Sep 142015

Last week I got into a Twitter debate with Jan Nieuwenhuijs ‏(aka Koos Jansen) on his tweet about Peter Hambro’s Bloomberg interview:

I sarcastically replied that if it was virtually impossible to get physical “then Bullion Vault and Gold Money must be running fractional scams, alert James Turk immediately to put a stop to it”. As I said in this post, when physical pool products start to increase premiums or limit inflows, then you know there is a real shortage.

Don’t get me wrong, there is a shortage of retail coins and bars – at The Perth Mint we are seeing huge demand for silver and we are trying to get back in stock on 1oz Koalas but struggling to keep up. However, turning what is a production capacity issue into a meme that there is a shortage at the wholesale level and that the gold and silver markets will “fail” or “default” is fear mongering.

The level of hype does get quite silly. I saw one dealer referring to the high price of junk bags of silver relative to spot as an example of backwardation. Some got very excited about this Financial Times reference that the “cost of borrowing physical gold in London has risen sharply in recent weeks”, which would not have been news to anyone following the work of Keith Weiner, whose basis charts showed increasing scarcity since mid-July.

Zero Hedge, unsurprisingly, got into the act with this claiming that the shortage of US Mint coins was proof that there was no metal in Comex warehouses:

“IF that silver were actually in the [Comex] vault, the U.S. mint could buy a spot contract – September has a silver contract open – and take immediate delivery.”

I find it surprising that Zero Hedge/article’s author are completely unaware that the US Mint cannot accept 1,000oz bars and instead has outsourced blank manufacture (see here). They also seem oblivious that their logic can be equally applied thus:

“If Eric Sprott’s PSLV fund’s silver were actually in the vault, the US Mint could buy the fund and request a physical redemption.”

Of course PSLV is backed by physical metal so how can we explain the fact that PSLV has not had one physical redemption since it listed and is only trading at a very small premium to net asset value if the “silver market is seizing up”? Obviously because wholesale players have no problem acquiring 1,000oz bars and thus don’t want to pay the costs of redeeming from PSLV. For additional proof of that, consider this recent interview with Sunshine Minting’s CEO Tom Power by Silver Doctors:

  • “We act as a conduit for the US Mint for acquisition of silver on the market. We go out on a weekly basis and puts bids out for the supply of the 1000-ounce bars – the raw materials – that we use for the US Mint”
  • “we have seen a push on premiums … subtle changes … little push on premiums”
  • “as soon as we start to see the physical shortage on the supply side for 1,000oz bars because the refining output is down then that’s when I normally would believe that’s when the price would start to escalate again and we just quite haven’t hit that point yet”

He does note that some suppliers “seem to be digging deep into the vaults and pulling out a lot of old stock that has been sitting there for a while … you can always tell when the market starts to get a little tight” but then only talks about subtle changes and little premiums and does not say there is a shortage on the supply side.

Furthering the hype is the recent reduction in Comex warehouse stocks and resulting owners per ounce (open interest vs stocks) moving to over 200:1. This is a perennial favourite of bloggers and while a useful statistic it is often presented using a narrow definition of stocks (eligible) which can give a distorted view – see here and also this recent tweet:

As Kid Dynamite (widely hated in goldbug circles so I guess most will ignore his quote) noted to me in an email, “the key to this meme is to start with the false equivalency: registered gold equals deliverable gold” and it ignores the fact, as this commenter notes, that “the percentage of the open interest that is actually positioned in the front months to take possession of any gold is about 5%, so that drops his 200:1 to about 10:1”.

In my tweet debate with Jan Nieuwenhuijs he questioned my scepticism. Why am I so cynical about shortages? Maybe it has something to do with the fact that I first covered this topic in my personal blog way back in August 2008 and repeatedly since, without any of the predicted failures of “the system”. Alternatively, try this video which covers the repeated claims of Comex’s imminent default (h/t Jan and Frank) – which I personally think would work better with the Benny Hill theme.

For all the conspiracy theories commentators are willing to believe, the one that they do not consider is that maybe Comex warehouse stocks aren’t what they appear to be and that maybe they are the ones being played, just like it has been done before:

“They were moving silver from New York to London where the Buffett orders were being executed. This made the US warehouse inventories drop sharply. Go look at the analysts who talked silver up on that very fundamental. If they said there was a shortage of silver and you better buy it is going to $100, then you may be dealing with a shill or a biased analyst.”

Bill Holter may not think that you should be shocked about 25% premiums in silver and that “whatever you must pay to get it into your hands” is fine. Personally I can’t see the sense of paying 25% when for a few percent you can buy physically backed pool accounts.

Think of it this way: when people are willing to pay 25% premium then for every $100,000 spent, only $80,000 goes to buying silver, which would be 5,333 ounces at $15/oz. If those people would be prepared to buy pool allocated at 1% fees, then the pool operator is going out and buying 6,600 ounces. That is over a full extra 1000oz bar pulled out of the physical market for each $100,000 spent on silver.

Guess who loves the fact that they are being saved from having to find and extra 1,000oz bar for every 5 bars currently being bought? Bullion banks. So silver buyers are so distrustful of The Perth Mint, Eric Sprott, James Turk and any other pool allocated operator that they are willing to take pressure off the silver market by spending their hard earned dollars on premiums rather than metal.

I will conclude with this comment from the owner of the Australian bullion dealer Gold Stackers: “A few core distributors in the U.S. are making an absolute killing in this market. Not a bad gig when wholesale margins go from 5c/oz to over 80c/oz, and the market is silly enough to say ‘Moar! Moar!’.”

So when you see the next article screaming about shortages and telling you to stock up on physical at any premium, ask yourself: who is the player and who is being played?

Jul 072015

The failure of gold to respond to Greece has attracted a lot of mainstream and goldbug comment. Goldbugs have focused on increases in demand as reported by coin dealers in articles such as this Bloomberg piece or directly by dealers such as USAGOLD (saying they had “experienced a strong surge of interest in June … [on] mounting concerns about Europe”) and Bullion Star (noting that “demand in the last week leading up to the Greek referendum has been about 150 % higher than normal”).

While Bullion Vault saw “internet traffic from Greece rise 50% during the first half of this year from the Jan-June period of 2014” they reported no new accounts from Greece, noting that “the preferred choice for Greeks buying gold has remained bullion coin. Specifically gold Sovereigns” which can only be bought from their central bank, the Bank of Greece – the volume of which had doubled according to the Royal Mint.

Predictably, goldbugs jumped to their favourite “disconnect” and “conspiracy” narratives, noting the failure of gold to go up in the face of this strong demand as proof of central bank market manipulation/rigging. Now don’t get me wrong, I certainly don’t deny central bank activity in the gold market (BTW, interesting that Barry didn’t respond to GATA’s questions). I mean, central bankers don’t pay $4,500 for the World Gold Council’s Executive Program in Gold Reserves Management to learn how to store, stocktake and shine up their stash.

However, sole focus on such a conspiracy narrative ignores the equally powerful professionals in the mainstream financial markets, the sizable money they control, and what narratives they believe about gold. I think we can’t ignore the question Koos Jansen asks: “are financial markets suffering from Euroscrisis fatigue?” and Blogger Bullion Baron sums up the attitude of these professionals well:

“A) After 4+ years of talk, Grexit has become the boy who cried wolf and the market now doesn’t pay the situation the attention it deserves.
B) The market (rightly or wrongly) thinks the Greece crisis no longer matters and will resolve itself without impacting global markets regardless of referendum or agreement outcomes.”

Here are just a few quotes to give you an idea of their views (size of their fund in brackets):

  • Huntington Asset Advisors ($1.7b): “Too many of the people who bought gold late in the rally have been scared off … people simply won’t go back to it.” (link)
  • Stifel Nicolaus & Co ($170b): “If we continue to see forward progress in the global economy, if the Fed continues to march towards interest-rate increases, you would expect gold to languish in those circumstances” (link)
  • RiverFront Investment Group ($5b): “They’re going to print money to ease the impact on the peripheral economies, which means further downside on the euro [currency] but upside for equity markets” (link)
  • Bessemer Trust: ($105b) “The risk of contagion to make it a European Lehman [Brothers] moment, is much, much smaller than a few years ago” (link)
  • Barclays: “The market has assessed that the risk of contagion from a Greek default is limited, more contained than in 2011 when Greece was last in the headlines” (link)

As an exercise, consider if just those four groups decided to use only 2% of the $281.7 billion they manage to short gold. That would total 145 tonnes of gold. Now estimate how many tonnes all those smallish coin dealers might have sold. Which do you think is bigger? With that sort of moneypower negative towards gold, central banks and bullion banks could easily sit on the sidelines.

As Gary Tanashian observes, “Gold is simply a marker, a barometer showing the state of confidence in the financial system and its managers (Central Banks) at any given time” and the quotes above show the confidence that professional money has in the system. It should therefore be no surprise then that Chinese bullion bank ICBC Standard Bank sees “scale up selling” on any rally in gold prices.

Are select central banks active in the gold market? Certainly, but market action is the result of many players reacting off each other and often engaging in narrative groupthink. Personally I think the mainstream professionals’ confidence is misplaced and they are complacent about Greece and how, as Ben Hunt puts it, we have “likely embarked on the death spiral phase of a game of Chicken” where “all sides begin to speak in terms of ‘having no choice’ but to take aggressive actions to defend their own interests.”