May 262015

Sorry readers – you’ve got a temporary blogger in place for the next couple of weeks whilst Bron has a well-deserved break, during which I’m sure he’ll still post, tweet and work away…so no break at all really. As a bit of background, my name is Anthony and I have worked at The Perth Mint for just over 10 years as a Finance Manager (yes…accountant….don’t hold it against me).

Although the typical blog posted here is well researched, factual and informative, hence why we call this the Research section, the next couple of weeks are likely to be somewhat more philosophical in nature.  Fair warning then, factual and informative will be optional extras…  So without further ado: Insurance – do we really need it?

Most of us never bat an eyelid when purchasing insurance for our car, house and even our life.  When it comes to our investments, however, many fail to even consider it.  Yes, experienced and intelligent traders introduce stop losses for open trades and other such risk mitigation strategies but how many lay people seriously consider insuring against, for instance, financial calamity.  Or diversify cash holdings across multiple banks to minimise counterparty risk?

To state that many precious metal investors view their holdings as insurance, at least in part, is far from a revelation, but is there really a need for it?  And what exactly are they insuring against?

There is little doubt the geopolitical environment continues to look unstable with numerous potential flash points.  This includes ISIS in the middle east, as well as Saudi Arabia ‘involving themselves’ in Yemen.  In Europe you have the Ukraine scenario and all the finger pointing…and sadly loss of lives…that entails. Asia doesn’t miss out with the almost forgotten ructions in the South China Sea for a start, and all of this is but to name a very few.

The global macroeconomic environment looks little better with rampant money printing by Europe and Japan, the strengthening US dollar and little sign of the Feds wanting to pull the interest rate raising trigger.  And let’s not discount the whole Greece merry go round and Grexit threat, with the resultant sovereign bond market upheaval that could cause.

Additionally, the strengthening US dollar which is leading to significant issues within emerging markets, many of  whom leveraged themselves up on low interest US dollar debt when the currency was weak, leaving them perilously poised as they service debt in a strengthening foreign currency from a weakening economy. We’ve also got a slowing in China and the commodities rout that has resulted – albeit with some strong arming from the newly invigorated US dollar.

All of this economic and political uncertainity has had surprisingly little impact on the apparent stability of the global market place, as very loosely assessed by movements in the volatility (VIX) index.  Are we reaching a Minksy type moment…the stability leading to instability as it were?

Clearly that’s impossible to predict accurately, however there have been some clear warning signs out there with the recent reasonably significant bond market weakening flashing something a little red.  Additionally the unprecedented currency movement in the swiss franc when the SNB dropped the peg to the euro in the middle of January this year was a move statistically outside the risk algorithms employed by most institutions.

Are we due a Black Swan event?  Are global markets due a significant correction? Are we approaching a state of inflation or deflation?  Is financial calamity just around the corner?

If I personally knew the answer to all of those questions, I certainly wouldn’t be writing this as a 9-5 stooge (sorry boss) however given the recent reduction in the precious metal prices, insurance policies seem to be selling at a discount.

Purchasing precious metals as insurance is a great way to start, and certainly helps with the justification case for many new investors.  One important point to keep in mind is if you are looking at it as insurance, you need to consider the type of investment you make, and with whom.

You need to ensure you minimise counter party risk, whether purchasing ‘paper’ or  physical metal in storage.  Alternatively, you can eliminate it entirely by taking possession of physical metal however that can bring it’s own set of risks.

So, do we need precious metals insurance?  Only you can answer that in your own particular circumstances…but I’m personally getting some more.  Whoops…is that another debt bomb I just heard go off…gotta go….

May 222015

I keep in touch with the work of academics interested in gold via this website and it is a humbling experience. It reminds me of the saying “those who can’t do, teach; those who can’t teach, blog” (I thought it needed updating).

That website recently posted a September 2014 paper by Dirk Baur, Joscha Beckmann & Robert Czudaj called Gold Price Forecasts in a Dynamic Model Averaging Framework – Have the Determinants Changed Over Time?

No doubt you have seen many commentators writing about their forecasts for the gold price and giving reasons (which is basically their “model” for what drives the gold price). But I bet you have never seen a gold forecasting blog post that include one of these:


That comes from Dirk et al.’s (lets call them Dirk’s team) paper and no, I don’t know what it means, it has something to do with knowing “the conditional distribution of the state at time t−1 given the time t−1 information set Y t−1 = y1, . . . , yt−1”. What I do know is that this hard core approach means what the academics do is rigorous.

I’ve met Dirk a few times when he was at the University of Technology in Sydney, he is now at Kühne Logistics University. Last time I met him he described how he had to present a paper in front of a bunch of other academics, where they do their best to rip it to shreds and/or ask lots of difficult questions. This is standard stuff for academics and it means people avoid circulating rubbish. I don’t think many bloggers would be willing to go through a similar approach.

Anyway, the reason I’ve highlighted Dirk’s team paper is because it proves that the things that drive the gold price change over time and more usefully, what the key ones are and their changing influence on gold. Most of the more serious forecasters usually create a fixed formula based on some variables, see this one by Eddy Elfenbein for an example – which simplifies to:

(((this month’s 2% Deflator/this month’s Ibbotson Real Rate/(last month’s 2% Deflator/last month’s Ibbotson Real Rate)-1)*8+1)*last month’s gold price)

Other models have a lot more variables, such as “commodity prices, interest rates, inflation expectations, exchange rate changes and stock market volatility among others”. What Dirk’s team show is that in addition to working out what weights each of these variables need to have in your formula, you also have to work out how those weightings change over time. This makes sense, because the world isn’t flat and things change. For example, Dirk’s team note that the influence of the stock market on gold is generally higher during times of turbulence.

As you can imagine, trying to work out which variables matter, what weightings they should have and how those weightings should change over time is a pretty tricky exercise and results in a “computational burden” due to “the need of determining a transition matrix Bayesian inference” (I don’t know what that means, which is why I used the word “tricky”). Dirk’s team calculate that a forecasting model with 14 variables results in 16,384 formulas to test, and that is without changing the weightings!

So Dirk’s team used a Dynamic Model Averaging approach which involves some sequential learning in the forecasting procedure. The interesting take aways for me from the paper include:

  • generally only two or three variables are driving gold prices at any one time
  • there are brief periods where you need six or seven variables to model the gold price
  • US CPI played a big role during the 1970s but is insignificant during the “great moderation” between 1980 and mid-2000
  • gold is influenced more by world CPI levels than by US CPI levels
  • silver prices had a strong influence on gold between 1995 and 2005
  • there are significant changes in the mix of variables around the Millennium
  • weak evidence for the importance of stock markets, even during financial crises

At the end of the paper Dirk’s team include charts of the key variables they looked at, which show how useful a variable is in forecasting the gold price (the closer to 1 the more important the variable). Below are four I picked out.


These charts clearly demonstrate the complexity of the gold market – the factors that influence it are dynamic, changing over time. It is like gold is a melting pot of the diverse views of market participants, which probably accounts for why it has a low to zero correlation to most asset classes.

The problem with all models of the gold price is that you have to forecast what the underlying variables will be to get a forecast for the gold price. Dirk, Joscha & Robert’s work shows that you now have to also forecast the importance of each variable, making the task doubly complicated. Something to keep in mind the next time you see a talking head on TV say that gold is going to go up or down because of their view about one single variable they think explains all.

May 212015

The Indian Government has released its Draft Gold Monetization Scheme for comment, which builds on the earlier WGC & FICCI’s Why India needs a gold policy proposal. At this early stage it seems “likely fail in its current form as it does not address some key concerns for banks and consumers”, according to Reuters.

Whilst it may be news to Zero Hedge that gold pays interest (see In India, Gold Is Not Only Money But Now Pays Interest) this is not something new for India which has always had a gold borrowing and lending market although at the retail level it has not worked so well, with previous schemes obtaining less than 50 tonnes.

Positives for the current proposal are a low 30 gram (approx. 1 ounce) minimum deposit, a very transparent deposit and assaying process, and exemptions from Capital Gains Tax, Wealth Tax and Income Tax.

The main problem seems to be that banks will need to offer interest rates of 3% to 4% to make it attractive to investors but when those banks can import gold on consignment from western banks at rates lower than that, then “the government would have to give subsidies to encourage their [Indian banks] participation”.

Another issue is that “there is no guarantee that tax sleuths will not come calling hot on deposit, asking for the source” of funds that purchased the gold, as First Post notes. In addition, they note that the need to melt the jewellery “is abshagun, inauspicious and a strict no-no”.

The melting issue comes up a lot in the comments to the draft, but one helpful suggestion to “change the draft to deposit jewellery and get monthly interest on it” seems to miss the point of the whole scheme, which is for the gold to be used by jewellers. It also shows the difficultly in marketing this idea when people can’t see why it makes no commercial sense for a bank to pay interest on stored jewellery which it cannot use.

It is also a bit of a concern that the Government’s draft says that “banks may sell the gold to generate foreign currency. The foreign currency thus generated can then be used for onward lending to exporters / importers” which is basically saying the bank will go naked short gold (and no, they couldn’t hedge it as the cost of the hedge would eliminate the profit on lending cash – hence why the call for subsidies).

However, my main issue with this proposal is that it is a stop gap solution to the “problem” of gold imports. As Indians are net accumulators of gold any mobilisation of their existing gold into bank gold savings schemes does not mean that those people will not buy more gold. All they are doing is changing the way they hold their existing gold savings; they will still want to add to their existing savings (in aggregate). Any mobilised/recycled gold is just sold back to others who don’t want a bank gold savings scheme – the total amount of physical gold in the country stays the same, it is just that some are now holding bank gold savings schemes.

Consider that yearly Indian consumer demand is around 800t and estimated stocks within India in round numbers are (ignoring Temple Trusts who have about 2,000t):

Physical Gold held by Indians -> 18,000t
Physical Gold held by Jewellers -> 2,000t

In the banking system, this is the situation:

Bank gold asset (loans) to Indian Jewellers –  2,000t
Bank gold liabilities to Western Banks – 2,000t

If the scheme is so successful that they manage to mobilise 800t a year then Indian banks won’t have to import gold and can instead sell the mobilised gold to manufacturers who then transform it and sell it back to other Indians. After the first year this is what Indians will hold:

Physical Gold held by Indians -> 18,000t
Paper Gold held by Indians -> 800t
Physical Gold held by Jewellers -> 2,000t

In the banking system, this is the situation

Bank gold asset (loans) to Indian Jewellers –  2,000t
Bank gold liabilities to Western Banks – 1,200t
Bank gold liabilities to Indians – 800t

Effectively all that will happen is that the 800t is used to repay the consignment loans from Western Banks – the Indian Banks use the money from selling the 800t to the Jewellers to buy London gold which they then use to repay their Western bank gold loans. After the third year this would be the situation

Physical Gold held by Indians -> 18,000t
Paper Gold held by Indians -> 2,400t
Physical Gold held by Jewellers -> 2,000t

In the banking system, this is the situation

Bank gold asset (loans) to Indian Jewellers –  2,000t
Physical Gold held by Banks-> 400t
Bank gold liabilities to Indians – 2,400t

Now you may ask why does the bank have 400t of physical? By the end of the second year, the Indian Banks only have 400t worth of gold loans left, so when they sell the 800t to the Jewellers that year and buy 800t (which they have to otherwise they would be going naked short and thus pure speculating on the Indian gold price falling) it only has 400t of loans to repay, leaving it with 400t left over. Note that as Indians are not net sellers (in aggregate) the banks’ only option is to buy gold overseas, but in doing so they send currency out of the country, which is what the Government is trying to prevent.

In the 4th and subsequent years, there is no more demand to borrow the 800t of gold being deposited into the scheme – the jewellers only need 2,000t. Ultimately, if we remove the banks (who are just intermediaries) out of the picture what we have is that the gold that is being lent by some Indians is going to Indians who want to buy it – there is a mismatch here, one side wants to lend and still own it, whereas the other wants to own it outright. That cannot be squared with any fancy financial footwork – no Indian bank is going to go short gold in Indian dollars.

Indian Gold Price

So gold mobilisation is probably only good for a few years worth of gold import substitution and thereafter the Indian Government is back to its “problem”. All this work for a temporary solution. Easier to just talk to the main temple trusts and get them to fund the local jewellery industry IMO.

May 192015

The “war on cash” story is getting a good run on the usual websites (try here, here and here for a sample) and no surprise to see some hype involved like this from Martin Armstrong (debunked by Bullion Baron here). Generally commentators are seeing this as positive for gold, but I’m not so sure it is good for gold in the long run.

The idea is that to get around the “zero bound problem” – where central banks cannot reduce interests rates too far below zero because people will withdraw cash to avoid negative interest rates (see JP Koning for more on this issue) – central banks will ban or punitively tax cash. To avoid this, people will buy gold instead of holding bank deposits, and/or use gold transactionally, which will increase demand for gold and its price.

I think that is a viable scenario with potential to go mass market depending on how aggressive the government gets. However, consider this selection of quotes on the “cash problem”, which are fairly representative of mainstream economic thinking:

  • Frances Coppola: “it is only those who seek to evade monetary policy who find convertibility suspended”
  • Jim Leaviss: “the authorities will be able to encourage us to spend more when the economy slows or spend less when it is overheating”
  • Peter Bofinger: “it would make it easier for the central bank to enforce its monetary policy”
  • Kenneth Rogoff: “given the persistent and perhaps recurring problem of the zero bound”

Note the use of “evade” and “enforce” (lets ignore for the moment that they are talking about policy, not law) – the attitude is that a central bank cannot be restricted in its need to “fight a large deflationary shock”, it must be able to reduce interest rates as far as possible until people do what it wants. There is no consideration of whether the existing policy is working or is counterproductive, more of the same medicine must be allowed to be administered.

This attitude means that if people find another way of evading the “policy” to force spending over savings, we can be sure that the thinkers will call for that method to be banned as well. They are already there, as Rogoff notes in his paper:

“It is unclear how easily these activities [use of anonymous cash] could substitute into other transactions media, but presumably this could be made difficult by restricting other potential anonymous transactions vehicles.”

It doesn’t get any clearer than that. I like the euphemistic “anonymous transaction vehicles” – gold and silver surely are the only globally recognised and easily used substitutes for physical cash (sorry, bitcoin is not easily used or understood by the mass market).

In the past I haven’t see gold confiscation as a likely scenario, but that was pre negative interest rates. If central banks continue down this path and can get governments to agree that they must be allowed to force people to spend, then it does change the risk assessment of confiscation.

However, I do not want to get all hype-ish myself. Policy and politics wise it is not a universally held view that cash should be banned, and we are speculating that people will just take a cash ban without any resistance. To be fair, Kenneth Rogoff did raise a number of costs to banning cash, which would cause policy makers to move cautiously. Also consider these thoughts from Carl-Ludwig Thiele from the German Bundesbank:

“we believe that there should be a mix of different payment instruments and government agencies do not have the right to tell the citizens how they should pay”

Then again, Germany is repatriating a fair bit of gold from the US, even if slowly.

May 182015

I was joking earlier this month when I said “350 million ounces looks like an understatement” with regard to Ted Butler’s theory that JP Morgan is accumulating physical silver. Last week Ted claimed that “the real amount may be in excess of 500 million ounces” but that he uses the 350 million ounce figure because he is worried “heads might explode if the number is closer to half a billion ounces” and he is “not looking for anyone to lose their minds”.

He also ups his belief of how many coins JP Morgan has bought, from 70 million to over 100 million. I didn’t deal with the coin buying claim in my last post, focusing instead on the divergent sales theory behind the 350moz claim, but here I want to address the coin side of the argument.

Ted’s theory is that JP Morgan “is exploiting a loophole in the law that requires the Mint to produce to whatever the demand might be” by manipulating the silver price down then requesting “the US Mint sell it all the Silver Eagles it can produce”. He says that JP Morgan “doesn’t care if it is paying $2 over the spot price, JPM wants all the silver it can get its hands on”. Ted then claims that JP Morgan has those coins melted down into 1,000 ounces bars and as “the coins are the same purity as 1,000 ounces bars, melting is a simple and a low cost process”.

My first response to this is why would JP Morgan buy coins when it can buy silver from anyone in the value chain before the US Mint? There are many businesses involved in getting coins produced, with value being added at each point:

Miner -> Refiner -> Blank Manufacturer -> US Mint -> Distributor -> Retail Investor

Given JP Morgan’s (along with HSBC’s) dominant market share in the precious metal markets, they have trading contacts with many miners, all of the key refineries, as well as blank manufacturers for the US Mint (one of which is The Perth Mint). Why pay the US Mint $2 an ounce when you can offer anyone else in the value chain before it gets to the US Mint much less than that? If they offered to pay, say, a $1 premium to silver producers they probably have every single one of them beating their doors down. Refinery margins are so thin you wouldn’t have to offer much to them to guarantee supply.

As to the “loophole”, while the US Mint has a requirement to meet demand that does not extend to its blank suppliers and nor to refiners or miners further back in the chain. Indeed, the US Mint has had periods where it has not been able to get enough blanks and has had to stop Eagle sales in the past, proof that its suppliers have no obligation to supply them. Ted also claims that JP Morgan buys Silver Maples but the Royal Canadian Mint has no such obligation to sell.

So there is no impediment to JP Morgan simply poaching all the silver supply that flows through the production chain that goes to the US Mint. If JP Morgan is indeed keen for physical silver, it makes no commercial sense to buy coins when they can acquire it much more cheaply from others.

Some may make the argument that these other suppliers would not sell at the manipulated and artificially low silver prices when JP Morgan wants to buy. The fact is, however, that the refiners and blank manufacturers take no price position with their silver and are hedged, so they do not care what the price is when a JP Morgan asks to buy silver – their business model is based on premiums above metal price less cost of manufacture, not on the metal price itself.

Miners you may expect would be more careful when they sold, but the fact is that most are price takers and have to sell as they produce as they need the cash to pay their bills. Miners may withhold a few days production but most cannot finance such long positions for long once the metal is out of the ground. The Perth Mint’s experience, as I’m sure is that of the other key LBMA refineries, is that mine supply into a refinery is fairly consistent. The evidence from the London Auctions is that miners are price takers.

Also, it would not be as cheap as Ted thinks for JP Morgan to have bought massive numbers of monster boxes (100moz = 200,000 boxes!) which would then need to be unpacked (and boxes disposed of) and the coins melted down by refineries. Nor would it be able to be done without one word leaking out to the wider professional market about what JP Morgan are up to and them then being front run by their bullion bank competitors. We have not heard one word of this massive logistic and operational exercise – it would be impossible for it to be completely hidden given all the staff involved at US Mint distributors, secure carrier firms and the refineries themselves.

Finally, do you think that a refinery getting thousands of monster boxes would not think it a bit unusual for them to be supplying blank manufacturers with silver which is then coined and then returns back to the same refinery for melting, and it would not prompt them to suggest to JP Morgan that it would be a lot less work and cost to JP Morgan to just buy the silver from them in the first place?

In addition, as to the Maple leaf buying, since the Royal Canadian Mint is a combined refiner, blanker and mint (like The Perth Mint) and the only refinery in Canada with the scale to melt down coins in such volume, is Ted saying that JP Morgan buys coins from the Mint then asks them to melt them back down? Wouldn’t the Mint just see the advantage to themselves to suggest they supply JP Morgan with 1000oz silver bars at a premium? Or is Ted suggesting that JP Morgan buys Maples and then ships them to Salt Lake City to the ex-JM refinery in the US or elsewhere at more cost just to have them melted down, and buys Eagles in the US and ships them to Canada (the nearest non-US refinery of scale) to be melted? If so, to what purpose? To hide their strategy from the Royal Canadian Mint and US Mint?

The whole theory is nonsense. I’ll leave it up to you to read my theory and Ted’s and make up your mind as to who exactly has “lost their mind”.

May 142015

Last week Koos Jansen “came out” (as in his identity, not sexual identity) by publishing an interview he did with a Netherlands newspaper on 9 April under his real name of Jan Nieuwenhuijs. Is writing under a pseudonym shirking from taking responsibility for your work, or just a safety measure to protect yourself from nutters?

Probably the most famous anonymous writer(s) is Zero Hedge, who explained their position in 2009 by arguing that not using their real names “turns the conversation to the content, and away from the author, the author’s biography” and should only be a problem “where the reader is unwilling or unable to distinguish facts presented by the writer from opinions expressed by the writer”. Admirable sentiments, although some may argue that Zero Hedge has changed quite significantly since 2009, with content now being subordinated to clicks.

The counter argument is that without any real reputation at stake, a writer may be more careless with the truth – not a problem in the gold blogosphere, however (I think a “LOL” is appropriate here).

I asked Jan/Koos why he initially decided to operate under an alias (FYI “Koos” is a normal name in the Netherlands, like say a “Bruce”). He said that he felt it would mean he would be more free to say whatever he wanted to say and it would keep that completely separate from being a sound engineer. This was also a factor for Australian blogger Bullion Baron, who said that while he stands behind what he writes, “some of my views aren’t popular and I prefer to minimise the risk they come back to bite me (e.g. potential employer finding out of context comments using Google)”.

Warren James, who writes at the Screwtapefiles group blog using his real name, sees it differently and he considers using his real name as a positive for current and future employment as he gets credit for his work (specifically the Bullion Bars Database). He said it also makes him more accountable and forces him to double check his work.

In my case, when I started my personal blog in 2008 I thought it was “important to disclose any potential “agendas” or commercial interests because while in theory one should be able to assess the validity of an argument independent of the writer, full disclosure helps the reader to be vigilant”. I also thought in practice that it would constrain my writing to have to constantly think whether something in my writing would “give me away”.

While being anonymous gives you more freedom to speak your mind, it doesn’t save you from being attacked personally by trolls and nutters, which is a general problem on the internet. In the case of precious metals, for those advocating self storage anonymity is probably essential lest someone try and find out where you live.

When Jan Nieuwenhuijs started his In Gold We Trust blog in 2013 he said he didn’t know it would gain the popularity it did, or that he would be able to make a living out of it (Jan quit sound engineering work at the end of 2014 when he started writing for Bullion Star professionally). Often the choice of a pseudonym is made without consideration of the future. As an example, consider the case of Craig Hemke, who runs the TF Metals Report. No doubt he considered his choice of “Turd Ferguson” as nothing more than a funny alias to use for commenting on Zero Hedge, without any expectation that it would lead to his own paid website. While in Craig has noted “how few interviews I do? It’s because so few want to have someone named Turd as their guest”, he still posts under the Turd alias as its “brand” recognition is just too strong.

Jan feels that same branding problem, as all his work to-date is under the Koos name. He’d rather use his real name, but how to transition? My suggestion: dual brand for a while, like Nissan did when it phased out the Datsun brand – write as Jan “Koos” Nieuwenhuijs for six months and then just drop the “Koos”.

May 132015

Bob Moriarty posted an article yesterday saying that he doesn’t “believe in either fundamentals or technical analysis … they give you some information but I’m not convinced either really works if your goal is to make money investing. I am always looking for measures of pure psychology”. Now I wouldn’t go as far as saying that fundamentals or technical analysis only have “some” value, but certainly I think gold and silver are driven a lot more by psychology than many analysts acknowledge.

I think the main reason for this is that there is so much “stock” of gold held relative to new supply. Fundamental analysis can pay off in commodities as new supply is significant compared to inventories, so changes in it, and marginal demand, drive prices. But in the case of gold, as I argued in this post from 2012, the massive amount of gold above ground means that it is the withholding of supply by existing investors that matters more.

The gold market is unique in that it has “a stock overhang so large relative to new supply that in any other market would push the price to zero, but for some reason for gold it doesn’t”. This some other reason is otherwise know as monetary demand. Investor demand for monetary safety is more about human perceptions, which are influenced by narratives, and is thus more psychological in nature.

So how do we measure market psychology for gold? Bob’s says that “I find the Sprott Physical Silver Trust to be an excellent measure of psychology” with PSLV “signaled a high in 2011 and negative discounts have been excellent as precursors to the XAU moving higher”. The chart below comes from Bob’s article and shows the key signal points (see his article for more of an explanation).


I think there is merit in using NAV discount/premiums, but my only concern with using the Sprott funds is that as they have a redemption mechanism, arbitrage means that the discount can never get too large. It is interesting that Bob uses PSLV (the silver fund) rather than PHYS (Sprott’s gold fund) as an indicator for gold. This may have something to do with the fact that PHYS has had an active arbitrageur redeeming physical, which caps discounts (see this post if you are interested in more detail on this activity and redemption arbitrage).

The result of redemption arbitrage is that you aren’t getting a full read on sentiment. For that you need a fund with no, or very costly, redemption ability. For that we can use the Central funds CEF and GTU. Below is a chart of GTU’s (the gold trust) premium/discount to NAV from CEF Connect.


You can see that the premium/discount for GTU has a lot more variability than PSLV and has much bigger discounts. The chart for CEF shows a similar pattern. At the moment they are both not showing the same extreme discount as PSLV, and they may not be of much use as a sentiment indicator going forward, if the Sprott offer to exchange GTU for its funds goes ahead. The potential for this action to succeed has affected GTU’s pricing as investors weigh up the possibility that a successful Sprott offer will eliminate the discount.

The Central Fund/Trust – Polar Securities – Sprott story is itself an interesting study in investor psychology and I will cover this story when the details of Sprott’s offer is released. In the meantime, Kid Dynamite’s article gives a good summary of the drama.

Dark Gold

 Posted by at 9:09 am  Stocks
May 122015

The gold market is often referred to as being “opaque”, lacking transparency. This is something of an understatement. The chart below is something I worked with Nick to put together. It shows all of the publically reported holdings/stocks of gold.

Transparent Gold

It is an extensive list and much wider in scope than many others, which usually just add up the major ETFs. The first thing that strikes you is the dominance of the ETFs in terms of traditional stores of gold like COMEX or TOCOM. I have no doubt that if the ETFs weren’t created the blue COMEX stock in that graph would have been a lot bigger.

Also striking is the huge drop off in 2013 from over 100 million ounces down to today’s 67.2 million ounces. At first glance this looks bad, like people don’t want gold, but the chart is only showing the preferences of the specific type of people who invest in these products (mostly Westerners). It is not like the gold was just thrown away, and import/export analysis does show that gold ex-ETFs has been imported into Switzerland from the UK, made into Kilo bars and then sold into China and India.

In the end, the amount of gold stays the same, it is just the ownership of the gold that changes. This ownership change does have some information value, as I discussed here, and while I will comment on what is going on with these visible stocks from time to time, it is worth putting the chart above into context.

The latest GFMS Gold Survey estimates the total amount of gold mined since ancient humans were first attracted by the “tears of the sun” at 5,902,877,700 ounces or 183,600 tonnes, which they say is currently held by the following groups:

Jewellery – 2,797,115,250 oz
Investors – 1,183,147,600 oz
Central Banks – 993,458,175 oz
Industry – 803,768,750 oz
Unaccounted For – 125,387,925 oz

So the 67,213,000 ounces of “transparent” gold represents only 1.1% of all gold or 5.7% of all the gold held by investors. The chart below demonstrates the relative insignificance of the transparent gold – the little blue bump at the bottom is Nick’s chart above.

Gold Stocks

When it comes to gold held by investors, Dark Gold dominates. While a lot of this dark gold is held privately, much of it would also be held in vaults operated by the major security firms like Brinks or G4S or run by bullion banks. Knowing what is going on with the gold in these vaults would give the operators some information advantage in the market. We, however, can only guess at what total stocks sit in these vaults (although Warren James is giving it a go with his analysis of ETF bar lists, see here for how he does it).

May 112015

Each month The Perth Mint releases its minted coin/bar sales for gold and silver (see here for the latest). Data hoarder Nick at Sharelynx takes those figures and produces the chart below, which converts the ounces into dollar amounts (using a month end rate as an approximate).

Perth Mint Au:Ag Ratio

On average, our minted coin/bar customers spend between 20%-25% on silver as they do on gold . Contrast that with the US Mint, which as you can see from the chart below, often spend dollar for dollar on gold and silver.

US Mint Au:Ag Ratio

The average ratio for the US Mint over the same time period as The Perth Mint chart is 74%. The Royal Canadian Mint’s customers spent 62% on silver compared to gold in 2014. The difference between the mints is probably due to a different mix of customer preferences – for gold, silver, or for both.

Trying to establish the ratio for other precious metal businesses is difficult, because few report sales volumes in such detail. However we can work it out backwards for those who do report their total holdings of gold and silver.

To get a reliable figure we need a business which offers both gold and silver to the same customer base over the same time period. To eliminate the effect of the different price peaks in gold and silver and any reductions in holdings thereafter, I also think we need to compare the period March 2008 to March 2011, which is a period where inflows into gold and silver were strong and consistent. The ETFs are a potential source of inflow information, but the data I think is unreliable as the ETFs have different mixes of customers (individuals vs institutional) so we aren’t comparing like customer with like customer.

From Nick’s data there are three businesses that fit these criteria: Gold Money, Bullion Management Group and Central Fund of Canada. The respective ratios of dollar amount of silver bought to gold bought over those three years are: 103%, 99.4% and 99.8% – surprisingly consistent.

I also found a note from Eric Sprott in late 2012 that observed that the “last Gold Trust issue in September 2012 raised US$393 million and the last Silver Trust issue raised US$310 million”, which is a ratio of 78.8%, close to the US Mint ratio.

This prevalence of equal dollar investment in gold and silver is something that we see in the Perth Mint’s Depository business. When we segment our Depository customers by the metal they buy, around 35% buy equal dollar amounts of gold and silver. However, there are also clear groups of customers who either only buy gold, or only buy silver. There aren’t many who have mixes outside of those three groups.

So it seems that precious metal investors are either goldbugs, silverbugs, or balancedbugs.

May 082015

Last week I did a post on the London gold Auctions, noting at the end “the number of days where the volume offered for sale does not change, or changes very little, through each round”. I’d like to explore that in more detail in this post. As and example of what I was talking about, see the chart below.

London Auction 30th March

The red and green lines show the volume of ounces offered to buy (bid) or sell (ask) as each round progressed (note: the auction finishes if the volume bid and ask is within 20,000oz, hence the red and green lines don’t come together at the final successful round). The purple line shows the price set by the Chair of the auction for each round.

On this day you can see that amount offered for sale pretty much remained the same as the price dropped. This is counter to theoretical laws of supply and demand – as the price drops, you would expect quantity supplied to reduce. In the case of the buyers, we see what is expected – quantity demanded increasing.

To date we have had 63 London Auctions, so what has been the average behaviour over this time? First, each auction has had different quantities offered, so we convert the chart above into an index, setting the mid-point of the final bid and ask volumes to 100. That way all volumes can be compared with each other. This results in the chart below.

30th March Index

Then we can graph all the bid volumes and all the ask volumes, eliminating Auctions where there was only 1 or 2 rounds as that doesn’t show much information on how buyers and seller reacted to price. The chart below graphs all the ask/selling volumes with the big fat red line being my “average” behaviour (excuse the x-axis, 12 is the last round, 11 the 2nd last etc).

Auction Ask

You can see with the clustering of the lines that most of the 45 auctions showed very little reduction in the volume offered for sale, say a reduction of only 10-20% in general. Contrast that to the buyers, below.

Auction Bid

Here we see a lot more movement, with the buyers on average starting off a lot lower in the bid volumes (between 30-50% below) compared to what the sellers do.

Of the 45 London Gold Auctions of 3 or more rounds, 38 have seen reductions in the 1st round price to the final round price. Of those 38, the average starting volume offered by sellers as an index to the final mid-point volume was 114.2, a move down of 14.2. For the buyers, the average was 52.5 a move up of 47.5.

So it seems that on the majority of days the sellers are generally price insensitive, putting in “sell at market” type orders. My guess is that it is mostly mining companies doing this selling, as for many of their managers it is safer to just sell on a public benchmark than try and “trade” your production in the spot market – if you do better than the London Auction you probably don’t get as much praise to offset the angst you get from your boss when you achieved a price below the London Auction.

You’ll note the big jump in volume from the 2nd last round (average of about 30% under the final mid-point volume) to the last successful round (where it is about 10% off the final volume). It is as if the canny buyers have observed this “sell at market” behaviour and are holding out as long as possible with the volume they offer to try and get the price down (or maybe I’m just reading too much in here).

If any of you are investors in gold mining companies (commiserations) you may want to ask them if they sell at market on the London Auctions. If the answer is yes, you may then want to ask them if they know who the sucker is at the London Auction.