point of running iterations at increasing levels of complexity (increasing numbers of presumably random trades/daily counterparties) was to show you that the more presumably random trades you aggregate, the lower the expected discrepancy (deviation) between purchases and sales after applying the statistical methodology of the survey.
As I showed, at 9 random trades, we found a 10% discrepancy between purchases and sales. But as we increase the number of random trades, we quickly drop toward zero. Even at 3,136 trades we were close to 1% discrepancy on average. In fact the largest discrepancy/deviation your model produced after 100 iterations was 2.96% and the standard deviation was 1.21%. This is compared to 4.35% in the actual survey.
Can you see a trend forming here?
9 trades – 10%
63 trades – 5.6%
126 trades – 2.7%
252 trades – 1.69%
3,136 trades – 1.21%
Does this next one fit the trend or stand out?
385,852 trades – 4.35%
There's a point here which you don't seem to understand.
The point of looking at it this way is to help us determine if the 4.35% discrepancy/deviation found in the actual survey is statistically significant or insignificant. Clearly it is significant, and therefore it requires an explanation beyond the "halving methodology" under which the survey was published. We are well past this point, but you don't seem to understand that, because you keep coming back to your model trying to tweak it, make it more complex, or reiterate it enough times to get an outcome so rare that it is more than three standard deviations, a 4.35% discrepancy. You'll probably have to run more than 1,000 iterations to get just one of those in your simple model with only 3,136 random trades.
Cont…
2/2
As I say, each reporting LBMA member essentially conducted its own internal survey of, on average, apparently, 170 "trades" per day. If those trades were "random" (as in not coordinated/one-directional) then, looking at my "trend" above, we could probably expect random discrepancy/deviation between purchases and sales from each reporting member after applying the "halving methodology" of the survey on the order of about 2% in any given day. When we (as a BB conducting our own internal "survey") aggregate 63 presumably random days, we now have an aggregate of 10,710 data points. So, after applying the final survey methodology, we'd expect to see, on average, a deviation of below 1.21% between purchase and sales.
And then, as the LBMA aggregating these numbers from 36 separate reporting members, we would expect (presuming randomness/insignificance) a discrepancy of 1% or less given the aggregate number contains data points from 395,852 presumably random "trades" *after applying the "halving methodology"*.
If it's not 1% or less (which it wasn't), then there must be another explanation."
As I said, Bron, I thought we were well past this point and yet you keep coming back to your model to show how we can get to such a large discrepancy as we saw in the actual survey. Fine, you keep playing with your toy model and I'll keep pointing out that in every iteration where you show a high discrepancy between purchases and sales, there must be one of three explanations:
1. There must be a net flow of twice the magnitude of the discrepancy between reporting and non-reporting members…
or
2. There must be a net-change in the volume of paper gold equal to or greater than the magnitude of the discrepancy during the reporting period…
or
3. A combination of the two.
You seem to be saying, "no, no, there must be another explanation. You just don't understand how complex these bullion banks are. I do, because I'm a bullion professional who has direct dealings with them, and believe me, they are complex!"
Fine. Let's see your alternative explanation. The only one I can infer so far from your comments is perhaps:
4. A reckless abandon when reporting numbers (i.e., bogus numbers) which would render the entire survey meaningless.
I suppose that is valid alternative explanation, but I thought we were working on the assumption that this is not the case. If so, I eagerly await your new, alternative explanation (as well as that sample iteration that doesn't produce a flow).
Sincerely,
FOFOA
We've been over this in our previous email exchange.
I am not modelling 3,136 trades, which is the point you do not get. You cannot go any further in terms of data points. The "trend forming" was about getting more accurate models that reflects the survey, not about modelling more underlying trades.
It does not matter if we could construct a model with 300,000 underlying trades or 900,000 trades, they only aggregate up to a maximum of 3136 data points upon which the LBMA methodology is applied and that is as far as you can model.
What I am trying to do is to model various scenarios with those 3136 data points - eg
1) totally random, which my model is currently doing
2) asymmetric BBs, which I haven't even started to create scenarios for in my model
3) volume of client trading to BB trading, ie how much speculative trade do they do off client flow?
4) for the above, either zero net position, or some long or short position, for each BB
It is only by exploring these scenarios that we can determine how much the LBMA methodology may distort the underlying buy-sell difference reality.
Before I want to come to any conclusions about the results of the LBMA survey I want to understand how the methodology works. You don't to understand that we are not “well past this point” and I think we are talking at cross purposes.
“each reporting LBMA member essentially conducted its own internal survey” – just to check, when saying “survey” do you mean “sampled”?
“There must be a net flow of twice the magnitude of the discrepancy between reporting and non-reporting members” – I don’t think the maths of Client A to Non-Reporting to Reporting to Client B work out as simply as this when you are talking about 3136 interrelationships between 56 banks
BTW, I had far too little client volume vs BB-to-BB volume. Tweaking the model gives an average discrepancy of -0.15% with a standard deviation of 5.14% over 1000 iterations. While that could explain away the LBMA result, I will not accept it and continue to refine my understanding. You'll just have to wait for me to do that.
Sounds good, Bron! I think I've made my case for any prying eyes to decide for themselves and, like I said, I (we) eagerly await your studied conclusions and your Occam's-worthy explanation for the discrepancy between purchases and sales!
Sincerely,
FOFOA
Hey FOFOA and Bron
My thoughts presented as scribbled down while reading through the survey and discussion.
The discrepancy between buying and selling as noted is only 4.5%. Since only 36 of the 56 banks responded, and the likelihood exists that banks doing one thing ( buying) are less likely to report than those doing the opposite (selling) this is a small enough discrepancy to be explained by the method of the survey.
The observation of “So in the reality of Bron's model they must be short 15,150 tonnes vis-à-vis their clients, and long those same 15,150 tonnes vis-à-vis the 20 non-reporting banks.” pales in significance to the volumes reported, hence not that crazy to assume as correct for those 20 banks.
It is likely, and in agreement with our thesis, that overall the banking industry would have a net short position vis-a-vis their clients ito paper gold. However one cannot determine in a meaningful way what the size of that net position is by using the LBMA survey due to their methodology.
“Each trade is assumed to be random as are the choice of non-reporting banks, otherwise we have an "unusual event" that needs explaining, but Bron is not arguing for that and neither am I.”
I am though. ^^
“1. My explanation – the large discrepancy means the BBs were expanding the paper gold arena, probably due to demand from the currency market.”
I agree this is probable, but do not think we can use the survey to deduce numbers.
“The with a sample of 56 and the commercial sensitivities involved, it is highly likely that there is some skew in who did not report.”
I see I agree with Bron here.
“Finally, your conclusion is too dogmatic, I think it is more likely that “to recap, we have three possibilities, ALL of which is true” – all of them are factors, to which I would add a fourth being that the banks do have some long or short position at the end of Q1 2011. “
Again I agree with Bron.
“Since the survey results are most definitely statistically significant, we now need an explanation and, as luck would have it, we have two, yours and mine. Let’s call your explanation “asymmetric reporting” and we’ll call mine “a net selling trend during Q1 2011” or just “a trend” for short. “
See above, I think both are factors. It's not either or.
“The point of running iterations at increasing levels of complexity (increasing numbers of presumably random trades/daily counterparties) was to show you that the more presumably random trades you aggregate, the lower the expected discrepancy (deviation) between purchases and sales after applying the statistical methodology of the survey.”
Interestingly here you do have a point. In effect there more trades there are, the more likely it is that imbalances between different bullion banks would be settled. Given the volume of trade one would expect this statistical effect to be minimal, but not necessarily negligible, so perhaps also a contributing factor.
“'If it's not 1% or less (which it wasn't), then there must be another explanation."”
Or it is simply one factor that needs to be taken into account. ;)
“What I am trying to do is to model various scenarios with those 3136 data points.”
Sure, the maximum number of data points available, but it does not account for inter-temporal clearing, as FOFOA notes.
I have read the rest of the discussion, and my position remains unchanged as it is stated above.
Hope my 2 cents is worth something.
Regards
TF
Hello Motley Fool,
You wrote: "The discrepancy between buying and selling as noted is only 4.5%. Since only 36 of the 56 banks responded, and the likelihood exists that banks doing one thing ( buying) are less likely to report than those doing the opposite (selling) this is a small enough discrepancy to be explained by the method of the survey."
If you are correct in this statement, then there is a net-flow of 15,150 tonnes from the seller's side to the buyer's side. You say that's a "small enough discrepancy". I say it's not. It's way too large to be probable. As you say, the banks doing the buying are the ones not reporting. So who did they buy 15,150 tonnes from? Who are their clients. If their clients are mines and scrap sellers, then maybe 1/15th of that short position could be physical and the rest would have to be a paper short position or massive forward selling or something. It's simply too large to be reasonable, therefore I say it's not a small enough discrepancy to be explained in this way.
You wrote: "The observation of “So in the reality of Bron's model they must be short 15,150 tonnes vis-à-vis their clients, and long those same 15,150 tonnes vis-à-vis the 20 non-reporting banks.” pales in significance to the volumes reported, hence not that crazy to assume as correct for those 20 banks."
That number would have to be the net sales from sell side (non-reporting) clients during one quarter so, yeah, it actually is crazy. That would mean clients (not bullion banks) were selling "gold" at a rate of 60,000 tonnes per year during that quarter. The idea is utterly illogical and vanishingly improbable, aka crazy.
You wrote: "It is likely, and in agreement with our thesis, that overall the banking industry would have a net short position vis-a-vis their clients ito paper gold. However one cannot determine in a meaningful way what the size of that net position is by using the LBMA survey due to their methodology."
This is a different explanation than your previous paragraph, and it really gets to the crux of the debate. Do the banks "have a net short position vis-a-vis their clients ito paper gold"? In your previous paragraph you reference the "asymmetric reporting" explanation in which it would be the clients, not the banks, with the short position. More specifically, the clients of the non-reporting banks in aggregate.
In this paragraph you are referencing my explanation that the banks, in fact, must have put on a large short position vis-à-vis their clients during that quarter. And if that's the case, we can, indeed, determine in a meaningful way the size of the change in that net position during that quarter using the survey.
The survey only shows the LBMA portion of the overall gold market. So it's perfectly reasonable to imagine a short position within the survey data that is offset in other parts of the gold market. Unfortunately the rest of the gold market only big enough to offset a small fraction of a short position of this magnitude. So we can disregard this notion of "short within the LBMA but flat within the overall gold market" for the purpose of determining other explanations, which is basically what Bron is doing by assuming the banks are roughly flat within the LBMA portion of the gold market in his model.
Cont…
2/5
You wrote: "“Each trade is assumed to be random as are the choice of non-reporting banks, otherwise we have an "unusual event" that needs explaining, but Bron is not arguing for that and neither am I.”
I am though. ^^"
I guess you must not have understood the context of that statement which I wrote on July 5th back at the beginning of this discussion with Bron. The "unusual event" in that statement was "asymmetric reporting" which Bron was not arguing for at that time. He was still arguing for "statistical insignificance" which is why I wrote that neither of us was arguing for the "unusual event". Here's the full context of that statement from July 5th:
"The amount of evidence required to accept that an event is unlikely to have arisen by chance is known as the significance level or critical p-value… the p-value is the probability of observing data at least as extreme as that observed, given that the null hypothesis is true. If the obtained p-value is small then it can be said that either the null hypothesis is false or an unusual event has occurred."
I am not equipped to calculate the actual p-value for the LBMA survey, but I can show that the survey results are so far outside of the bounds that either Bron's null hypothesis is false or an "unusual event" has occurred.
In this case, the "unusual event" would be what I just described in that the banks doing most of the selling reported their trades to the LBMA while the banks doing the buying declined. If that didn't happen, then Bron's "null hypothesis" is false. I don't think that happened and I do think the null hypothesis is false. I think my explanation at the top of this post is far more logical than the "unusual event" required to keep Bron's hypothesis true."
So you see, we still have only three possible explanations, confusing term-usage notwithstanding. "Bron's null hypothesis" in the above quote referred to his "statistical insignificance" explanation at that time, the "unusual event" later became "asymmetric reporting" (which requires the utterly illogical and vanishingly improbable magnitude of net flow which I mentioned above), and the third option is that both "Bron's null hypothesis is false" and an "unusual event" did not occur. That third option is my explanation that the larger sales number in the survey can be most simply explained by more sales than purchases occurring during the period of the survey.
You wrote: "“1. My explanation – the large discrepancy means the BBs were expanding the paper gold arena, probably due to demand from the currency market.”
I agree this is probable, but do not think we can use the survey to deduce numbers."
Sure we can. Here, I'll show you using Bron's sample iteration from his model above. Remember, the first part is the reporting members. That's the only part we can see in the survey. So the second two parts constitute "that which we can't see" in the real world of the LBMA:
Cont…
3/5
Reporting Banks Sells 5780t
Reporting Banks Buys 5627t
Reporting Banks Discrepancy 153t short
Non-Reporting Banks Sells 3096t
Non-Reporting Banks Buys 3232t
Non-Reporting Banks Discrepancy 136t long
All Banks Sells 8876t
All Banks Buys 8859t
All Banks Discrepancy 17t short
In Bron's explanation, he wants to keep the "All Banks Discrepancy" (aka the net short position of the BBs within the LBMA portion of the gold market) flat, or close enough to zero that the total discrepancy is small enough that it could be hedged elsewhere within the gold market.
But in my explanation, there's no reason to assume that the non-reporting banks are much different than the reporting banks. So let's look at two possible assumptions under my explanation. The first is that the non-reporting banks are just as net-short as the reporting banks. And then we can also imagine that the non-reporting banks are net flat, or anywhere in between for that matter. And let's see if the "halving methodology" distorts what we see in the survey. (Hint: It doesn't!!)
Here's Bron's basic model which shows how the "halving methodology" affects the outcome of the survey. The BB trades with other BBs are divided by two, but the BB trades with clients are not. In my explanation the reporting banks have a net short position vis-à-vis their clients, not vis-à-vis other banks. So the halving of the interbank transactions does nothing to the overall net position. In fact, the net position shown on the survey is precisely correct for the reporting banks under my scenario. The survey methodology has zero impact!
Using Bron's sample survey numbers above…
Reporting Banks Sells 5780t
Reporting Banks Buys 5627t
Reporting Banks Discrepancy 153t short
…I made the banks flat vis-à-vis each other and applied the 153t short position solely to their trades with clients. It works out like this:
Reporting Banks Sell to other Banks 2784t
Reporting Banks Sell to their Clients 2996t
Reporting Banks Buy from other Banks 2784t
Reporting Banks Buy from their Clients 2843t
Reporting Banks Discrepancy 153t short
Notice that when we divide the interbank trades by 2, the net position remains 153t short. It is unaffected. Here I plugged those numbers into Bron's simple model to show how it looks. So you can see that the actual total discrepancy, under this scenario, would be the same magnitude or greater than the discrepancy reported in the survey just as I said. And, in fact, under this scenario, we can not only deduce the real discrepancy for the reporting banks, we know it precisely because it's exactly what is on the survey.
Cont…
4/5
You wrote: "“The with a sample of 56 and the commercial sensitivities involved, it is highly likely that there is some skew in who did not report.”
I see I agree with Bron here."
So do I. So what? I just accounted for that in the last section when I said we don’t know the net position of the non-reporting members. Only that of the reporting members under my scenario. And if the net position of the non-reporting members is in the opposite direction (rather than just being of a different magnitude in the same direction), then it represents a directional flow. So we're back to explaining that utterly illogical and vanishingly improbable flow magnitude.
Of course there could be a combination of explanations here, but to make the magnitude of the flow logical and probable still leaves a huge discrepancy to my explanation.
You wrote: "“Finally, your conclusion is too dogmatic, I think it is more likely that “to recap, we have three possibilities, ALL of which is true” – all of them are factors, to which I would add a fourth being that the banks do have some long or short position at the end of Q1 2011. “
Again I agree with Bron."
Again, so do I. And again, so what? As I said in just the last paragraph, we can make the flow logical and probable and it comes out to about 500t because the flow is found in the interbank trades and therefore was halved. So a quarterly flow of 1,000t which would show up as 500t is about the maximum. That's assuming the entire global mining and scrap supply flowed through the LBMA.
You wrote: "“Since the survey results are most definitely statistically significant, we now need an explanation and, as luck would have it, we have two, yours and mine. Let’s call your explanation “asymmetric reporting” and we’ll call mine “a net selling trend during Q1 2011” or just “a trend” for short. “
See above, I think both are factors. It's not either or."
Correct, but I did estimate logical and probable maximums for "statistical insignificance" and "asymmetric reporting" which left about 6,325 tonnes of the 7,575 tonne discrepancy to my "net selling trend" explanation.
You wrote: " “The point of running iterations at increasing levels of complexity (increasing numbers of presumably random trades/daily counterparties) was to show you that the more presumably random trades you aggregate, the lower the expected discrepancy (deviation) between purchases and sales after applying the statistical methodology of the survey.”
Interestingly here you do have a point. In effect there more trades there are, the more likely it is that imbalances between different bullion banks would be settled. Given the volume of trade one would expect this statistical effect to be minimal, but not necessarily negligible, so perhaps also a contributing factor."
Right, and I am making a reasonable (and I should add, generous) allowance of about 10% of the discrepancy as possibly a contributing factor. But I should also note that this factor could be in either direction, so we should really call it a statistical margin of error of plus or minus 10% in the discrepancy between purchases and sales.
Cont…
5/5
You wrote: "“'If it's not 1% or less (which it wasn't), then there must be another explanation."”
Or it is simply one factor that needs to be taken into account. ;)"
Huh? I don't understand. Can you give me an example of a factor that I haven't considered? For the record, the "factors" I have considered are net sales, net flow and completely bogus numbers. The numbers could be bogus, but I'm operating under the assumption that they are not.
In one of his comments Bron seemed to be on a fishing expedition for "other factors" like errors in reporting (aka widespread bogus numbers). In his off-the-cuff example he referenced swaps. Here's what he wrote:
Bron: "For example, head of precious metals passes on LBAM request to IS guy who has a lot on their plate, they run a query which they think is OK, but they haven't thought about whether the two legs of a swap should be treated as two trades or one, or if they have excluded reversing (error) trades out etc etc."
I wanted to mention this example because in the survey itself, the LBMA said that swaps were only 5% of the reported volume, and that 90% of the volume was spot transactions, which I wouldn't think should have the confusion factor Bron is considering. From the survey:
"2). It can be seen that spot transactions form the large majority of the total (around 90%), with forwards and other transactions each representing around 5%. The average daily trading volume in the London market in this period was 173,713,000 ounces or $240.8 billion (Figure 1)."
Swaps fall under "other transactions". Also from the survey:
"All Members were sent the reporting form at the end of April, which asked for the data on spot and forward transactions to be divided into sales and purchases, and between members and with other counterparties. The third catch-all category of “other transactions” was also included to cover, for instance, options and bullion-related commodity swaps."
So it was 90% spot transactions, 5% forward transactions and 5% options and swaps.
I hope this clears up a few things. Don't let all the detail of our discussion cloud the simple truth that the LBMA survey showed a lot more sales than purchases during that quarter. If that represents a net-increase in paper gold, aka net sales by bullion banks to their clients (which I think is the simplest and only Occam's-worthy explanation for at least 83% of the huge discrepancy), then the "divide by 2" methodology didn't affect those numbers because they were between members and their clients.
The sheer magnitude of the reported volume can be explained by the use of XAU (the ISO 4217 standard currency code of one troy ounce of gold) as a trade currency. And the banks' "presumed neutrality" can be explained by derivative hedging in other correlated markets as they do with other currencies.
Sincerely,
FOFOA
Hi FOFOA
Given the obvious effort that went into your reply, I will try and reply with more rigor.
I find that I have more questions than answers really.
Here is the reasons I see for the discrepancy observed :
a) The reporting banks had a net short position in paper and physical combined.
b) Inter-temporal effects
c) Survey methodology which does not allow us all information.
d) A skew in reporting of data, in that one side is more likely to report than the other.
So. The side not reporting's information added likely lessens the discrepancy. The remainder is the result of a their net short position and inter-temporal effects.
Let me just clarify the latter, as it seems, I misunderstood and also confused you with this point. Given that the data presented is only a snapshot of time, we cannot know what trades they were about to undertake to rectify their positions more towards neutral. It is likely that all bullions banks are net long or short most of the time, and balance their positions as trades come in, perhaps even overbalancing, only to be fixed with next trade. This is what I mean with inter-temporal imbalance.
Such temporary exposures are only a problem if there is a lack of certainty that they can rectify them easily, ie. A lack of trust in the system.
“The survey only shows the LBMA portion of the overall gold market. So it's perfectly reasonable to imagine a short position within the survey data that is offset in other parts of the gold market.”
If we assume the bullion banks are overall net neutral. I am not sure this assumption can be made.
“But in my explanation, there's no reason to assume that the non-reporting banks are much different than the reporting banks. So let's look at two possible assumptions under my explanation. The first is that the non-reporting banks are just as net-short as the reporting banks. And then we can also imagine that the non-reporting banks are net flat, or anywhere in between for that matter.”
Wouldn't assuming they are net long be the correct way to go about it, if we assume net neutrality overall?
This is not a position between net flat or just as short.
“So a quarterly flow of 1,000t which would show up as 500t is about the maximum.”
Why are we only looking at physical flow when paper flow exceeds that by 100 fold?
Thank you
Motley
Hello MF,
You wrote: "The side not reporting's information added likely lessens the discrepancy."
Not true. It can be different in the same direction (i.e., net short but to a greater or lesser degree). In this case it adds to the overall discrepancy. It only lessens it if it is in the opposite direction (i.e., net long to some degree). In that case, to the degree in which it lessens the discrepancy there must be a flow of twice that magnitude. Beyond 1,000 tonnes for one quarter, that flow becomes hard to explain because it means a paper short position held by clients rather than by the LBMA members. And that client short position, whatever it is, only shows up as half that amount in the survey.
"If we assume the bullion banks are overall net neutral. I am not sure this assumption can be made."
We are assuming they are net neutral (or at least that their financial geniuses have assured them that they are). But the question at hand is whether they are net neutral within the "gold" market, or if they are treating gold as simply another foreign currency.
"Wouldn't assuming they are net long be the correct way to go about it, if we assume net neutrality overall?"
Only if you are prepared to explain or accept on faith alone that 15K tonne flow (i.e., paper short held by clients of the bank rather than the bank itself). I won't remind you how unlikely I find that explanation.
"Why are we only looking at physical flow when paper flow exceeds that by 100 fold?"
Because physical flow makes sense. Paper flow at that magnitude doesn't. First of all it doubles the net long acquired by clients on the buy side during one quarter from 7,575 tonnes to 15,150 tonnes. And secondly it requires private parties (aka bank clients) as the counterparties to those longs. Who went short 15K tonnes in one quarter?? If it was the banks, hedging with derivatives, then they only went short 7,575 tonnes. If it was their clients then it's double that amount (due to survey methodology).
Why is this part so hard to grasp?
Yes, it is possible that there was a skew in reporting. But if so, and if it would reduce the discrepancy were we to have all banks reporting, then it means a net flow in a magnitude of double the amount which it reduces the discrepancy.
Also, I think your inter-temporal effects are going to be very minimal, because we're looking at a whole quarter (three months) and you've also got to factor in this effect as it would appear on both ends of the quarter. So here is your explanation for the discrepancy, along with my (generous) estimated contribution levels. We are in full agreement! Unless you want to challenge my levels! :D
a) The reporting banks had a net short position in paper and physical combined. 83%+
b) Inter-temporal effects maybe 1%?
c) Survey methodology which does not allow us all information. 10% or less
d) A skew in reporting of data, in that one side is more likely to report than the other. 7% or less
Sincerely,
FOFOA
PS. I'm not saying it's like this every quarter. I'm on the record saying that I can imagine that sales and purchases could have been roughly equal in the next quarter and opposite (net-long) the quarter after that if they had taken a survey for those quarters. My explanation is only about the shock-absorber effect.
Hey again FOFOA
'You wrote: "The side not reporting's information added likely lessens the discrepancy."
Not true.'
Hmm. Well, if we assume the banks try to be net neutral overall then this does seem likely. Mind if I speculate a bit?
"Only if you are prepared to explain or accept on faith alone that 15K tonne flow (i.e., paper short held by clients of the bank rather than the bank itself). I won't remind you how unlikely I find that explanation."
Isn't one of our assumptions that the Chinese for one are managing the price downwards so they that can acquire physical cheaply? For them paper sold to suppress the price, and paper losses don't matter much. Could this help explain a net short position for the clients?
Sure I'd like to malign your levels. ^^
a) The reporting banks had a net short position in paper and physical combined. 71%+
b) Inter-temporal effects maybe 4%?
c) Survey methodology which does not allow us all information. 10% or less
d) A skew in reporting of data, in that one side is more likely to report than the other. 15% or less
*grins*
TF
One more question. Is there no trading between clients?
Could a bullion bank have sold to one client and another have bought from that client?
This would seem a position where some (reporting ;) ) are net short, while some are net long.
TF
btw I left a couple more comments on Bron's blog regarding the LBMA liquidity survey,
http://goldchat.blogspot.com/2012/12/lbma-liquidity-survey.html?showComment=1356105481600#c5065611511981887567
I was waiting to see if Bron would get back to the subject after the holiday but so far he has not.
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