Thursday, January 5, 2012

Party Like It's MTM Time

The ECB published its "Year of the RPG" year-end quarterly revaluation ConFinStat yesterday, and the trend continues. Here are the relevant results:

In the week ending 30 December 2011 the increase of EUR 3.6 billion in gold and gold receivables (asset item 1) reflected quarterly revaluation adjustments, as well as the sale of gold coin by one Eurosystem central bank.

Quarter-end revaluation of the Eurosystem’s assets and liabilities

In line with the Eurosystem’s harmonised accounting rules, gold, foreign exchange, securities holdings and financial instruments of the Eurosystem are revalued at market rates and prices as at the end of each quarter. The net impact of the revaluation on each balance sheet item as at 31 December 2011 is shown in the additional column “Difference compared with last week due to quarter-end adjustments”. The gold price and the principal exchange rates used for the revaluation of balances were as follows:

Gold: EUR 1,216.864 per fine oz.

USD: 1.2939 per EUR

JPY: 100.20 per EUR

Special drawing rights: EUR 1.1867 per SDR


As I noted here last Friday, during the dark of Thursday night, euro gold mysteriously levitated itself up a whopping €32.89 from Thursday's London PM fix of €1,184.16, which would have been a disappointing decline since the October MTM Party which marked gold at €1,206.39. This, of course, begs the question (once again) that was implied in this post as to how important "Snapshot Day" really is to young central bankers. (Evidence from Sept. '10 and April '11 seems to suggest that year-end and mid-year might be more important than the other two quarters.)

But this is neither here nor there which is why I put it in a silly little sidebar. It is simply a curious observation.

Sidebar #2

It is funny to see how pathetically little some in the euro-skeptical media really understand about the Eurosystem. Here's the Wall Street Journal's Marketwatch headline relating to yesterday's MTM Party:

ECB balance sheet grows, gold reserves increase

The flaw in the headline is compounded in the body of the article:

"The value of the Eurosystem's gold and gold receivables holdings increased by EUR3.6 billion to reflect quarterly revaluations as well as the sale of gold to the ECB by another euro-zone central bank, the ECB said."

First of all, that's not what the ECB said. This reporter's statement that one of the NCBs (National CBs) sold gold to the ECB carries obvious implications which are not only wrong, but very misleading. Someone in Europe emailed me last night asking:
"Did you notice that one European CB sold gold to the ECB? My guess is it was Italy."
Someone else posted this comment on a forum after reading that article:
"Gold of a Eurozone CB sold to ECB ... If I am not mistaken-correct me if I'm wrong-this does not happen very often?

More gold on ECB balance sheet in exchange for buyout sovereign debt perhaps ...?"

Here are the problems with that article. The ECB is simply the core of the Eurosystem. Actually, there are two systems. The ESCB or the 'European System of Central Banks' which is comprised of all the CBs in the EU, even those not using the euro as their currency. And then there's the Eurosystem which is comprised of all the CBs using the euro, with the ECB at its operational core.

The ConFinStat, put out weekly with quarterly MTM revaluation, is the balance sheet of the whole Eurosystem which includes all of the NCBs using the euro. It is not the balance sheet of the ECB. If you'd like to see the ECB's balance sheet, you can find it in the Annual Report for the ESCB and the Eurosystem which is published every year at the end of the first quarter to be presented to the European Council, Parliament and Commission. In last year's report, which can be found here, the ECB's balance sheet appears on page 214.

The actual ECB balance sheet includes 16,122,143 ounces, or 501.5 tonnes of gold which was valued at €17B as of December 31, 2010. That gold comes from the "foreign reserve asset" capital subscription to the Eurosystem by the NCB's of which at least 15% of the subscription fee had to be in gold. And the amount of each member country's fee is based on a “capital subscription key” which reflects the respective country’s share in the total population and GDP of the EU. These two determinants (population and GDP share) have equal weighting. The ECB adjusts the shares every five years and whenever a new country joins the EU.

The ECB marks its 501.5 tonnes of gold to the market price each year, but the unrealized gain from the revaluation goes into a special "Revaluation Account" which is credited to the NCB's according to the subscription key. In other words, the NCB's own the ECB, use it as their system's operational core, and benefit directly from the revaluation of their share of the ECB's assets including its gold.

So hopefully you can see why it makes no sense whatsoever that, as the Marketwatch article says, a euro-zone central bank would sell gold to the ECB. And even if gold had been transferred from an NCB to the ECB, it wouldn't show up as a change on the consolidated balance sheet referred to in that article!

Furthermore, the amount of gold *coins* that one of the NCBs sold last week was all of €1 million. What's that, 820 coins? Most likely it was simply a net sale of gold coins to the public.

Finally, try a Google search of the first part of that Marketwatch headline, "ECB balance sheet grows", and you'll see just how many analysts are incorrectly referring to the Eurosystem's balance sheet as if it belongs to the ECB. And if you can't quite see how this seemingly-innocuous incorrect view is detrimental to the usefulness of one's analysis, just ask Texan any question you want to about the ECB. (j/k Texan ;)



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dave2004 said...

There is something going on in the silver market, the NAV of the Sprott ETF is above 30%. Are some people afraid of not getting any silver?

I would not mind either a closing of the GSR before the Freegold transition...still some Ag to transform into Au

Michael H said...


For commentary on the premium to NAV of PSLV, see for example

Michael H said...

Interesting article on the oil market:

"In this post I forecast the imminent death of the crude oil market, and I identify the killers; the re-birth of the global market in crude oil in new form will be the subject of another post."

Still reading through it but looks worthwhile.

Michael H said...

Some notes from the above-linked article:

- Goldman's GSCI index allowed BP to 'lease' their oil inventory to investors using GS as an intermediary.
- These OTC transactions created 'dark inventory' of crude.
- In 2008, "(investors) poured $ billions into oil index funds and similar products and the oil leases/loans which accommodated these funds’ financial purchases of oil had the effect of raising forward prices and of depressing the spot price, thereby creating what is known as a market ‘in contango’."

"When the forward price is high enough in a contango market what happens is that traders will borrow money to buy crude oil now, and sell the oil at the higher price in the future. Provided the contango is high enough, they will cover interest costs, and the cost of chartering and insuring the vessel and its cargo, and lock in a profit for the trader at the end."

This lead to the stockpiling of crude in tankers, sitting idle off the shores of the UK.

- Then the bubble popped:
"In June 2011 the QE pump ... stopped, and price levels began to decline. Consumer demand – as opposed to financial demand – for commodities had also been affected not only by high prices, but by reduced demand from developed nations for finished goods. In September 2011 more than $9bn of index fund money pulled out of the markets for the safe haven of T-bills."

"What happened as a result was that the regular rolling over of oil leases, and the free dollar funding for producers of their oil inventory ceased. So the leased oil returned to the ownership of the producers, while the dollars returned to the ownership of the funds."

"Since the ‘repurchases’ were no longer occurring, the forward oil price fell below the current price, and this ‘backwardation’ was misinterpreted by market traders and speculators . They believed that the backwardation was – as it usually is – a sign that current demand was high and increasing relative to forward demand, whereas in this false market the current demand is unchanged but the forward demand is decreasing."

- Another observation:
"The oil market price is – by definition – the price at which title to dollars is exchanged for title to crude oil.

But there is very considerable debate among economists about the effect of derivative contracts on this spot market price, and whether it is the case that the futures market converges on the physical market price or vice versa."

Michael H said...

Some more:

- "In my view there is little or no chance of military action against Iran"

- "I see real demand – as opposed to financial demand and stock-piling, such as in the copper market – declining in 2012 as the financial crisis continues at best, and deepens at worst, particularly in the EU. Stocks are low because bank financing of stock is disappearing as banks retrench, and it makes no sense for traders to hold stocks if forward prices are lower than today’s price."

- "... my forecast is that the crude oil price will fall dramatically during the first half of 2012, possibly as low as $45 to $55 per barrel."

- "As the price collapses we will see producer nations generally and OPEC in particular once again going into panic mode, and genuinely cutting production."

MH: let's see how it plays out.

I'll have to think for a while about what the effects (if any) of this scenario would be for gold.

Anonymous said...

On M. Singer (Czech CB). What I don't understand is why Greece does not default inside the Euro zone - but perhaps this is what the present talks about the 'voluntary' haircut will eventually lead to...

All the non-Euro CB people seem to think that Greece just need return to their own currency and to devalue, and suddenly they would have a competitive economy with lots of industrial production and healthy exports. That sounds like utter nonsense to me. It would fail in Greece as it will fail in the UK and in the US.

Finally, concerning Sprott Physical Silver. I still have an offer for buying a substantial quantity of physical silver and storing it in a recognized non-bank vault in a very PM friendly jurisdiction, all for less than 5% over spot. As a small investor in silver, you can even pay the 7-12% VAT/sales tax and then take your Eagle, Maple Leaf or Philharmonic coins home, and still do better than the 30% over spot of the Sprott Fund.

So all long term investors should be out of the Sprott fund by now. Sprott's own hedge funds, for example, already switched from Sprott Physical Silver into other investments some time ago when the premium was around 20%.

Since it is hardly possible to short the PSLV, however, the only thing you can do for now is scratch your head.

But I still think it is very interesting to pay attention to Sprott's moves. Apparently, he has filed documentation for a secondary offering of his PSLV. If he has the investments banks ready that underwrite the secondary offering, we may see quite some action again. The last time he bought silver for his PSLV, he most certainly drove the price up by several US$ per ounce over a 2-3 month period. The investment banks that underwrite the secondary offering would probably not complain if the manages to repeat the trick.

Finally, Sprott is perhaps already big enough in order to 'break' the silver market. I don't think he is going to do this - simply because he needs the investment banks, and for now he plays within the system. But he is certainly too big to just be pushed around by the banks.


Anonymous said...

Concerning Iran, I note that Jim Rickards is on record saying that war is increasingly likely.

Also, costata mentioned that North America is, for the first time in several decades, on the way closer to energy self-sufficiency. This is due to the new discoveries of natural gas and due to the Canadian oil sands that are economic only at the present oil prices close to 100$/barrel.

So for the US, it might make a lot of sense to 'somehow' get the oil price towards 150$/barrel. The charm of this 'solution' is that the little people who have to drive to work every morning, would pick up most of the bill. The downside is that this would be effectively a consumption tax that might lead to another recession.


dave2004 said...

Thanks Michael H for the screwtape blog, I wasn't aware of this one.

KnallGold said...

King of metals! And we're more hungry...

Texan said...

Vtc, $150bl oil would crush the US economy. My personal view is that the$140 spike in summer 2008 is what caused the stock market collapse. I think every $10 bucks is about a $100 bn drain in spending, but I am sure that's pretty rough. In any case, you can forget the Us having any interest in $150 oil, especially in an election year. See the IEA oil release at LoWEr prices early last year (Arab spring).

Aaron said...

Hi VTC, Costata

victorthecleaner said...

Also, costata mentioned that North America is, for the first time in several decades, on the way closer to energy self-sufficiency.

This one is a bit lost on me. The United States transportation and agricultural systems are directly linked to fossil fuel supply. The USA consumes ~18M bbl/d and US production peaked at ~10M/bbl in the early 70s.

Let's assume $150/bbl wouldn't crush the US economy and at the right price the US could once again ratchet production upwards of 10M bbl/d (unlikely IMHO). Cantarell's production today is ~500,000 bbl/d and Cantarell's production curve follows a pretty nice bell. Alberta flows from what I'm reading might make it to 3M bbl/d tops, but in sum we're talking about a very unlikely maximum production level of USA (10M bbl/d) + Mexico (500,000 bbl/d) + Alberta'(3M bbl/d) = 13.5M bbl/d falling ~4.5M bbl/d short at current USA consumption rates.

From what I understand it takes a long time to switch a nation's infrastructure from a liquid fossil fuels based system to something else and I don't see any sort of fast transition plan on the horizon.

How is "North America is, for the first time in several decades, on the way closer to energy self-sufficiency"?

Edwardo said...

$150 dollar a barrel oil would be very harmful to the U.S. economy, however, that fact alone hardly guarantees that such a spike won't occur, let alone occur in an election year. It will be very difficult for Republicans on the hustings to make hay out of a collapsing economy if it is the result of a military conflict brought on by a member of the Axis of evil. You can be sure that is how
any such conflict will be presented by the MSM, and, at least for a time, most of the populace is likely to accept the MSM narrative.

Presidents have a good track record of being re-elected in the midst of war. In any case, going foward, the Government is certainly preparing for some serious domestic unrest as per the advent of the odious NDAA.

Texan said...

Edwardo, you are right. The spike could occur. But I don't see why they would want it to occur.

Edwardo said...

They wouldn't, Texan, but a spike in oil prices, which came as the result of a military conflict with Iran, might be seen as an acceptable tradeoff if it increased the odds of securing the White House for another term.

I'm not saying that Obama would choose to gamble in such a way, since anything like certainty about the outcome (broadly defined) of such a conflict would be very difficult to come by. In short, while Obama could, arguably, increase his odds of winning the election, he could, equally, find that he had made a Faustian bargain.

Nickelsaver said...


I wonder, if Obama was to strike Iran before Ron Paul drops out of the GOP race, it would launch Paul in the polling.

J said...

From Harvey Organ

Many of you have written me about an update on the Tropos Affair.

Two weeks ago, when I sent this out this Bloomberg article “China, Japan to Back Direct Trade of Currencies,” I commented on its significance, but not quite as much as came to light since bringing it to your attention. .

and then this today:

China and Japan are bypassing the USD in trade, the development of an ASEAN central bank led by China and the reserve status of The dollar is under full attack. I believe this will be the story of 2012. Iran's decision not to accept dollars for oil pales by comparison ... My guess is that Geithner's current visit to Japan and China will be meaningless .. Once you lose the moral high ground it is next to impossible to regain.

I wrote last year that Tropos would rock the markets and we did not have to wait too long to see why.

This unresolved matter regarding Tropos was a major underlying current that influenced the agreement to directly trade currencies between China and Japan bypassing the United States Dollar currency (“USD”).

You may recall that Tropos was the intended recipient of USD$700 billion transmitted via a valid ACATS from the Bank of Taiwan, but the funds were hijacked by the Federal Reserve, and to this day, the money is still retained under the control of the Federal Reserve.

Tropos proceeded pursuant to the tenants of Maritime Law, which is the legal system by which matters relating to international currencies are adjudicated. As part of this process, Tropos had written extensively to the Bank of International Settlements (“BIS”), President Obama, various agencies in the U.S. government, as well as the G-20 countries and various global leaders detailing the behavior of the Federal Reserve. Many of these letters are posted in previous blog reports last summer.

In one of the Tropos letters, it was said: “This bold disregard for lawful transfer through the rogue actions of the steward of the reserve currency of the world is an affront to all global participants. We believe this is a watershed moment that will define the moral position of world participants in the international banking system for some time to come both amongst developing and established countries.”

Tropos went on to say “ if the Federal Reserve can so act without consequence or redress, the international banking system loses the confidence of its constituency and becomes unable to operate, effectively losing public trust in the “private scrip” issued by a given central bank. This has impact on all nations, which must currently use Federal Reserve Notes “private scrip” as the world’s reserve currency. This action by the Federal Reserve is destabilizing global trade, creating chaos and uncertainty in financial matters and requires the focused attention of leaders in the global community”.

Tropos had widely disbursed the letters to the G-20, NATO, the BRIC countries and others. Both China and Japan listened and took action. This is huge.

The fallout out of allowing this “disregard for lawful transfer” is now being played out as countries choose to bypass the USD in trade arrangements. It goes without saying that China and Japan represent a significant part of the world’s trade.

The impact of this currency arrangement between China and Japan will serve to lower the velocity of USD in circulation, since the two countries will not be using the USD. This effectively will weaken the dollar as demand for the USD shrinks. This will be felt this year.


J said...

Cont 2/2..

As countries successfully trade among themselves without the USD, the status of the USD as a Reserve Currency suffers as a result. One wonders how long the Tropos Affair will go unresolved and at what cost to the status of the USD as a global Reserve Currency, before it is resolved?

Clearly, global trading nations have taken note and are making their views known by bypassing the Federal Reserve and the use of the USD. No doubt, there are more nations who will follow, especially in Asia. It is no longer just a money question; it has become a geopolitical nightmare that has far reaching consequences for the United States and the Federal Reserve and the citizens who must use the weakened USD currency.

The bottom line result from the weakening of the USD as the Reserve Currency means that gold and silver will benefit, and likely achieve new highs in this coming year as a direct result.

Harvey Organ

M said...

@ Wendy

About the Canadian housing bubble... True,prices are leveling off slightly but we've seen this weakness before, just to have it climb again. I hope the top is in but I doubt it.

I pulled Feb 12th out of the air. There is no reasoning behind it. Im just playing the guessing game.

J said...

Jan. 11 (Bloomberg) -- China’s gold imports from Hong Kong surged to a record in November as consumers bought the metal before the Lunar New Year this month and investors sought to hedge against turmoil in financial markets.

Mainland China bought 102,779 kilograms from Hong Kong in November, up from 86,299 kilograms in October, according to the Census and Statistics Department of the Hong Kong government. China doesn’t publish gold trade data.

China’s Gold Imports From Hong Kong Surge to Highest Ever

Texan said...

Sorry, what is the "Tropos Affair"?

Michael H said...

More thoughts on the Chris Cook article I linked above:

The oil market 'events' of 2008 gives me an idea for further interpretation of the silver 'events' of 2011.

First, here is Turd writing Monday:

"Silver was a runaway train back in April and the Comex was near collapse. Frightened, the criminal C/C/C orchestrated a $6 takedown on the night of Sunday, April 30 and followed it up with four margin calls in 8 days."
"2011 was a very, very scary year for the cartel of bullion banks, ... Faced with collapse and virtually unlimited losses, the banks took the only action they know. Namely, they criminally and selfishly rigged massive declines in gold and silver for the sole purpose of exiting as many of their short positions as possible. And it's worked! In April, the ratio of short:long silver contracts was almost 3:1. Now it's almost at parity."

Victor presents an alternative view, that the silver market was in backwardation because of perceived counter-party risk:

As further background, Screwtape presents a fictitious scenario to explain the 'Wynter Benton' series of silver postings:

Also, much of this is influenced by costata's scenario presented in his silver open forum.

Based on the above, these are my further thoughts on the silver price spike:

- The large silver short positions in the price run-up, and their subsequent decline, are not signals of BBs trying to cap the price and facing significant losses, but instead are caused by producers selling their inventory and their future production in a rising market.

- The April silver price spike was due to orchestrated marketing hype, as seen by WB, ZeroHedge, etc.

- Silver was in backwardation in the price run-up because the producers knew that it was a temporary spike and they were selling their forward production heavily. This depressed the future prices, while the hype affected primarily the spot price.

- The arbitrageurs were not able to close the price difference, as victor noted. Either a) the arbitrageurs were in on the sting b) the arbitrageurs and the producers are one and the same, or c) the arbitrageurs were overpowered by the volume of future selling.

ein anderer said...

@Joy of Learning:
Living as a German in Germany’s south I know quite well also Switzerland.
If I was allowed to choose between Germany and Switzerland I definitely would prefer this small country in the midst of it’s beautiful mountains and lakes.
They pay much better, the social system is much more advanced (3 pillars), the state is not in such huge debts, and the political system is not an optimum but far more better than Germany’s (since they rule a huge amount of things in the regions, without the need of big administrational hydrocephalies). At least no need of so much "ECB" and "Brussel".
AND: The last two wars they did not used weapons although they were NOT "neutral" as many claim.
Or Sweden or Finland (if you can stay their long winters …)
But Germany: I always feel as if many things here are going on "behind the curtain". That may be true for almost every modern state: But Germany seems to be quite a model for this kind of dishonesty. The Merkel-Effect …
And we have huge debts! And we do NOT own physical Gold! "Our" gold was (!) in London, Paris and New York, right. But NOBODY knows if it is still there. Read Eric Sprotts "Do Western Central Banks Have Any Gold Left???" ( ). I do not think they have.

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