Tuesday, August 20, 2013

My Candid View – Part 7

Actual GLD Vault

Hi FOFOA,

Another question that I think has a decent chance of getting asked is something related to the repatriation of German gold.

We are, of course, standing in a different place from the tidal wave whose narrative is "They don't have the gold and so they crashed da Market" to get their hands on cheap physical to replace that which they didn't have.

My line in response to the conspiracy perspective would be that while a seven year delay for a return of one's gold does seem rather strange, there was no diplomatic furor from The Germans as a result. And if it was the intent of "the manipulators to sidestep some sort of catastrophic market event, driving the price of gold down below the cost of production amounted to swimming through croc infested waters in order to get out of the heat. Could "they" be that stupid? Possibly, but to paraphrase Victor, I don't like any theory that rests on such a premise.

Cheers,
Edwardo

Hello Edwardo,

What a mess these kinds of stories are to deal with. First of all, the price decline has nothing whatsoever to do with German gold repatriation, obviously.

As you know, I don't think anyone is actively trying to suppress paper gold. Short term price manipulation can happen in anything, and in any direction, but that's done for short term profits and not for ideology. And as you point out, the current price decline is probably not producing any extra physical because it is stifling the mines and probably increasing the flow to the East in weight terms. The suppression of gold was systemic and due to the expansion of the supply of paper gold backed by central bank guarantees from ~1983-1999. The suppression was for the purpose of buying time, and not for some CB anti-gold ideology. (For more on this, please see 'The View of the Rocket Man' video at the bottom of Part 3.)

In terms of "active suppression," I do think the BBs have control of how quickly paper gold rises given overwhelming demand. In other words, they have no problem handling high demand for paper gold. They can simply create more of it. They can expand the supply. So the rate of rise can be easily managed as long as there's strong market demand for their product, paper gold. It gets quite a bit more difficult to control the price, however, when there is low market demand for their product, especially with so much of it already out there. Kind of like dollars. ;D

I think this may be partly why "the top" in 2011 looked the way it did. The LBMA survey was coincidentally released right before the top! The survey was released in August of 2011 and gold topped at $1,896 on Sept. 5, 2011, just days later. I wonder if they would have even released the survey if they had known that demand for their product was about to reverse trend.

The survey was conducted in Q1 of 2011 and it appears to show an expansion in paper gold during that quarter. This would be newly-issued paper gold amounting to more than 7,600 tonnes during a quarter in which the price of gold barely rose $35. Since this was near the top of the decade-long bull run, I can imagine demand being high and that some of it was met with new supply rather than old supply. Perhaps in Q3 demand was instead met entirely with old supply which is why we saw the price spike from $1,492 to $1,896 in one quarter. Then demand dropped out from under the massive supply and the BBs lost control.

It's kind of like the printer who has control of the rope as long as demand is pulling. Remember the tug-of-war analogy in 'Big Gap'?

"The printer controls supply and the marketplace controls demand. A tug-of-war is actually an apt analogy. When demand for a currency spikes its price, the printer just eases his grip on the rope, releases more rope and the whole demand side just falls on its butt. […] But in the same way that the marketplace has no control over the supply side, the printer is powerless on the demand side."

Anyway, the point is that any kind of "active manipulation" talk is a non-starter for me unless the talker can demonstrate an understanding of what's actually possible and not simply parrot the conspiracy theories. When you understand what went down and what went up over the last year and a half, that was not manipulation. It was some kind of a massive shift in trader sentiment that has nothing to do with physical gold.

Sorry, enough about manipulation/suppression. Let's talk about German repatriation.

Only simple minds imagine that CBs share the same transitions concerns as we shrimps. I, on the other hand, understand that while "gold in your physical possession" is the best transition policy for shrimps, that is not the case even for private Giants, let alone CBs. At the Giant level, properly allocated physical is the best way to store the bulk of your hoard. I have a hard time imagining anyone with 20+ tonnes stored in a home safe.

For CBs, there are many reasons why their gold is where it is. During WWII Germany stole a lot of gold. A good deal of the European gold that wasn't stolen by Germany was moved to New York for safekeeping, so that it wouldn't be stolen by Germany. Then, after losing WWII, most of that stolen gold was taken away from Germany.

Since WWII, Germany has been a net-producer accumulating a lot of gold. And most of that accumulated gold was accumulated in New York City through Bretton Woods. That's why it's there. Nations generally keep at least some of their gold in the financial centers because that's where it is most useful. And under the auspices of the BIS, that's normally the safest place for it, especially for small countries.

If the gold is all kept at home, then it can disappear whenever there is a violent transfer of power. The gold obviously doesn't belong to the ruling party, it belongs to the people of the country, but that doesn't mean it cannot be physically stolen. However, if it is kept in London or NYC, it is much more difficult for the deposed party to make off with the loot.

There are, however, good reasons for Germany to want to repatriate some of its gold. First of all, it has a lot of it. And it certainly has more than necessary stored externally. But transporting gold is risky and dangerous. So it is always done in secret. Germany is probably doing more business with countries other than the US these days, more business in Europe and the East, so it doesn't make sense to keep so much of its gold on the North American continent. It is potentially more useful if it is physically in Europe.

But more than any of these reasons, the repatriation talk was simply a response to the gold bugs demanding to know where Germany's gold was being kept. So BUBA released a complete list of where it is, and since an inordinate amount was shown on that list to be in NYC, they accompanied the release with the repatriation talk.

We don't know if they really want their gold moved. And if they do, we don't really know if the US refused immediate delivery or if they asked for the 7-year plan. And even if they wanted and were to receive the gold within one year, it would make sense to say it was happening over 7 years. It's safer to transport a pre-announced shipment if you distract potential pirates with a bogus timeline. In any case, we really don't know all of the facts. We only know the theories of conspiracist gold bugs for whom this release was made in the first place. So, whatever.

I care about this story about as much as I imagine the Bundesbank does. It's more of an annoyance to be quelled than anything else.

Sorry if that doesn't help you much for the interview, but I had to get it off my chest since you asked. ;D

Sincerely,
FOFOA

This article approximates quite well the "other" view:

What If? by Grant Williams

Edwardo,

FWIW, I wrote that last reply before I even saw this email, let alone read the 'What If' article in it.

So the GLD drain is to get back the gold for German repatriation, and the price suppression is so the Fed doesn't have to pay too much for that gold? Something like that? ;D

How about this? Something else happened right around the middle point between those two lines. And that is the marginal paper gold bug, as represented by my bellwether, turned his back on the gold market and declared the end of the bull run and the beginning of a secular bull market for the dollar (aka deflation).

As each marginal gold bug throws in the towel, a new marginal gold bug is created, and then it's only a matter of time before he throws in the towel creating another new marginal gold bug. And so on and so forth. And the marginal gold bugs that don't throw in the towel simply get squashed because there are just too many commodities heading lower and dragging paper gold down with them.

These guys really must think that gold moves in isolation. Well, at least he admits he's inclusive when he adds the gratuitous "and silver" while quoting analysis by Maguire and Silver Doctors. ;D

There are a few redeeming ideas and charts in that article, so let's play with his scenario a bit and see if it makes any sense in the big picture without enlisting any conspiracy theories.

The main premise that he relies on is this CB leasing of physical gold that the CBs now want back. In order to have leased gold, you must also have a borrower of that gold. That is, someone who carries the short-side price exposure. In the 90s that borrower was the mines and the hedge funds. And they both took it in the keister when gold started rising in 2001. So from 2001-2011 there was not really a market for leased gold other than the small bit for fabrication, unless the CBs were acting as the lender of last resort for the BBs in providing actual physical reserves needed for the subterranean flow. This would imply a tight flow during that whole period. This would also have left the BBs with the short-side price exposure which they would have hedged going long futures or other correlated asset derivatives. This BB long hedging could have possibly been partial support for the decade-long commodity bull.

If this situation is in the process of unwinding right now, as the article proposes, then as the BBs return the physical to the CBs (taken out of GLD, Comex or wherever), they are relieving themselves of that price exposure and must consequently sell the off-setting long-side hedges, which would have been Comex futures and other correlated commodities/currencies, adding downward pressure to any otherwise organically-emergent bear market.

Let me just pause here to say that, even if this was the case, I would still say categorically that it has absolutely nothing to do with BUBA's repatriation request. At least it's not a response to BUBA. BUBA's announcement may, however, have been BUBA's way of telegraphing the ongoing unwind to anyone who might be paying attention.

One problem with this view is that somehow there was a surplus in the subterranean flow that amounted to at least 1,300 tonnes—the gold that went into GLD. Did the BBs borrow that gold from the CBs in order to corral some of the demand coming from the West? Perhaps, but it seems to me that that particular Western paper gold demand could have been met with fractional paper rather than fully-reserved paper. So this logic tells me that, somehow, the 1,300 tonnes that was accumulated between 2004 and 2010 (when GLD inventory plateaued) actually was surplus to the required physical flow. And if so, then it doesn't make sense to me that the BBs would be borrowing physical from the CBs between those years.

I can't explain the existence of that surplus during those years, except to say that it existed and therefore there must be an explanation. So I am left with imagining plausible explanations to show that it was possible. One such plausible explanation is that the BIS successfully kept the biggest interests out of the flow through some sort of deal-making like Another wrote about. But that kind of deal-making must have had a finite timeline which I wrote about in Think like a Giant 2. This coincides with Ari's 2010 "target" which then got pushed to 2013 after the GFC in 2008. This correlates with GLD inventory plateauing in 2010 and then declining in 2013.

Again, it's merely a plausible explanation to show that the surplus reserves required to build up GLD were possible even though the physical gold flow was technically "cornered" as far back as 1997. The alternative is the view in the 'What If' article that the CBs were leasing out more than just their good name all that time. I suppose it is also possible that, rather than leasing the physical to the BBs, the CBs could have actually ponied up the 1,300 tonnes for GLD directly. That way no one is carrying the short-side price exposure implicit in a lease during an obvious bull market. The CBs could have done that to "corral" the Western demand, but I think it is too much of a stretch to believe the source of that gold being the CBs could have been kept quiet. So I think it is more likely that it was BB gold that was checked into the coat-check room rather than CB gold. And if the BBs had that much gold to spare (that much slack in the flow rope), then why would they have been borrowing physical from the CBs?

The consensus view is that the gold in GLD was "purchased at market" to meet the demand from investors. Well, the BBs are the market in LGD bars so even if they "bought" the gold to put in GLD, they bought it from themselves. Ergo, coat-check room. No matter what, GLD represents a place to put gold that would otherwise be part of the BBs' physical reserves if it were not in GLD. And that's why the coat-check room view is the correct view.

The main difference in the conclusions drawn from the consensus view is that there is no shortage of physical and never was. There's plenty of it to always meet demand. But even in that view of plenitude, it would still be correct to view it as a coat-check room. Just that the checked coats (in that view) would represent only a small fraction of the total coats (physical reserves). And in order to maintain that view of plenitude even in light of the present drain on GLD, redemptions must be a necessary or obligatory part of the arbitrage that keeps GLD in line with "gold", which, of course, makes no sense.

Sorry to meander here, but I thought it would be worthwhile to think through a few ideas out loud, and, yep, turns out I'm still happy with my view. ;D

Sincerely,
FOFOA

How is it the case that in order to have that view (of plenitude) redemptions must be obligatory?

Because in my view the massive redemptions reveal the opposite of plenitude. Redemptions are a choice made by someone, not a necessary part of the arbitrage "mechanism" as it were. "Obligatory" might be the wrong word as it implies that the APs must actively manage GLD so that it tracks "gold". The consensus view would argue that they are simply "arbing" to make a profit off of the stupid GLD investors who don't watch the NAV (the price of GLD relative to "gold"). So (they would say) it's not so much obligatory as it's simply a way to make money.

My answer would be that I used the term "obligatory" (or compulsory) to cover both "the AP actively managing scenario" as well as "the arb requires redemption scenario" which is the crux of the consensus view. That's really what the difference boils down to. Would GLD track "gold" if it weren't for the arbs creating and redeeming shares to skim a profit off of the stupid GLD investors? The answer is of course it would. I does!!! Kind of like silver tracks gold. GLD is not an actively managed fund. Instead, it is an exchange traded fund. That means participants in the exchange arb the correlation between GLD and everything else.

Arbitrage is natural. It mostly happens automatically. A dedicated arbitrageur probably wouldn't even mess with GLD because it tracks everything else so well. He's looking for ratios that are technically exploding past fundamental differences so that he can make a profit. If hundreds of thousands of people are trading GLD and "gold", then the ratio between the two should be self-correcting over a reasonable amount of time… AND IT IS!!! This graph of the intraday premiums and discounts shows it self-correcting repeatedly during the day, every day!

We have evidence in the data that creations and redemptions of shares are not necessarily a part of this mechanism. Logically they are not, because GLD could theoretically trade at $500/oz. gold or $5,000/oz. gold with the same amount of inventory. It has an objective or indicated value, and to the BBs the shares are literally "as good as gold." Think about that.

So if there's plenty of gold reserves in the LBMA, then why are the BBs draining GLD? The consensus view says "because they need to redeem the shares to book the profit on the arb that maintains the correlation between GLD and "gold"." Nonsense!

Sincerely,
FOFOA

"So from 2001-2011 there was not really a market for leased gold other than the small bit for fabrication, unless the CBs were acting as the lender of last resort for the BBs in providing actual physical reserves needed for the subterranean flow. This would imply a tight flow during that whole period."

Well, we have a pretty good idea that there was a tight flow then. I remember discussing this with JR on the forum and him saying the constantly rising price was evidence of gold not flowing well, ergo the ever rising price being required to keep the flow going.

Well, the prices of silver and other commodities went up too. But we know that physical gold is in a league of its own, so I think it might have been a mistake to think that the "gold bull market" was a symptom of the shortage of physical gold (or silver or anything else). It probably helped the physical gold shortage, but it might not have been because of it.

I'm not saying there wasn't a shortage of physical. I think that, because the flow of physical has been "cornered" for at least 16 years, obviously there is a shortage until there is a revaluation. But I'm also saying that something other than the price rise must have delayed the inevitable because obviously there was a "surplus" in the flow of at least 1,300 tonnes from 2004-2010—enough to populate GLD with physical gold.

That's not a huge "surplus" in the big scheme of things. If we think about a roughly 4,000 tonne-per-year flow from mining and scrap during those six years, 1,300 tonnes total amounts to only about 5% of that "new" flow. That's a marginal percentage, so whatever took care of the threatening physical demand could have easily overshot enough to fill GLD with or without intention.

BTW, I hope you realize that I am discussing speculative issues at the "cutting edge" of Freegold that are not fundamental nor foundational to Freegold. I am simply using my "view" or "lens" to tease out the best explanation, or at least a non-contradictory one. That's why I use the term "plausible" instead of the occasional "certainty" I show toward Freegold. Certainty doesn't extend beyond the gold revaluation or dollar hyperinflation. Beyond those two topics I'm venturing into analytically speculative topics trying to apply that in which I have high degree of confidence to those things which are obviously unknown, in the attempt to discover a plausible and non-contradictory explanation.

Some people mistakenly apply my "certainty" toward Freegold to anything I comment on. And then they think that if they can disprove me on any small detail then my macro view must be wrong as well. This reveals poor understanding of what I'm discussing, but it is rampant in my arena, which is why I don't spend much time speculating publicly about things other than what is covered in the A/FOA archives.

Yes, I understand. The naysayers are always on the lookout to catch anyone else who has the temerity to do what you are doing.

Funny, I read this article that someone called "straight out of Freegold" and, to me at least, his choice of words and phrases revealed just how far away from Freegold he really is!

http://dailyreckoning.com/your-personal-gold-standard/

He's clearly not expecting a gold revaluation:

"And gold at the levels I’m talking about would mean that you’ve now verged into hyperinflation, or something close to it, because nothing happens in isolation."

He's clearly talking about an inflationary spike that will occur in all commodities and not exclude paper gold:

"It will have a kind of a slow grind upward… and then a spike… and then another spike… and then a super-spike. The whole thing could happen in a matter of 90 days — six months at the most."

I find it a little funny that people want so badly for someone like him to be a secret Freegolder that they are blind to how different his analysis actually is.

It reminds me of XXXXXX. He, like Rickards, expects the dollar to devalue and gold to fill the hole. But neither one seems to have thought it through far enough to realize that nothing fills the hole without at least one thing being revalued in isolation.

Rickards: nothing happens in isolation.

I'll have to remember that one! ;D

I completely agree. Good catch with the isolation language. He was wrong before the words ever escaped his mouth since we've already had a revaluation (isolated move higher) (1933) albeit a vastly less spectacular and meaningful one than what lies ahead.
_____________________

Open (Window?) Forum

From Open (Window?) Forum, which has more discussion about "GLD – The Coat-Check Room View", here's Phil Collins with a familiar sentiment:



The Debtors and the Savers 2012

"…Thinking for yourself pays. Seeking reassurance feels good, but it doesn't pay. Waiting for official confirmation is also rewarding, but the reward isn't money."

"Change isn't easy. More often, it's wrenching and difficult. But maybe that's a good thing. Because it's change that makes us strong, keeps us resilient, and teaches us to evolve..."


33 comments:

MIA said...

First and from downunder!

Kid Dynamite said...

hi FOFOA,

I'm not a regular commenter here, but I wanted to take a few seconds this morning because I think this post does a good job debunking a lot of the utter crap in the blogosphere about gold price "smackdowns" etc.

but I wanted to disagree with you on a key point: arbitrage...

you wrote:

"Arbitrage is natural. It mostly happens automatically."

that's true: if by "Automatically" you mean "it's a mechanical process that traders can trigger with signals. But you err with your next sentence:

"A dedicated arbitrageur probably wouldn't even mess with GLD because it tracks everything else so well."

well no - there's a reason why GLD tracks its underlying value so well, and that's precisely because of arbitrageurs!

of course, rising gold prices do not necessarily mean *excess* GLD demand, and thus accumulation of gold in GLD, and falling prices do not mean the opposite - the key is the *excess* part: if GLD's price is leading the price of gold on the way up, arbitrage results in accumulation. If GLD is leading on the way down (falling faster, I mean), arbitrage results in depletion.

What you really need to look at is the intraday NAV of GLD vs its trading price (and this data is not easy to get - if you find a good free public source, please do let me know): if GLD is being redeemed during periods where it's *not* trading at a discount to NAV, that would support your theory. The data that I have analyzed, however, shows no such thing: it shows redemptions in line with NAV deficits.

(you can't tell by looking at that WSJ graph you linked to, but in the initial price crash in April, GLD spent most of its time trading below NAV).

best,
KD

Wil Martindale said...

Not sure about XXXXXX (?) but regarding Rickards and the vast mentality of goldbug paper traders (in the many and varied colors they come) the cognitive stumbling block appears to be the baggage of a typical currency hyperinflation.

I submit it is better to view this as the onset of a global systemic revaluation, than a typical (regional) hyperinflation of times past, cradled in the hands of the dollar.

What does remain the same is the fear that accompanies the paradigm shift that one's "life savings" is about to be instantaneously transformed from "great wealth" to "worthlessness". This is a panic that few have ever personally experienced or even recognize beyond conjecture.

It is the panic driven rush to transform "worthless" paper holdings into ANYTHING of value that fuels the psychology of a currency collapse. It is not "getting into" wealth, it is "getting out of" collapse, that latter being much more rabid than the former.

As this change in the perception of valuation takes hold it becomes it's own cyclical, self-fulfilling prophecy--a turbo-feedback Loop on nitrous oxide!!

Though conspiratorists like to describe this as a "massive confiscation of wealth" it is merely a massive re-evaluation (and revaluation, how similar the terms) of associative values ... just as Another expressed so simply and elegantly long ago.

Sadly, those 401K's will not be fungible enough to escape the headline news of "massive wealth confiscation" when in fact it was merely a "wealth revaluation".

Bubble UP, bubble down, they are merely a paradigm change in associative values fostered by the superorganisms gullibility in chasing yield and following the urge to get something for nothing.

Gold will do much to extinguish this behavior, as the reality of an associative reference point -- a more solid "anchor" to relative valuations -- takes hold.

FREEGOLD was always the perfect and true "gold standard" we never really had, since men and their desire to influence gold's barometer for personal gain has always gotten in the way and fucked things up.

If there is any challenge to the "certainty" of FREEGOLD, it is the human tendency to fuck up a wet dream, no matter how wonderfully perfect that nocturnal emission might have been.

Let us not forget that what we cannot control, we tend to destroy - despite the nose we cut off (to spite our face).

It is not logical, but it is human ... or so the FLOW-ER laments ...

Hill C said...

Can anyone explain why the ECB removed its leasing language for member central banks in its last statement on gold? We know that at least one member leased gold and it is logical to believe that others did as well. If this was done in the past to manage the gold price, why doesn't this explain, to some degree, the recent decline in prices without getting in to conspiracies?

Jim said...

If the desire is to maximize the value of what gives TPTB power (paper), which requires minimizing the value of physical gold, why would they not use every tool at their disposal? You would seem to agree that creating paper gold substitutes was a grand idea (conspiracy?). What else lowers the demand for all gold, physical and paper (increasing the demand for and perceived value of their paper currency and debt)? Wouldn't volatility in gold prices do that? Would that not deter someone from using gold as a mean of savings, not know what the currency conversion rate might be when it's needed? And wouldn't the big banks love to have this job of creating volatility?

King David said...

Hi FOFOA
I own physical gold as a conduit to transfer wealth when the "reset" takes place. As no one knows when this reset will happen I also own shares in multinational "blue chip" companies listed on the Johannesburg Stock Exchange. I need the dividends from these companies to pay the bills until the reset happens. What will happen to our currency (the Rand) and my shareholding in these companies after the dust has settled. In other words should one be invested in equities at all?
Cheers

Michael dV said...

Kid Dynamite
welcome...It is not often we get an honest intellectual challenge here. Most just shout: I'm right, you're wrong...and leave quickly (or stay but just shout the same thing over and over).

Phat Repat said...

I hear it oft mentioned how the Chinese 'push' their people to purchase gold that I wonder whether FG will be delayed until we see such a similar push in the West? Or, perhaps, since bull markets last about 20 years from onset, we will have to wait until 2020 or thereabouts? And, now we have inflows into GLD to consider as well. Hmmm... The game continues, until it doesn't.

Phat Repat said...

And though I am not making a prediction that the game can go on for that long, as that is truly a fool's errand, I would caution that this game could go much longer than many might realize or be comfortable with.

If your mindset is one of transferring your wealth to future generations, and that is something I hadn't fully resolved myself to until reading FOFOA, then you will be part of the FG transition. If your mindset is otherwise, then you may be sorely disappointed (and likely divest of your true wealth too soon).

Phil_O_Dendron said...

@wil Said.

"If there is any challenge to the "certainty" of FREEGOLD, it is the human tendency to fuck up a wet dream"

This dovetails with a concern that I have concerning the revaluation and all of those that did not prepare by getting their own stash.
The group of takers in society that believe that they are entitled to other people's effort and savings is growing ever larger. If/when the revaluation occurs this group is going to play the "fairness/racist/equality" card to try to claim for themselves what you worked for.
They will have no shortage of champions in congress that will attempt to "level the playing field" by passing some law or rule that takes from the savers to give to the takers.
I could provide a list of a few of the champions but I think most people know many of them.

I think that this is the biggest danger to Freegold; The political manuevering by one group to steal from another group.

burningfiat said...

Great post! I'm really enjoying this series!

If I was a (shrimp) arbitrageur, I wouldn't go after high volume market like GLD and paper gold. Too small diffs intraday...
If I were adventurous: Arbitrage between different bitcoin exchanges. They seem to deviate a lot at times... Although I imagine , if I entered BTC bourses with guns blazing and many million dollars to employ, I could quickly drive any price difference to ~zero, thereby destroying the original arb. opp.

Hill C said...

@ Jim
I guess my point was gold leasing was stopped with the launch of the Euro in part to set gold free from paper. Why the change in language? I realize FOFOA has stated that possibly Europe supported the paper market at times, however the removal of the leasing language would indicate a change or a delay from their thoughts/strategy in 1999? Maybe, Europe itself was not ready for the transition given the turmoil at the time? This issue has baffled me considerably and the next statement on gold is not due until the fall of 2014.

Edwardo said...
This comment has been removed by the author.
Edwardo said...

Phat Repat wrote:

And now we have inflows into GLD to consider as well.

A little perspective is in order. On June 28th, when paper gold made its intraday low at approximately $1178 an ounce, GLD's physical inventory stood at 969.50 tons. On August 8th, gold closed a few dollars shy of $1300 an ounce and displayed an inventory of 909.33 tons. Today, gold closed in the low 1370s with 912.33 tons of physical inventory. That's not much inflow from where I sit.

Or, perhaps, since bull markets last about 20 years from onset, we will have to wait until 2020 or thereabouts?

This isn't about a bull market. In any event, by any reasonable measure, the bull market ended in 2011. Mining shares, their recent bounce notwithstanding, have been absolutely clobbered. Gold is selling at or below production costs, and, even amidst this snap back rally, mining outfits are reporting that they are scaling back their operations where they are not simply shuttering them altogether. But this isn't about bull markets. It never has been. If anything, the late great bull market attenuated the evolution to a new global monetary system. So, when you offer the following:

I would caution that this game could go much longer than many might realize or be comfortable with.

I would caution that this game could end much sooner than many might realize.

King David,

I am going to be quite presumptuous and try to answer at least one of the questions you've posed to FOFOA, who, in any case, doesn't give "investment" advice. Neither do I for that matter, but I will offer that your use of the term "investment" is instructive. If you are looking for a return that entails risk, then the stock market is certainly an arena that caters to that desire. If you want to "save", as opposed to put your capital at risk, well, some other choices, one in particular, are in order.

Wil (from another account) said...

"Australian bank Macquarie has reported that gold is flooding out of London and into Switzerland at a mind-boggling rate. Specifically, 240 tons were exported in May alone and 797 tons during the first half of 2013. That means gold is being exported at a annualized run rate of 17x the 92 tons exported for all of 2012."

As all the BEST games are truly mind games, does it not give one pause to see the the rate of gold flowing so exponentially from West to East, while West seems "not to care?"

Or is this new Brown's bottom what's really happening?

When one systemically important group has ALL of one thing, and another systemically important group wants NONE of it (or steadfastly appears to) what does that do to its value?

Head fake, or submission to the inevitable?

Or the larger scheme of things, what TRULY defines the wealth of a nation?

Its character?
Its people?
Its resources?
Its military?
Or its gold?

I do not know the answers, I only ask the questions, for upon reflection, the answer may soon be proven.

Or to quote another ... time proves all.

Sam said...

@Wil

Everyone that matters wants oil. Everyone that matters that has oil wants gold. Therefore everyone that matters wants gold.

Sam said...

@Phil

“I think that this is the biggest danger to Freegold; The political manuevering by one group to steal from another group.”

Remember the battle is between the debtors and the savers, the easy money camp and the hard money camp.

You fear the easy money camp. They have been in power for a very long time so I understand why. But there life cycle is coming to an end. They are not a danger to the inevitability of freegold. They certainly have no power to stop it, and their power to take from the savers and give to the debtors will be much more limited in a post FG environment. They are the class that is going to feel the pain in the coming transfer of wealth. They are not a roadblock to freegold, they are the coal in the firebox pushing the out of control train towards freegold.

M said...

I hope FOFOA finishes off this series with some more bond market and balance of trade talk.

Phat Repat said...

@Edwardo:
"That's not much inflow from where I sit."

It could be an anomaly; agreed, more data/time required.

"This isn't about a bull market. In any event, by any reasonable measure, the bull market ended in 2011."

Really? When did the bull market start? Connect the points; doesn't appear to have ended, yet.

"I would caution that this game could end much sooner than many might realize."

Possibly; but Another and FOA were far more connected, and here we are. I am happy we are getting more time to add to the stack; and with that, hopefully other Westerners are taking advantage. The word is getting out, thanks to FOFOA, et al.

FOFOA said...

Hello KD,

Yes, I do understand your view of GLD. I even grabbed that WSJ graph from your site! Let me summarize your view just to be sure I've got it right. Demand for GLD shares either leads or lags demand for other forms of "gold" regardless of price trend directionality, most likely driven by oversized institutional money flows. The differential would show up in graphs like that WSJ one as the average premium or discount for the day. The APs or whoever is arbing this demand differential scalps a profit by moving physical either into or out of the Trust. I guess that's a pretty succinct summary, but did I get it right?

Assuming I got it right, I think your view begs a few questions, and they all have to do with the last 10 words in my summary. The rest I agree with!

We've seen quite a drain on GLD this year, huh? 441 tonnes or 32% of the inventory since its peak in December!

Where do you think those 441 tonnes of physical went after it left the Trust? I know, it didn't necessarily go anywhere. What I mean is, who do you think owns it now that it's no longer being financially "carried" by GLD investors? Do you think the APs (most of which are bullion banks) sold it into the market? Or do you think they just absorbed it into their reserves? This is an honest question. I really would like to know what you think.

And if you think they "sold it into the market" in order to close out the arb and book their profit, who do you imagine they sold it to? Would it have been a case of more supply than demand such that it helped drive the price of gold down? And if so, can you see how your view fits my "plenitude" description which was kind of my point in the above email?

If you think they simply absorbed it into their reserves, then why even redeem the shares? I mean, if they're not going to sell the physical gold to close out the arb, why not just sell the shares to close out the arb? Perhaps during one of the dozen or so times it was in premium each day? Because of this reasoning, I assume your answer will be that they sold the physical gold to someone in order to book the profit from the arb, whether or not that sale actually had any effect on the price discovery markets. So you must think they have plenty of physical reserves to cover allocation and delivery requests in the overall paper gold market. Again, "plenitude", which was kind of my point.

So do you have a view of plenitude in the physical portion of the overall "gold" market, even in light of the GLD drain? Do you agree that redemptions could be a choice by a BB in the case that there was a real need for physical reserves? And I'm really curious about your view on this one: Where do you imagine the 1,300+ tonnes came from? Do you think the bullion banks that are also APs bought it from someone else (i.e., from the physical market) in order to create GLD shares? Do you think a non-bullion bank owner bought the gold from the physical market and asked an AP to put it in the Trust on his behalf? Or do you agree that the bullion banks could have simply taken it from their own fractional reserves and created shares which they sold to the public?

Obviously Eric Sprott had to buy the physical for his ETF, but he's not a bullion bank. These LBMA bullion banks have physical reserves already, so my question to you is do you think they put their reserves in, or do you think they left their reserves untouched and bought the gold in GLD from some non-BB physical gold owner? Again, this is an honest question because I think it will help me to understand your view better.

You know, KD, I'm not arguing against arbitrage as the mechanism that keeps GLD tracking "gold", I'm only saying that redemptions are not a necessary part of that arbitrage. And now that we've had a whole bunch of redemptions this year, we should be able to check if I'm right.

Cont…

FOFOA said...

2/4

If the draining of GLD is a necessary part of completing the arb, or somehow compulsory in GLD tracking "gold", then we should be able to confirm this in the data. I should also mention that I couldn't care less about SLV. I don't think SLV is a "coat-check room" for the BB's silver reserves (LOL), and I don't think there's any useful comparison between the two. Also, I never argued like others did that the differences between the way GLD and SLV behaved this year supported my case.

That said, I did take a look at some comparison data based on a comment you made last month over at Screwtape Files. You wrote, "Victor, I'm guessing that i'm the only one reading this thread who actually analyzed the data of GLD and SLV vs their respective NAVs in the weeks following the 4/12 selloff. what I found was that GLD spent significantly more time below its NAV than SLV did: the data matched the normal arbitrage theory."

The week following the 4/12 selloff was the last bit in that WSJ graph. Was that the data you were talking about, or do you have another source for detailed intraday data? In any case, from April 12 – 16 we can see in the graph that the maximum premiums and discounts were 0.3% in each direction, while most of the time they stayed within 0.1% of the NAV. And that's during a period of heavy redemptions, about 36 tonnes in three trading days!

So this is the general period you were talking about in that comment, and since I don't have any fancy data sources, I went to the GLD and SLV websites to see what they recorded as their premium/discount snapshots each day. You said "weeks following 4/12" so I looked at two weeks beginning 4/15, the next trading day following 4/12. Here's the data:

GLD ………….. SLV
-0.10% ……… -2.9%
0.05% ………. 0.0%
-0.06% …….. -0.3%
0.08% ……… -1.4%
0.01% ……… -1.9%
0.02% ……… -0.8%
-0.01% ……. -0.2%
0.00% ……… 1.3%
0.07% ……… 4.4%
-0.01% ……. -0.4%

You said, "GLD spent significantly more time below its NAV than SLV did" but what I see here is that SLV was in discount to NAV on 7 out of the 10 days while GLD was in discount only 4 out of the 10 days. Of course that was only a daily snapshot, so you must have seen something more significant in your non-public intraday data, right? I'd love to see your data, because maybe they're just cooking the books for the 4:30 snapshot! ;D

Anyway, like I said, I don't care about SLV because I don't think there's any useful comparison. I'd rather compare GLD with GLD at different times!

Cont…

FOFOA said...

3/4

Just scanning the last year plus, the largest discount was -0.67% on May 16, 2012, about a week before the May 22 puke 15 months ago. Here are the premiums and discounts leading up to that puke:

5/9/12 … 0.06%
5/10/12 … -0.11%
5/11/12 … -0.02%
5/14/12 … -0.15%
5/15/12 … -0.67% (largest discount in last 15 months)
5/16/12 … -0.10%
5/17/12 … 0.04%
5/18/12 … 0.10%
5/21/12 … 0.17%
5/22/12 … -0.37% (Puke day)
5/23/12 … 0.17%

That looks pretty conclusive, huh? Well, if we go back further to Feb. 29, 2012, we find a discount almost twice as large at -1.28%, and no puke or even a small redemption anywhere close to that date. In fact, there was even a share creation on that day! Yet, even without any redemptions, somehow the discount magically corrected back to zero two days later and into a premium three days later. That's because the "arb mechanism" is all paper. We only had one "official" puke in all of 2012 by Lance Lewis's standards. The very next "official" puke was on 2/20/13. So let's look at the premiums and discounts leading up to this year's February puke:

2/5 0.00%
2/6 -0.04%
2/7 0.00%
2/8 0.02%
2/11 0.01%
2/12 0.00%
2/13 -0.01%
2/14 -0.02%
2/15 -0.05%
2/18 HOLIDAY
2/19 0.01%
2/20 0.00% (Puke day)
2/21 0.00%

Wow, look at that! Almost no discount to NAV! In fact, it was only in discount 4 of the 10 days leading up to the puke. Must be the big redemptions that are keeping it tracking "gold" so well this year! ;D Here are all of the daily premium/discount snapshots since 2/21/13. See if you can spot the trend!

Cont…

FOFOA said...

4/4

0.02%
-0.04%
0.01%
0.00%
-0.05%
-0.02%
-0.04%
-0.05%
-0.01%
-0.01%
0.00%
-0.02%
0.06%
0.04%
-0.11%
0.00%
0.02%
0.02%
-0.07%
0.00%
-0.04%
0.00%
0.00%
0.03%
0.01%
HOLIDAY
0.05%
0.01%
-0.01%
0.03%
0.01%
0.03%
0.01%
-0.04%
0.08%
-0.09%
-0.10%
0.05%
-0.06%
0.08%
0.01%
0.02%
-0.01%
0.00%
0.07%
-0.01%
-0.02%
0.06%
0.03%
0.00%
-0.02%
0.02%
-0.09%
0.05%
0.00%
0.02%
-0.04%
-0.02%
0.00%
0.03%
-0.05%
-0.09%
-0.05%
-0.02%
0.02%
-0.01%
HOLIDAY
-0.02%
0.02%
0.05%
-0.03%
0.04%
-0.02%
0.00%
0.00%
0.02%
0.03%
-0.03%
0.04%
0.00%
-0.04%
-0.01%
-0.07%
0.01%
0.01%
0.06%
-0.05%
0.01%
0.03%
-0.02%
0.00%
0.06%
0.01%
0.03%
HOLIDAY
-0.01%
-0.02%
0.01%
-0.02%
0.08%
0.08%
0.02%
0.05%
-0.06%
-0.01%
-0.02%
-0.01%
-0.05%
-0.10%
0.04%
0.07%
-0.03%
-0.04%
0.20%
0.03%
-0.03%
0.00%
0.02%
-0.01%
-0.04%
-0.01%
0.02%
-0.04%
0.02%
0.01%
-0.02%
0.05%
0.02%

My oh my GLD is tracking "gold" well this year! In fact, GLD was only in discount to its NAV 42% of the days in the above data, not to mention the miniscule magnitude compared to past years. You said, "if GLD is being redeemed during periods where it's *not* trading at a discount to NAV, that would support your theory." Well, there you go, or else they must be cooking those books! ;D

Sincerely,
FOFOA

King David said...

Thanks Edwardo
I am not looking for investment advice but rather would like someone to sketch a scenario of what could happen in developing countries during the 6 month period pre and post reset. I agree that the USD will implode but I suspect it will be the last currency standing? Where does that leave the Rand? What in general will happen to listed stocks denominated in Rand? Can one assume you will have ownership of the companies after the reset and in what currency will they be denominated if the Rand has also blown up? In South Africa it might be more a case of survival than trying to get through with most of your wealth. I have reached a point where I am fed up with the status quo and can't wait for a reset to happen to purge the world of all the corruption and bureucracy. I just can't get my head around how it might play out here. Any thoughts would be appreciated.Cheers

Motley Fool said...

Hi David

The dollar is the lynchpin of currencies worldwide at present. If you pull the pin, it has spillover effects.

From memory we have 124.7 tonnes of gold on the SARB asset side balance (about $5.5 billion at current market price - which if we assume a 40 multiple would revalue to about $220 billion) as well as in excess of $300 billion in treasuries. A net loss, as you can see. We do still have some estimated 6000 tonnes of gold left in ground, which will help, though the marginal cost of production in energy terms is getting problematic given the depth of our mining.

I expect the Rand to go into freefall, just like most other currencies when the dollar collapses. Given the scope of our social security net I expect government printing, which will drive our own HI.

From history we see that in HI the stock market tends to perform well nominally, but poorly in real terms. At present I think our stock market is way overvalued as it is.

If you must hold equity for income purposes, I would personally consider what will constitute essential need during economic collapse. This implies basic foodstuffs, sanitary goods, and medicines, and allocation to such stocks.

Remember that savings is supposed to be that part of your assets which you will not need in the near future.

It would be advisable to consider stocking up on essentials now, for when economic turmoil hits. It is not that expensive an exercise if you do it with forethought and the benefit of research. This will limit your required expenditure during economic collapse quite significantly, as these basics tend to go up at least 4 fold in real terms during HI.

Peace

TF

Edwardo said...

Phat Repat wrote:

It could be an anomaly; agreed, more data/time required.

The point is even if it's not an anomaly and GLD bobs around this inventory level for some period of days, or even weeks, the trend is still quite clear, a pause in the action, notwithstanding.

Really? When did the bull market start?

It began in '99. It couldn't be clearer looking at a monthly chart with all the usual array of TA indicators.

Kid Dynamite said...

Hi FOFOFA - long comments, so let me try to be succinct:

" Demand for GLD shares either leads or lags demand for other forms of "gold" regardless of price trend directionality,"

yes absolutely. and yes - all of the YTD redemptions are something we can indeed use to evaluate your hypothesis by looking at the data, and what I'm telling you is that the data that i've looked at (while certainly not conclusive and covering all of the period) supports the arbitrage explanation.

you can't look at the GLD website end of day snapshot. it's useless. literally. it's a single point in time. And you can't look at averages: you have to look at the data intraday. Ideally, you'd want to combine it with trading volume to really get a robust analysis. The data I looked at was not from the WSJ chart - it was 2 weeks of snapshots of GLD vs its NAV for every minute of the trading day.

(cont)

Kid Dynamite said...

(cont)

as for what happened to the gold that came out of GLD: I think that the BB's sold it into the marketplace (yes, to book profits from the arb - and yes, by definition that trading has impact on price discovery - that's why prices collapsed!). and yes, I think gold is plentiful, and I think it's hilarious that many PM blogs talk about RECORD PHYSICAL DEMAND without noting that by definition that also means RECORD PHYSICAL SUPPLY.

If one is talking about RECORD PHYSICAL DEMAND and prices are plummeting, well... you can do the math and draw your own conclusions on that one...

anyway: i agree that GLD redemptions COULD be used by BBs if they needed physical reserves, but I don't think that any of the data thus far supports that theory (and in fact, dis-supports it). If i looked at periods of GLD redemptions which coincided with GLD trading at a premium to NAV, that would be supportive of your theory (keeping in mind that redemptions need not correlate to that same day's activity). I have seen no such data.

final thought, for those who scream "GLD IS BEING RAIDED FOR ITS GOLD" - keep in mind that GLD creations and redemptions are done via unallocated credits (unlike SLV, which is done in physical)... so if a BB needed physical gold, there's no reason for them to buy and redeem (and then allocate) GLD: they can just buy unallocated gold and have it allocated.

i find it difficult to have these kind of conversations in comments - feel free to email my via my blog's contact page.

Joe Vanderbilt said...

Hi KD,
Thanks a lot for your input, I have since a long time hoped for a kind of "confrontation" KD vs FOFOA. :-) You guys are the only ones I follow in the blogsphere regarding gold related issues.

Lucky you that you had access to such detailed intraday data. Too bad that it seems you cannot share it. In any case, is there a reason beyond cooked books that could explain the systematic daily reversion to near zero of the discount to NAV (at the published snapshot time) of what was certainly a deeply negative value most of the day (according to your data)?

If possible make your discussions with FOFOA public, I find it extremely interesting.

Cheers
Joe V.

Michael H said...

FOFOA,

While I agree with you conceptually that GLD was set up for the benefit of the BBs and allows the BBs to maintain control over their reserves, I do disagree with some details of what you wrote above.

Would GLD track "gold" if it weren't for the arbs creating and redeeming shares to skim a profit off of the stupid GLD investors? The answer is of course it would.

I think the arb mechanism is integral to GLD tracking the gold price closely. As a counterexample, consider PHYS, which is closed-ended and thus lacks the arb. It tracks the gold price but nowhere near as close as GLD.

...who do you think owns it now that it's no longer being financially "carried" by GLD investors? Do you think the APs (most of which are bullion banks) sold it into the market? Or do you think they just absorbed it into their reserves?

This is a trick question. When GLD is arbed, paper gold is sold into the market but the physical gold becomes part of the BB's reserves unless it is allocated to some other entity.

... why not just sell the shares to close out the arb? Perhaps during one of the dozen or so times it was in premium each day?

For the same reason that the presence of exits in a crowded theater does not guarantee that everyone will make it out alive in the event of a fire. Even though some shares traded above NAV I doubt it was enough of them for the arbs to unwind the positions they built up while GLD traded below its NAV.

Kid Dynamite,

If i looked at periods of GLD redemptions which coincided with GLD trading at a premium to NAV, that would be supportive of your theory (keeping in mind that redemptions need not correlate to that same day's activity). I have seen no such data.

I do not think it is possible for GLD to trade as you describe -- with GLD share redemptions while the bulk of GLD shares trade at a premium to NAV, or vice versa (and I agree that a conclusive analysis would require both premium-to-NAV data as well as volume data).

The reason I do not think it is possible is that whatever entity that is paying above NAV for GLD shares, in the hopes of accumulating them to redeem them, would be buying them from an arbitrageur who would be shorting GLD shares and buying spot unallocated gold. The result would, all else being equal, be that no net shares would be created or redeemed.

Kid Dynamite said...

Michael - yes, good point in your last paragraph: I was envisioning the possible scenario that I see so many breathless gold bloggers proposing: there is a huge shortage of physical gold and banks have to "raid" GLD in order to get any gold...

in that scenario, the "creation" side of the arb wouldn't work, as there would be no gold available for creations...

in essence, GLD would look like PHYS: redemptions allowed but no creations - not because creations are not allowed, but because they cannot be logistically completed...

Michael H said...

Kid Dynamite,

in that scenario, the "creation" side of the arb wouldn't work, as there would be no gold available for creations...

Recall that, as you mentioned earlier, the entity that wants to create baskets of GLD shares has to deliver unallocated gold -- "spot paper gold". The custodian then allocates gold into the fund.

For there to be "no gold available for creations" would mean there would be no gold to allocate for anyone who holds unallocated gold credits. Now *that* would be a serious problem.

Kid Dynamite said...

Michael -

i'm not sure it would mean there was no gold to allocate for anyone - although I agree it would be a serious problem that would probably quickly result in unallocated chaos...

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