Last week I got into a Twitter debate with Jan Nieuwenhuijs (aka Koos Jansen) on his tweet about Peter Hambro’s Bloomberg interview:
— Jan Nieuwenhuijs (@KoosJansen) September 10, 2015
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:
The chart they don't want you to see: world didn't end in 1998 when TOTAL (not just reg) stocks v OI was this high pic.twitter.com/fkwEHbKdwT
— Bron Suchecki (@bronsuchecki) September 10, 2015
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?