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.

 Comments Off on Is gold stretched?
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.

 Comments Off on Ratio trading gold and silver