Sep 252015

Alex Stanczyk of the Physical Gold Fund has just posted a transcript of an interview with an executive at a Swiss refinery about the state of the market. It is well worth a read or listen to the podcast. Below are some quotes and my take on them.

“How difficult is it to source the metal you need today? … It is truly difficult. This is also reflected by the price. It is getting more and more expensive to get material out of the market, and also there is less liquidity in the physical precious metals market than there used to be in the past.”

I think the statement that the difficulties “is also reflected by the price” needs to be clarified as later on he says “the price does not reflect the realities at all.” This is not a contradiction! The first reference is to the premium, the second is regarding the spot (ie metal) price.

When acquiring physical, the professional end of the market settles trades by unallocated account debits and paying a small dollar premium for charges, freight etc, rather than buying a physical form on the spot market with dollars. The references to “price” and “expensive” were to that premium above metal. See this post if you want more detail on this aspect of the market.

It was a bit frustrating that the interviewer did not pick up on this reference and drill further – was this a premium on 99.50% 400oz bars, if so were bullion banks refusing/delaying redemptions from unallocated accounts, or was it for other forms or was he referring to loco premiums reflecting freight and funding costs?

I would have also liked to know to what extent that refinery’s feed stock comes from newly mined gold or do they rely more on scrap and 400oz bars. Each refinery has a different mix of source metal and contractual arrangements for supply that can affect their perception of tightness. The Perth Mint is primarily a newly mined supply refinery with scrap being a swing form of supply for us, so we have a strong base of supply.

“The other point is that nobody is interested in any physical delivery at the end. These products are all cash settled. People are happy just to use the spot market as a benchmark, and the product itself never ends up in the physical market.”

He is obviously talking about Western markets here, and he makes an important point and will tie in with my future posts on fractional reserve bullion banking. He goes on to note that this is a dangerous set up as if everybody wanted the physical it “would not be around”. However, this is not a risk as “it looks very much like people are very confident in general financial markets”. The question of course is how much physical reserve exists against bullion bank unallocated accounts versus how much of an increase in physical redemption activity occurs.

“As long as market participants are happy for cash settlements, this can go on forever.”

So true. This was in response to a question about a mismatch between the spot price, which has been low, versus the tightness in the physical market. This idea of a disconnect between paper and physical is an argument that the money in the futures market or other paper markets is somehow not legitimate, that their “view” on price is not valid. Yes markets are more financialised these days, get over it.

I guess some people think that if only futures markets could be banned and everyone had to trade physical, the price would magically shoot up. They forget that if you ban all forms of paper gold you ban paper longs. And in any case, any paper contract can be synthesized using physical and borrow/lend. They also seem unaware that the net position of paper trading is, by arbitrage, reflected into the physical market, and vice versa.

“The flows of metal end up in Asia. It is mainly China, also India, and to some extent the Middle East.”

Same here in Perth.

“Then there is price-sensitive scrap – very opportunistic – coming every now and then out of Asian countries; not China or India, but other countries in the area.”

This is not something you hear talked about a lot, but yes the Asians do actually sell gold but are very good at it. Having a location advantage to Asia compared to the Swiss refineries, we do pick up a lot of this business but as I mentioned above, it is a swing or volatile source of material for us due to its price sensitive nature.

“since the last move up, a lot of scrap has already come to the market, so if the price moves up again, I don’t know how much scrap will be around in order to compensate for the lower volumes coming from the mining industry.”

I note that at the Denver Gold Forum CPM Group saw that a decline in mine production from 2018 was baked into the cake given the lack of exploration. If our refinery guy is right about scrap then the next leg up in the gold price could be quite dramatic. It is hard to call the scrap market as really high prices may be the inducement to get women to look in the bottom of their drawers for that last bit of out of date jewellery, and you can be sure the cash for gold business will be promoting hard in that environment. In any case scrap has not been/will not be a major source of metal sufficient to dent bullish demand too much, when it comes.

“If you see in one of these products a paragraph that references the possibility of cash settlement, keep your hands off.”

Good advice, I don’t think investors really pay attention to the contractual terms of the products and read between the lines, and often it is about what is missing rather than what is there.

  • Zhanglan

    This is not news: the London Vaults were already empty in April 2014 : remember the bars dated from the 1950’s & ’60s which they supposedly found at the back of the vault?

    These scaremongers do not need the price of Gold to go up in order to preserve their failing business models – they just need to generate more speculative interest to ensure transactional volumes pick up, in order to generate a sustained stream of commission income

    Look at the chart, and you will see that Gold has failed to regain the August 23rd high of $1,160, the June 19th high of $1,200, the May 18th high of $1,226, or the January high of $1,296, and we have just failed at the March 18th low of $1,148: from a technical perspective, this market is shot to ribbons, and the next key support is the $968 top last seen on 1st March 2008

    Sure, this is just “technical” analysis, not based on “fundamentals”. Well how far have fundamentals got you over the past 5 years?. Better to wait until the market turns – or at least until the Prophets of Doom come up with some new ammunition rather than simply parroting their tried & tested nonsense

    • Kid Dynamite

      one thing: i don’t “analyze” gold, i just analyze those who lie about gold and illustrate their lies.

    • JanNieuwenhuijs

      Small sidenote: many vaults in London ARE indeed empty now. Outside the BOE and LBMA/ETF vaults, there’s not much around×471.png

      • S Roche

        Jan, have you addressed “Rowingboats” observations?

        • JanNieuwenhuijs


      • Zhanglan

        Koos, I am unable to accept that information at face value for the simple reason that Gold in London is vaulted not only at J P Morgan, HSBC and Brinks, but at other warehouses too and none of them are under any obligation to publish their inventory to anyone other than their customers (individually) and their Auditors (in aggregate)

        Here is the LBMA on the topic (my emphasis);

        The clearing members each maintain confidential and secure vaulting facilities

        My conclusion is that we do not know how much Gold there is in London; what we do know for certain, however, is that these rumours have been around for a period of time, and that during that time the price of Gold has gone down very significantly. And as to EvG’s timely comments in 2010 – none of the factors he mentioned would appear to have changed all that much – even the price is now back to more or less where it was when he made those observations. What is> apparent was that the 2011 top was not based on any fundamental forces, but rather on rabid speculation fed, strangely enough, by people such as E v G himself

        • JanNieuwenhuijs

          Let’s not talk about EvG. 5 years ago London was packed with gold. Non-monetary gold flows are publicly available at Eurostat.

          My point is that all non-monetary (and likely also monetary gold) that goes in out of the UK can be tracked by the LBMA through trade statistics. If they match those numbers with what they know from the BOE vault (inc monetary gold), apparently they can come up with how many bars there are in London.

          You and I can’t ship gold in and out of the UK without it being reported to customs (unless we smuggle it), so I think the LBMA and BOE they know.

          Does this mean the price wil go up tomorrow? I don’t know. I do know the Indians and the Chinese do not sell it back.

          • Zhanglan

            Really? Look out of the window of your Singapore showroom and tell me how many Pawn shops there are in Peoples’ Plaza offering to buy gold for cash; that’s ChinaTown you are looking at

            If you go to Hong Kong or Shenzhen, you’ll find the same shops doing the same trade, and if you’re interested in Wholesale bullion rather than Retail, then remember the “Flash Crash” in July which was caused by someone dropping a load of Gold following the collapse in the Chinese Stock Markets

            The notion that Gold sold in Asia goes solely and inevitably into “strong hands”, never to be seen again is a total and utter fallacy. If you doubt this, how come Bullionstar itself publishes Buy-Back prices on its website?

          • JanNieuwenhuijs

            Did I say Singapore or Hong Kong (the two major gold trading hubs in Asia)? No. I said India and China (inc Shenzhen). By law, gold can not exported from China (only in 50 gram sizes per person crossing the border). In India gold is allowed to be exported but this rarely occurs (in bullion form, jewellery is different coz India does manufacturing processing).

            Is BullionStar located in China?

          • Shavi Tupyraz

            I do know the Indians and the Chinese do not sell it back” …… “No. I said India and China”

            You did not say India & China – you said Indians and Chinese, of which there are many, not just in Singapore, but across Asia: the Dubai Gold and Commodities Exchange is run by and majority owned by Indians, for example

            Its all rather convenient to conflate “China” with “the Chinese” and with the PBOC, but you of all people surely realise that these are by no means the same construct, and that the Chinese cultural and ethnic diaspora spreads far and wide across Asia and is not constrained to the political and fiscal regime of the evil evil Communists.

            And with this in mind, yes, Bullionstar is located right smack bang in the middle of the Chinese, adjacent to an MRT station named “Chinatown” and sandwiched between Hong Kong St and Chinatown Point, 3 stops away from Little India. Without revealing any commercially sensitive information, would you care to disclose what percentage of Bullionstar’s clientele are ethnically Indian or Chinese, and hence the basis for your assertion that they do not sell it back?

          • JanNieuwenhuijs

            You’re right, I said “the Indians and Chinese”, with which I meant the people in the countries India and China.

          • Shavi Tupyraz

            well, you can of course selectively change what you said any time you like – it’s just unfortunate that people reading your comments are constrained to respond to what you actually wrote, rather than what you would prefer to have written once you have been called out as being patently wrong

            the point remains valid: there is Gold on sale (and resale) in China, but more importantly in the context of Bron’s article – there is either no immediate shortage of Gold outside China, or any such real or imagined shortage is currently having no more influence on the real-world price of Gold than it has at any stage since these rumours began several years ago

            you also appear to be misguided about – and have failed to respond to challenges in respect of – both the reporting of Gold vaulted in London and the ability of individuals to export it without either Customs clearance or reverting to smuggling. I have no agenda to undermine your apparently thorough and detailed research such matters, but there do indeed appear to be one or two ragged edges to your analysis, and your reversion to Alice in Wonderland’s “it’s my word and it means precisely what I choose it to mean” reasoning appears to dilute the credibility of some of your assertions

          • JanNieuwenhuijs

            Patently wrong because I said “Chinese” instead of “China”. Yeah.

            Yes Andrew, there is never a gold shortage, there will always be plenty of gold around – if the price is right. I just think the location of the stuff will be important if people around the world will lose confidence in central banks again.

          • Shavi Tupyraz

            thankyou for clarifying that Koos; when I see any concrete evidence of that, I’ll agree with you. Until then, the Gold price continues to collapse

          • JanNieuwenhuijs

            I noticed. People seem to have confidence in our central bankers these days. Ah well, that’s what makes a market.

          • joey

            confidence?? lol

          • JanNieuwenhuijs

            Also interesting …

            ….after prices peaked on January 19, 1980. Initially, the loco-London price gained a substantial premium (in some cases, 40 percent) over small local markets (principally in the Middle East and Far East). Then, according to Green (1981, page 28), “within a very few days a wave of reselling of jewelry and coin on an unprecedented scale developed.” Green continues (page 29):

            The scale of individual dishoarding was often substantial. I was
            in the Kuwait souk the day gold hit $850. The street of gold shops was under siege. Perhaps two or three thousand people milled around, fighting their way into the overcrowded shops with cigar boxes and biscuit tins crammed with bangles and necklaces. The goldsmiths weighed the ornaments–often two or three kilos from one woman [worth $50,OOO-$75,000]–and paid cash. Those ornaments were melted down in a nearby basement and the rough gold bars air-freighted to London and Zurich the same night.

          • Shavi Tupyraz

            I have no knowledge of the scrap market, but it appears to be far more complex than we might initially expect – particularly in terms of its depth and price dynamics: my suspicion – and that’s all it is – is that much of the “pawned” items are not necessarily re-cast, but may persist for some considerable period of time in their original form: if you go inside one of those pawnshops (or look at GoldSilver’s secondhand website ) it’s readily apparent that high-end jewellery, minted bars and probably coins are not automatically consigned to the smelter. That Gold remains “available”, both for cash and, ultimately, for melting down, but may not be immediately obvious in published estimates

            There is an active secondhand market in China – inevitably retail, and extremely risky in terms of provenance and quality – but I am in no doubt whatsoever that market dynamics apply in Shanghai in pretty much the same way as they do in Mumbai or Dubai (and that’s perhaps not too different from what foes on in Kuwait, Singapore or the seedy downtown kasbahs of Greater Metropolitan Hammersmith)

          • JanNieuwenhuijs

            I have been told the SGE was designed exactly for this reason, to allow all Chinese citizens to have direct access to (granted) 9999 gold for the lowest “possible” price.

          • Shavi Tupyraz

            as I say, in truth I have no idea; however, human nature suggests that all the best scams have a grain of truth in them, and I wouldn’t be surprised if there were plenty of unsophisticated “investors” who would fall for a cheap deal in a smoke-filled room, where the 9999 Gold bar they were being offered did indeed contain a lot of Gold – just not 99.99% of it (or anything even close). Hey presto! The Chinese cannot resist a bargain, and that 100 grammes of “available” scrap Gold has suddenly become 200 grammes (or so it seems to the man behind the bar – pun intended)

            In my personal opinion, the Chinese (wherever you find them) are a fundamentally lawless race, with an instinctive aversion to rules and regulations – that’s why even places such as Singapore (and especially China itself) have to implement fairly draconian legal systems in order to stop them doing pretty much whatever they damn please. In this context the SGE is perhaps a noble idea, but I am unsure how highly it is prized (or how widely it is known) amongst the wider population. I simply do not know, and even if I were to ask a few questions, this would only skim the surface. Do you have any figures on how many individual accounts there are open on the SGE compared to stockmarket accounts with equities brokers?

          • JanNieuwenhuijs

            “…currently the SGE has about 8,358 institutional customers and 7.33 million individual customers”’s_Gold_Market_Towards_Internationalization_SGE.pdf

          • Shavi Tupyraz

            it’s curious; I’ll try to dredge up some stockbroking figures for comparison purposes. 7.33 million is just over 0.5% of the population



            I know for a fact that the real “Zhang Lan” holds precisely 60 grammes of non-jewellery Gold in her portfolio, compared to a very significant (but recently sadly diminished) position in Chinese equities, and even those are only being accumulated until she decides to get back into the property market with a vengeance.

          • joey
          • Shavi Tupyraz

            2.5 – 6 tons per annum (although presumably much of this may net out with corresponding declines in other centres overseas)

            it’s interesting that this is obviously a retail product (size, distribution channel) but also explicitly linked to the Gold Monetization scheme; if they are in fact targeting the 22,000 tons of Gold which they believe is held in Indian households, then 6 tons is a drop in the Ocean. Something doesn’t add up.

          • joey

            I look at it as a reluctance from the people to give up their Gold. Smart…

    • S Roche

      All good points Z, but I would just note that gold did surge to USD 1,920 in Aug 2011…so, either E v G was actually observing something real, or just a case of stopped clocks, either way an open and critical (such as yours) mind helps. I am sure it was a surprise to many that the “cure” for the high gold price was the high price. Cue the manipulistas…

  • Farmer Don

    “How difficult is it to source the metal you need today? … It is truly difficult”
    As a lay person I understand that you can always get delivery from Comex, but this happens very seldom in the physical business. It sounds like your mint does not take this route. You pay the premiums to get gold from your traditional sources. I’m assuming this is because these premiums are still way less costly than the “premiums” of getting your gold from Comex. These are, I imagine, going through new proceedures, waiting till a delivery can be received, lining up transportation, security etc.etc. But if shortages were very real, and premiums hit a certain level, wouldn’t this start to happen?? And since the physical market is so large, wouldn’t this show up quickly? Also are sellers in the Physical market aware that this alternative is available, and price the premiums at a level low enough for this not to happen?

    • Bron Suchecki

      We don’t pay any premiums to source gold – miners pay us to refine their gold, so that source comes to us effectively with no premium. We do avoid sourcing material outside of Australia because of the additional costs as you mention like freight but if we have the demand then it can make sense to pay a few cents to acquire additional sources of raw material so we can make more coins. This is usually only with silver, our gold coin volumes hardly make a dent in the 300-400t of gold we refining, which mostly goes out as kilobars.

  • Bron Suchecki

    Most of Australia’s silver production is as by-products from mining of other metals and as such we cannot refine the concentrates form it comes in, so it is exported overseas for processing. Most of our silver comes as a by-product of gold refining and a few sources of silver material that we can process, so the 30% reduction has not affected us yet.

    • joey

      It is a byproduct Bron and for that reason it’s becoming more scarce as mining companies continue to falter. Now what article of late did i read that from?

      • Shavi Tupyraz

        The above-ground supply of Silver is not becoming more scarce: it is becoming more abundant as time passes. You are misguided in your opinion.

        • joey

          Sorry it’s not opinion. It’s fact! btw you know little about me and by the sounds of it Australian mining to make such comments. I have noticed your posts are anti precious metals. So i guess we’ll clash from time to time.
          Bron’s comment on “30% reduction has not affected us “”yet”” . Not yet? Soon Bron, Soon…
          Keep stacking…

          • joey

            Oh, look. UBS Is About To Blow The Cover On A Massive Gold-Rigging Scandal


            Soon :-)

          • Shavi Tupyraz

            it’s always “soon”, isn’t it, but for some reason Tomorrow never seems to come quite quickly enough for some people

          • joey

            I’m not holding my breath on this as these manipulators have been found wanting yet a small fine and slap on the wrist and off you go does little to stop the paper ponzi game.
            What is encouraging is that more are being caught increasing probability of a soon rather than later.
            Oh well, time will tell…

          • Shavi Tupyraz

            There is no need to personalise a debate about precious metals, It doesn’t matter who you are, I believe you are wrong, and here are my reasons

            “The silver mining production will go through a maximum production, a peak silver event, in 2025–2030, by 2170 the silver mines have gone empty, and after that silver will only come from copper and zinc mining. By the year 2300, the silver, copper and zinc mines will be empty and unable to supply any significant amounts of silver. After that, only recycling of what we have in society will be available. However, if we have assumed the right feedback model between silver price and recycling efficiency, then there is no immediate danger of shortage of silver…… With these measures, it appears that the supply is secure through to 2650, when silver finally runs out.”

            I do not believe that 2170 AD represents a meaningful investment horizon, much less 2650

          • joey

            I forgot to say I’ve never seen KJC and ABC Bullion with such little Silver available for purchase ever!
            Good evening to you.

          • Nguamlam

            ‘Peak silver 2025-2030’

            ‘At the present rate of recycling where the society consumes 40,000–45,000 tonne, and 23,000 tonne comes from mines, then recycling is 45–50% of supply.?’ – not my question mark;-)

            (40,000t is about .2 oz per person and the above ground estimates are dispersed away from official control, dubiously guessed and only available at a price in any case).

            Most of the economically available silver remains in the ground and as byproduct sales by stupid base metal miners.

            That data and the fact that silver is a monetary metal, particularly in a crisis is maybe all that we need to know :-)

            I bet the recycling gets very very difficult very soon – subject to price of course.

  • Shavi Tupyraz

    Every time he writes, Jesse reveals a little more about his (and the orthodox) naivite:

    “there are currently about 161,937 ounces marked as registered ‘up for sale as these prices’ and a total of all gold in all the warehouses of 6,856,672 ounces, of which”

    Just pause for a second and consider what he is saying there: “Registered” is equated with “up for sale”

    But the whole point about Registered is that it has already been sold, because by its very nature the Warrant which makes it Registered evidences a transfer of ownership, and is issued by the Approved Warehouse which holds the metal in favour of the new owner

    And as for the “6,694,735 [which] are not offered for delivery into those contracts at these prices” – how on Earth does Jesse believe EFP settlements are effected?

    This is pure fantasy, as nobody in their right mind would go to the expense of registering a Warrant unless they had to, and had already been obliged to deliver. Nobody except the owners know who owns what Gold on COMEX (perhaps not even the Warehouses once a Warrant has been electronically transferred to a new owner), and nobody but the holders of Short futures positions knows whether or not they are covered. But to insist that the only “available” cover is represented by Registered inventory is clearly and utterly mistaken

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  • Zhanglan

    “So where am I wrong here?

    Well, by saying that you are going to pose two questions and then making two statements, for starters

    Gold has the value which people attribute to it, by which I mean the price at which the enthusiasm of a willing seller matches the eagerness of a willing buyer in a visible equilibrium; this changes over time – not primarily because the apparent supply (or “availability”) of Gold varies over time, but because of sentiment

    As above, sentiment is a two-way thing, and the price at any given instant is not solely attributable to where people think it “should” be – it’s driven by where people want to sell it, and what other people are willing and able to pay for it. Over the past 4 years the enthusiasm of people to sell gold has been greater than the willingness and/or ability of people to buy it, and until that changes, the price will not rise significantly

    May I respectfully suggest that you wise up on Utility Theory and also the concept of Marginal Regret

    • dolph9

      Is it not fair to get emotional about what is an important topic, and about one’s own wealth that they worked for?

      You revealed at the end exactly why you hold gold…because you do not, in fact, have confidence in the current system. If you did, you would indeed hold currency, tulips, equities, farmland, shops, and mistresses because at lease those things have some use and sentiment in them remains high.

      Bron, on the other hand, seems to have a lot of confidence in the present system. At least, that is my interpretation of his writings. Maybe I’m wrong and he’s just trying to be objective.

      But why dedicate your work to something, why sell a product, and then go on to say, this product is worthless, you will never need it, you are wasting your precious currency which is better spent on any number of other things? To be fair there are many gold shills and at least Bron is not that. But Bron misses the entire reason why we hold gold. It’s not merely a speculative investment, or an insurance against any number of small events. Gold is insurance against the collapse of the entire system. Gold has no role other than that, except as jewelry.

      You cannot simultaneously defend the system and hold gold. The two are now incompatible.

      • Shavi Tupyraz

        You are wrong and he’s just trying to be objective; and I am living proof that it is not inconsistent to hold Gold and to believe that, for better or for worse, the current economic, financial and political system if likely to persist for the currently-foreseeable future

  • Chris R.

    Any reason why they would not identify the interviewee? Pretty sure based on the information given it was someone from Argor-Heraeus.

    • Ronan Manly

      Presumably the refinery executive requested not to be identified. But there is a very short list of which refineries it could be (Swiss LBMA Referree panel), and as you say, even that list can be whittled down with the clues given in the article.

  • Bron Suchecki

    I have no idea where you get the idea that I think gold has no value and I never mentioned “manipulation” in the post. I think you are reading things in, projecting your own thoughts on to what is basically just a statement of facts about finalisation and paper trading.

    Answers to your questions are here

    • katongole.isaq

      SKYPE isaq.katongole
      Email 55a6657eefd96.jpg

      • Victor Fantastico

        have Bar Enlargement pills for sale – no need to “manipulate” open interest to get excited – simply extend your leverage and keep that price pumped up for weeks on end! (Also suitable for backwardation)