Mar 222016

After two decades with The Perth Mint, Bron Suchecki has left to take up a new career challenge. We wish him well in his new venture and thank him for his outstanding contribution to our business during his time in Perth.

We’ve decided that this is a great opportunity for the Research Blog to take a time out.  We’ll use this time to review its place in our overall suite of content sites, and ensure that The Perth Mint continues to offer insightful content in the right format to our readers and followers.  While we do this, we will ensure that the valuable content and reference material currently available on the Research Blog remains available to you.

And we look forward to sharing with you some new initiatives to ensure The Perth Mint stays at the top of your list of sites to visit for knowledge and thought-leadership in precious metals.

Feb 032016

At the beginning of each year the London Bullion Market Association (LBMA) polls a range of respected precious metals analysts in the large banks and independent consultancies for their forecasts for metal prices for the coming year. This year contributors are “predicting price increases across the board for all four metals”. Their forecasts for the average price during 2016 are:

Gold – $1,103, ranging from $978 to $1,231
Silver – $14.74, ranging from $12.63 to $16.78
Platinum – $911, ranging from $748 to $1,076
Palladium – $568, ranging from $413 to $674

LBMA forecasts have been quite accurate historically. The charts below show the actual average gold price each year as a line against the lowest (bottom of red bar), highest (top of green bar) and average of the forecasts (where red and green bars meet). Note that these charts are of the yearly average, so during 2016 prices will move around these figures (see the survey for more detail).


This year the range of forecasts for gold is quite tight, indicating more consensus or confidence amongst the analysts about gold. The most pessimistic analyst is René Hochreiter who forecasts a low for gold during the year of $850 while Martin Murenbeeld sees a high of $1,375.

The LBMA analysts are less accurate in the case of silver. This year their range is wider but overall see a downtrend. Bernard Dahdah sees a low for silver of $11.00 with Philip Newman seeing silver getting as high as $19.50 during 2016.


In the chart below I’ve worked out an approximate gold:silver ratio forecasts for those analyst who forecasted both gold and silver. It is not exactly the same as an actual ratio forecast because it is just dividing an average by an average, but as gold and silver tend to move together it is a reasonable approximation.


In line with the tight ranges for gold and silver, the LBMA analysts don’t see much change in the ratio for 2016 and certainly not back down to long term averages around 50.

Feb 022016

Since my article on the LBMA Silver Price on Friday, more market participants have come out criticising the process:

  • Afshin Nabavi, MKS: “People are going to lose all faith in the fix if this keeps going.” (link)
  • Brad Yates, Elemetal: “When Thursday’s number came in, people initially thought CME would void it, it was so far out of line with the market. When they endorsed it and it became the official print, the benchmark immediately lost credibility. We had two clients shift business away from pricing on the fix to live pricing.” (link)
  • Simon Grenfell, Natixis: “The new silver price setting mechanism appears broken. It is clearly an issue that the regulator should be looking at.” (link)
  • Grzegorz Laskowski, KGHM: “The large discrepancy between the spot price and the fix is very alarming to us especially that it happened twice in a row. I think the LBMA needs to make every effort to explain why it happened and needs to help to develop a system that would help to avoid these kind of situations in the future.” (link)
  • Unnamed bullion banker: “People are too scared to change their orders in the middle of the process so it got stuck. In the old days, banks would step in and take positions in order to balance the process. No-one dares do that anymore, as then they have to answer to compliance etc.” (link)
  • Unnamed precious metals dealer: “The system is broken. In the old days, if it was out of line, someone would have bought the fix and then sold the futures. It’s a joke — that’s all I know.” (link)

The most damming comment comes from Ross Norman as he is respected enough to be included in LBMA’s oral history project ‘Voices of the London Bullion Market’, who noted that “ten times in the last six months the silver price has been ‘fixed’ outside the trading range of the spot price for that day which is nonsensical. … A benchmark or reference price it is not. … the so called LBMA silver price does not come close to reflecting reality – and it is clearly vulnerable to manipulation – it is therefore effectively invalid.”

It seems the LBMA is certainly feeling the heat, with Ronan Manly noting this recent change to the LBMA’s website:

Ross asks why the LBMA Silver Price oversight committee (on which the LBMA sits) has “not come forward and explain what is going wrong and what they are going to do about – it is after all their job”. However I think there isn’t much they will be able to do about it because, as Ross himself notes, the real problem “is that banks are increasingly unwilling or unable to place corresponding orders where they perceive a mis-pricing because of fears of being accused of abusing a situation and facing the wrath of the regulator or their compliance departments.”

To fix the Fix, bullion bank traders (whether they are direct participants or not of the fix process) have to be able to “buy the fix and sell the futures” when the fix gets swamped by sell orders (or vice versa). The problem is that banks have a wide range of clients who hold positions with them across spot, forwards, futures, options, ETFs and so on. It is therefore highly like that one of those clients would be the loser of any such activity (and others winners) and complain (as did the client Barclays’ trader Daniel Plunkett traded against) about it. Alternatively, the regulator may decide to investigate markets from time to time.

The problem is that when a regulator comes looking at trades after the fact they could construe manipulative intent when no such thought was going through the trader’s mind – who was just arbitraging a market imbalance – and the trader finds themselves fined £95,600 and banned from trading, as Plunkett was.

If you think that traders would not be worried about such an unfair claim against them happening, or that client complaints or random regulatory investigations it would be unlikely, you haven’t been reading enough Matt Levine, who, coincidentally on the day of the silver stuff up included the two following stories in his daily article:

  • Nav Sarao, who is facing a 380-year jail sentence, “may not have had a material, or even any, impact on the bout of equity market volatility in May 2010 that later became known as the flash crash, according to a draft research report by University of California, Santa Cruz and Stanford University professors” (link)
  • Tom Hayes, who is serving 11 year jail for LIBOR rigging, saying that he was “thrilled that the brokers can tonight return to their families and their lives” while also “bewildered that he is now in a situation where he has been convicted of conspiring with nobody” (link)

Now I’m not saying these guys are scapegoats, but as a trader these stories would not make you feel comfortable that you would be given the benefit of the doubt. So would you help keep the fix in line with other markets if it risked you going to jail? No you would not, so the traders sat/sit on their hands. No matter what the LBMA, CME or Reuters say, I can’t see traders keeping the fix in line with other markets unless they got a letter from the FCA and SEC saying they will not go to jail, and the chances of that happening are zero.

The only hope for the fix is if non-banks step up to act as market makers/arbitraguers, otherwise “it can only get worse” as Ross says. Bullion Vault’s article hints that some such trading did happen

“As soon as [the benchmark] was done, [futures market] was hit with arbitrage selling and traded down to 14.07 with 5,000 lots trading. Then bounced back to trade $14.30+.”

however given how far the fix was able to drop, and how the futures market dropped much less, such arbitraging was not enough (but highly profitable to whoever executed it). Possibly more non-bank traders will step into the market to take advantage of the fact that the banks are impotent.

The problem for the LBMA Silver Price as a business is that unless traders do step in, more and more clients will stop placing their orders on it, as some of Elemental’s clients have. As the two-way liquidity drains away the chance of imbalances and out of line fixings increases, which causes more to pull out and so on in a death spiral.

unable to place corresponding orders where they perceive a mis-pricing because of fears of being accused of abusing a situation and facing the wrath of the regulator or their compliance departments. … Since Mitsui the only non-bank amongst the price setters departed – (and therefore the least regulation-bound), we have only banks remaining in the benchmark setting process so it can only get worse.

If the alleged email from the CME to its clients below (as reported by Platts and called “nonsensical” by a banking source) is indicative of how this issue is being dealt with, then the future of the fix is fraught.

“The platform worked as it should, in fact perfectly. It’s as good as the orders the participants enter. If you are a client of a ‘participant’ I guess you should direct this question at them. If you want individual flexibility, become a participant.”

Feb 012016

The release of Federal Reserve Bank of New York’s December gold stocks report provides and opportunity to analyse the progress of this current phase of withdrawals from its custodial stocks. I say “phase” because in recent times there have been periods of concentrated withdrawal activity in between periods of little or no activity, as the chart below from Nick Laird at Sharelynx shows.


It is interesting that these phase seem to correspond with economic turmoil – crash 2000/1, global financial crisis 2007/8, and today?

Note that during 2000 and 2001 the FRBNY was able to consistently ship out 40 tonnes a month. That works out at 2 tonnes a day over 20 business days a month. Commercial vaults designed for high throughput can do more than that but if you look at this National Geographic documentary on the Federal Reserve you can see it is not suited to high volumes. As I explained in this post, “those who think Germany could put 300 tonnes in a big plane or warship and move it in one or a few days have been watching too many Die Hard movies”. In any case, Germany’s 300 tonnes could therefore have been realistically  repatriated in one year.

During 2014 and 2015 we know that Germany repatriated just under 190 tonnes and the Netherlands around 123 tonnes. Given the reported net withdrawals from the FRBNY (back calculated as they only report balance in millions of dollars @ $42.22, I calculate the following delivery schedule.


All figures represent withdrawals, except the one highlighted in yellow, which is a deposit. Note that every figure in this table is a multiple of either a 4.420 tonne or 5.157 tonne “lot”, eg 41.991 = (4.420 x 6 + 5.157 x 3). I have tried a number of possibilities but the above is the only realistic one I can find that fits the reported facts in the lot multiples. Out of this comes two observations:

  1. Another central bank(s) have been withdrawing metal from the FRBNY but not disclosing it, close to 40 tonnes to-date.
  2. Someone deposited 41.991 tonnes just as the Netherlands was about to withdraw 123 tonnes.

As the FRBNY is reporting physical custodial stocks, the only explanation for the deposit is either another central bank deposited physical, or the FRBNY moved some of its (ie America’s) gold reserves into the account of another central bank, which could be the result of:

  1. A new FRBNY lease/swap TO a central bank
  2. FRBNY repaying gold leased/swapped FROM a central bank in the past

Given how tight-lipped central bankers generally are, we are unlikely to know who the mystery (and coincidental) gold depositor was.

Jan 292016

Since I’m partial to a bit of alliteration in my post titles, it is just as well that the Fix had a name change because there is a word beginning with F that describes what happened midday London yesterday (and that word is Farce – go wash your mind out with soap). Anyway, “storm of stupidity” is probably a better fit because it looks like a combination of price insensitive sellers using what now appears to be a closed-end fund.

Before we get underway, I want to address the manipulation argument. This was predictably raised by those looking for a simple explanation, seeing the price action as another Plunkett-style trade. I think that is unlikely in this case, as any trader attempting that post-Plunkett would certainly not be wanting to draw attention to themselves and only be looking for a few cents. Once you saw the price dropping dramatically and the fix process struggling to clear, you wouldn’t keep pressing on to leave a nice trail in what you know is a fix that is going to be investigated due to its extraordinary nature.

My first “stupid” is the people who put sell-at-market orders on. These people are most likely mining companies, particularly those for whom silver is a by-product. As I discussed here last year, they think it is safer to trade on a benchmark – safer in that if they traded the spot market and didn’t achieve the benchmark price they would get in more trouble for that then the times they achieved a better price.

I asked our senior dealer whether this fix farce would prompt such sellers to stop using the fix and let their brokers “work” their position in the spot market old-school style. He said no – generally they weren’t aware of the intra-day price movements and just took the benchmark as given. I suspect however that such a view is based on the assumption by the sellers that an industry benchmark is liquid and will represent the market price. Clearly this was not the case yesterday.

This leads us on to our second “stupid” – regulators/compliance. Adrian Ash reports that:

“Dealers blamed Thursday’s action on rules – decided by the compliance departments of banks and brokerages, and aimed at meeting the new regulatory regime – which block traders participating in the benchmark auction from “arbitrage” in other silver markets at the same time.”

A classic case of unintended consequences where regulators come up with simplistic solutions and end up throwing the baby out with the bathwater. How is a benchmark meant to represent the market if it can’t be connected back to that market? This means the LBMA Silver Price is sort of a closed-end fund without an ETF-style market making arbitrage mechanism to keep its price in line with reality.

It does raise the question of whether the CME/Reuters or the brokers have some duty of disclosure to tell their clients that because of the inability of brokers to arbitrage the LBMA Silver Price, the price they get may be at a discount or premium to the rest of the market. With the undoubtedly millions of ounces sold on the fix at an 80 cent loss, someone may try to sue someone.

This leads us on to the question of what were the bullion banks doing during the fix? In a situation where the banks can’t arbitrage during the process and there is a persistent buy/sell imbalance, then they have to take on price risk that when the price fixes, they are not going to be able to layoff the “market making” position they took on into the spot or futures markets at a profit.

The fact that the price spiralled down implies that the volume being sold was large, large enough that the banks were not confident that when the price fixed that they would be able to lay their positions off in the “free/open” market without moving the price down. It does beg the question of where were other market players to take advantage of such a divergence? I think the answer is that such trading is a tricky business as you can’t be sure that your order into the fix will balance the market and you will get set at that price – it is not a simple arbitrage where you know you can execute at two different prices, it is a much more dynamic process. Managing that risk is a skill set that, surprise, is probably only located within the LBMA market making banks. But they have their arbitrage hand tied behind their back (thank you regulators).

I think it is also important to note that the setting of the price of the auction rounds is automated. There is the capability “in exceptional circumstances” for the CME to “overrule the automated new price of the next auction round in cases when more significant or finer changes are required”. It would be interesting to know if the CME just let the algorithm run wild or intervened, although I note that Reuters, in addressing IOSCO Principles for Financial Benchmarks, say “No expert judgement will be levied – auction-based methodology”. Yes, brave new world, no meatbags required.

A contributor to this situation, by giving regulators intellectual “cover”, are those academics who failed to understand what market making is and the different roles of brokers and principals. In precious metals we had various academic papers that observed an interaction between the fixes and the spot and futures markets and presented it as if they had found evidence of manipulation when they had merely discovered arbitrage. In FX market this manifested as outrage about foreign exchange “rate-rigging” (eg here).

The problem for the CME/Reuters/LBMA is that if the sell-at-market sellers wake up and can’t be reassured that the silver fix has a mechanism to keep it in line with the rest of the silver market, then they will abandon it and the fix will die. But I can’t see how the fix administrators are going to be able to roll back regulatory/compliance requirements for “no arbitrage”. Maybe others will step in to perform that arbitrage. But then why can they “rip faces off” but not the banks saddled with being conduits for fix orders? Maybe regulators will want to regulate these 2nd tier arbitrageurs so there are only “real” buyers and sellers? And the 3rd tier? I wouldn’t be confident that regulators wouldn’t go down that absurd rabbit hole rather than admit they were wrong.

You’ll note I’ve used the word “fix” rather than “LBMA Silver Price” in this article. Its resistance to what seems to me to be a superficial cleaning up of the old fix – look at this new fix Mr regulators, its electronic, uses algorithms and we’ve stopped using the word “fix” and we’ve even made the price “easier to see. The traders wanted to have bigger fonts, so we did that” (yes, I kid you not). All the while, however, it was structurally deficient in the face of large buy/sell volume imbalances.

For institutional and other big money investors, this fix farce will just make them think that the silver market’s liquidity is a joke.


I wonder if CME is still “proud” of this new fix system? Well at least the bigger fonts will make it easier for people to see how much money they are losing.

 Comments Off on LBMA Silver “Price”: A Perfect Storm of Stupidity
Jan 152016

Three years ago tomorrow (16 January 2013), Deutsche Bundesbank announced that they would be repatriating 300 tonnes of gold from New York and 374 tonnes from Paris by 2020, which was a revision of their October 2012 promise they would transfer 150 tonnes from New York by 2015. So how have they progressed and are they meeting their schedule?

In January last year I did an analysis of the state of the German repatriation.  At that time Deutsche Bundesbank said they had “transferred 120 tonnes of gold to Frankfurt am Main from storage locations abroad: 35 tonnes from Paris and 85 tonnes from New York”, which, when added to the 32t and 5t (respectively) transferred in 2013 means they had transferred 157 tonnes in total by December 2014.

Based on data accumulated each month from the US Federal Reserve by Nick Laird of Sharelynx, the Fed’s custodial gold holdings have reduced by 125 tonnes from January to November 2015. I am fairly confident that all of these are German repatriations as there hasn’t been any announcements of other central banks withdrawing metal from the Federal Reserve’s vaults in New York. In addition, the amounts delivered each month are similar to those that occurred in 2014, as the chart below shows.


To-date, Germany looks to have returned 215 tonnes, which is well over their initial promise of 150 tonnes. In this chart I forecast that based on the monthly rate of 2015 withdrawals, Germany should have repatriated all of their planned 300 tonnes by September 2016, putting them over three years ahead of the “by 2020” target.

It seems what Carl-Ludwig Thiele, Member of the Executive Board of the Deutsche Bundesbank, said in this interview with Handelsblatt in February 2014 was true: “the Americans have never stonewalled or hindered us in any way. On the contrary, their cooperation has been most constructive in every respect”.

By the end of this year Germany would have around 1,237 tonnes in New York, which would be 37% of their total gold reserves. But why stop there? If the US Federal Reserve and Germany have demonstrated that they can move around 130 tonnes a year, then continuing on at that rate for the remaining 3 years and 3 months would result in another 422 tonnes back on German soil with 814 tonnes left in New York (24%), surely enough, along with 400 or so tonnes in London, “so that, when push comes to shove, we can have it available as a reserve asset as soon as possible” (Carl-Ludwig Thiele in October 2012)?

As to the Paris repatriations, we don’t have any independent indication of what they have delivered during 2015. With a 374 tonne target, and only 67 tonnes confirmed returned as at December 2014, Germany will have to move at least 61.5 tonnes a year from 2015 through to 2019 to meet the target. Anything less than that will raise questions, particularly considering that it would have to be easier to ship gold from Paris to Frankfurt than from New York.

Based on the dates of the previous repatriation updates, here and here, we should have our answer some time next week.

Jan 142016

Even though investors are constantly told in disclaimer boilerplate that “past performance is no guarantee of future performance” the siren call of historical price charts is hard to resist. In the case of gold and silver, it is impossible to avoid projecting the 1970s bull market on today’s price action due to its epic nature and perfect representation of Dr. Jean-Paul Rodrigue’s bubble behaviour.

Gold bulls would argue that economies and financial systems have not been healed and accordingly the gold price top in 2011 was only a mid-cycle peak similar to the peak of $197.50 in December 1974. In chart form this claim manifests as per below.


The claim looks strong based on the similar behaviour during the initial bull phase – excepting the area marked (1), which is OK as history is said to rhyme, not repeat – and the almost identical retracement in terms of size (50%) and relative duration.

The “relative” speaks to the weakness of this charting analogy as to fit the two time periods one has to “speed up” the 1970s – the recent gold market’s build up and retracement took about twice as long at the similar behaviour during the mid 1970s. Maybe the explanation for this is the greater degree of central bank market activities with QE etc to prevent financial market corrections (and corresponding gold market response).

Based on this chart projection, the current gold market is due for a new bull market as marked at (2) and while the 10:1 ratio will warm the hearts of gold holders with that giddy $9,000 scale on the right hand side of the chart, I would note that on this basis it will take around 5 years before gold reaches its previous $1,900 highs sometime in 2020.

Final point I would make is to emphasise the “rhyme, not repeat”. Note that the final price run involved two parabolic price phases, the first marked (4) at around $400 and then another to $850. My advice would be if you see a parabolic price move, sell – there is no guarantee that it will play out exactly the same this time and a 50% correction is reasonable on the other side of the bubble. The $4,000 in the hand could turn into $2,000 just to maybe get $8,000. While hopefully many are sagely nodding right now that they would be so happy with $4,000, the fact is at that time there will be many plausible arguments put forward that even higher prices are inevitable, just as there was when gold was running up to $1,900. But such is the stuff that bubble tops are made of.

Of course this would not be a trademark Bron balanced blog post without a dream-popping counter argument, as per the alternative chart contortion below.


Here we see a mid-bull cycle surge marked (1) but the financial crisis marked at (2) prevented a retracement and pushed gold on to its eventual high. On the downside we see a similar levitation/denial after the top before the price crashes and continues its depressing deflation.

Note that the timescales on this overlay are identical – a day in the 70s equals a day in the 00s, which is a factor in its favour. By this chart 2016 will continue to see gold fall down to circa $900 marked (3) before staging another run up over the next three years to around $1400 or thereabouts as marked at (4).

The logic behind this potential future is that while the financial system is hardly fixed and there will be risk events ahead that will drive money into gold, central banks have demonstrated a willingness to take action to prevent the sort of complete economic breakdown that would justify a $8,000 gold price.

Ultimately, which of these futures you subscribe to depends on whether you believe in the narrative that central banks are omnipotent. If you think they have fixed things and/or can hold it together, then sell the coming $1,400 blip. If you think it is still to unravel, then buy the $1,000 dip. Good luck either way.

Read this article in German at GoldSeiten.

Is gold stretched?

 Posted by at 5:00 pm  Investing, Ratios
Jan 132016

Last week I wrote about the gold silver ratio as a way of determining which represents better value. Since then the ratio has moved higher, with gold outperforming silver on its move above $1,100. This has brought with it a number of bullish articles and while the move is encouraging and supports the idea that gold may have bottomed, in relative terms gold looks stretched to me at this time if we take a step back and look at the bigger picture.

First, consider gold relative to the other precious metals and oil. In the charts below a higher number indicates relative overvaluation. Only for palladium could you argue that gold is not stretched. By the way, look at the volatility in the oil ratio. You often see people talking about the stable gold:oil ratio but movements from 10 to 30 is an increase of 200% and a fall from 30 to 10 is a 66% reduction – hardly stable.


Next, if we look at agricultural commodities (click here for a bigger version). The left hand side has the breakfast club commodities – OJ, coffee, sugar, corn and bacon – and the right hand side has cotton, coca, soybeans, lumber and cattle. Only two of these ratios are within long term ranges with the rest at elevated levels.


Finally, the charts below compare gold to other metals (in these charts the ratio is inverted, so a low figure indicates gold is relatively more expensive – click here for a bigger version). Again, most of the ratios are at the extreme end of long term high/low trading ranges.


Of course the above charts may be reflecting the relative weakness of commodities but on that logic when commodities recover that will just put the ratios back into their normal ranges, meaning gold will not get a boost from that general money flow into commodities when (if) it happens. No doubt gold is attracting fear money at this time and moving up along with the US dollar – another example of its non-correlated behaviour with asset classes – but it is still too early to call as the chart below puts the move above $1,100 into context.


Gold has been above the 200 day moving average before and failed and it doesn’t take a technical analysis genius to look at the chart above and see that gold has to move to at least $1,150 and hold before shorts will lose their confidence (although recent equity jitters and questions about the strength of economic recovery would be giving them pause for thought).

In terms of Asian demand, Perth Mint is seeing good premiums on kilobars in the fact of this price rise. Normally demand dries up on price surges so this is positive but we wouldn’t classify demand as crazy either, which considering Yuan devaluation and the fact that early February is Chinese New Year could also be read negatively.

All up, I feel that gold is a bit stretched and thus likely to grind sideways in the medium term as it builds a base and other metals and commodities catch up.

Read this article in German on GoldSeiten.

Jan 062016

Focusing on registered stocks versus open interest is a favourite of many bloggers because it produces dramatic “Comex is about to fail” figures. I have written many times that one also needs to consider eligible stocks as eligible inventory can be converted to registered relatively quickly. Blogger Kid Dynamite noted in passing in an email that December was a textbook example of eligible being used by issuers to make deliveries to stoppers. Not one to take the words of a cartel apologist at face value, I contacted data wrangler Nick Laird for detailed Comex warehouse movements and issuer/stopper figures, to check the facts for myself (and you).

To set the scene, at the beginning of December total registered stocks in all Comex warehouses was 120,967.246 ounces of gold. In retrospect, we know that the total number of contracts that stood for delivery during December was 2033, or approximately 203,300 ounces. Since that number is larger than the total registered stocks, you may be surprised why you didn’t hear about the default of Comex. The reason is that gold was either deposited directly into registered stocks in a Comex warehouse or gold was transferred from eligible to registered.

The table below shows all the changes in registered and eligible stocks per day per warehouse. Note that every single registered change during December was positive. I have coloured them by whether they were directly deposited (yellow), a transfer from eligible to registered (gold), or unknown (blue). In the case of the unknown, these are most likely transfers in my opinion but it is hard to be clear about that as the eligible change is including other movements.


Note that the total increase in registered during December was 154,947.693 ounces – 76% of the contracts standing for delivery – and that 105,086.452 ounce were clearly eligible to registered transfers, given the exact ounces involved. However, what is interesting is how these deposits into registered stocks match up with contracts “issued”, which are listed in the table below.


In this table I have multiplied out the number of contracts by 100 to show them as ounces (and also combined customer and house so the table is easier to read). You will note that the numbers coloured match the amounts being delivered into registered on the same day. For example, on the 15th HSBC issued 223 contracts (22,300 ounces worth) and in the warehouse movements figures we can see a transfer from eligible to registered on the 15th of 22,301.706 ounces.

The warehouse movement ounces of course generally will not match exactly with number of contracts as 100oz bars are usually odd weight where the bar’s weight varies between each bar within a specified tolerance, or where three kilobars are being delivered (which while being exact weight, are 32.15oz each so will rare exactly equal multiples of 100oz, see here for more info). Nevertheless, the repeated movement from eligible to registered matching issued amounts on the same day is proof that eligible stocks can be drawn upon by shorts to meet their obligations. Accordingly, solely looking at registered stocks to open interest is not a reliable indicator of the ability of shorts to make delivery.

For Trainspotters Only

In the table below I’ve done two things:

  1. Split Scotia Mocatta’s eligible warehouse movement figure from the first table above into an assumed eligible to registered transfer and the balance into an eligible other.
  2. Divided all ounce warehouse figures by 32.15. If the resulting amount is an integer (highlighted in purple) then it indicates the movement of kilobars.

I think the fact that the “eligible other” figures are kilobars strongly indicates that my blue “unknowns” were all eligible to registered transfers. It is also interesting that Scotia seems to deal a lot in kilobars in smallish quantities, at least during this snapshot on December. JP Morgan dealing in tonnes of kilobars is nothing new for my long-term readers.


Jan 042016

In August I did an analysis of the ideal percentage allocation between gold & silver. This assumed one picks a percentage allocation and sticks with it. Another investing approach is to switch between gold and silver based on one’s view of which metal will outperform the other in the future. One way to determine the point at which to switch is to use the gold/silver ratio.

Below is a chart of the gold/silver ratio, calculated by dividing the gold price by the silver price. Another way of looking at this chart is that is shows the price of gold in ounces of silver.


On the chart I have marked some reasonable high and low trading bands based on historical movements in the ratio. When the ratio is high, it is saying that gold’s price in ounces of silver is high, so sell gold and buy silver (light grey line). When it is low, gold is relatively cheap, so sell your silver and buy gold (gold line).

It is important when dealing with ratios to keep in mind that they are just a relative performance measure. Switching between metals at a high or low ratio does not guarantee dollar profits, as the ratio can change when both gold and silver are falling in price (in which case it is just telling you which metal is losing you less money).

You can see from the chart above that in February 2011 the ratio broke through 45, which based on history looked like a reasonable ratio low and thus a signal to sell silver and buy gold. The ratio then had a relatively steady climb to 75 in November 2014, a historically high point and with some commentators suggesting silver will be the outperforming metal going forward based on this high ratio.

However, the chart below shows the dollar performance of gold and silver since 2011.


First, note that the ratio had you out of silver and missing its 50% increase. Gold still went up initially but you can see from the chart that while the ratio moved from 45 to 75 over nearly four years, both gold and silver fell over that time period. The ratio signal did “work” in the sense that gold did outperform, only falling 15% compared to silver which fell 49% between Feb 2011 and Nov 2014.

The other caveat is that the ratio trading bands (or any trading bands) are not guaranteed to work in the future. You will notice on the ratio chart that prior to the mid 1980s a reasonable gold:silver ratio trading band appeared to be 30 for a switch to gold and 40 to switch to silver. However in 1983 you would have got into silver at 40 waiting for the ratio to get back to 30 as it had done many times in the past 12 years but instead it only got into the low 30s before climbing to nearly 100 in 1992.

It should be clear from the chart that something structural or fundamental changed in the gold or silver market during the mid 80s to early 90s with gold and silver moving into a new “relative” relationship. Possibly that structural change was the decision by the United States to liquidate its Strategic Stockpile of silver, as detailed here, see the chart below.


Note that the rate of stockpile reduction increases from 1985 onwards, around the time the gold:silver ratio begins its dramatic run to 100, and that when the stockpile drops to its first low point in 1993 the ratio breaks below 90 (which it has never seen again).

The takeaway is don’t just trade a ratio purely based on historical numbers without some theory as to how the two assets are related and whether the environment in which that relationship exists is likely to continue in the future.