Refuting More Rumors

[Ad Orientem]

Bron Suchecki is like a lamp in the darkness as he periodically illuminates the often ill-informed and sometimes downright nutty corners of the gold bug world.

OK, it is all getting a bit silly out there on the gold interwebs, particularly in respect of the supposed physical-paper price disconnect. I have been trying to kill this meme ever since it first appeared in 2008 but it seems the idea of production capacity shortages seems too difficult for many to get.

The "real" price of gold isn't what you pay for a 1oz coin on eBay. As Mish says "Premiums on small denomination coins is not the same a general premium on physical gold itself." But don't take his or my word for it, here's what Jim Sinclair says:

"For many retail investors around the world they are dialed into the paper market in various exchanges. The second market is a small one, but popular among retail investors, and that’s your corner or even major coin dealers. But neither of those are in fact the real gold market, which is the cash market for gold. This is the cash market for 400 ounce deliverable fine gold bars. That represents the true price of the market on any given day. ... for the physical market, not the coin dealers, but the real market, the 400 ounce deliverable market and Asian type settlement ..."

So what is going on in this real market? Well, don't look to Jim Willie who thinks that "those who purchase metals in bulk are having to pay $2000 or more an ounce for gold in the Asian markets". I work for the Perth Mint and we sell tonnes and tonnes of gold kilo bars into Asia every week and we'd be lucky to get a few dollars of premium above the so-called fake paper spot price. That tells me there isn't any stress in the wholesale markets. So COMEX and LBMA aren't going to be failing any time soon.

Read the rest here...
http://goldchat.blogspot.com/2013/04/ch ... dudes.html

[craigr]

Yes we are lucky to have people like Bron around to knowledgeably discuss how the gold market really works.

[Libertarian666]

Right, as long as there is a supply of gold from somewhere, the paper and physical price cannot disconnect.

The question is: where is that "somewhere", and is that supply likely to run out suddenly?

Maybe this is where that "somewhere" is:

http://kingworldnews.com/kingworldnews/ ... _Gold.html

[Ad Orientem]

Right, as long as there is a supply of gold from somewhere, the paper and physical price cannot disconnect.

The question is: where is that "somewhere", and is that supply likely to run out suddenly?

Maybe this is where that "somewhere" is:

http://kingworldnews.com/kingworldnews/ ... _Gold.html

You need to read Bron's linked commentary in its entirety. He blows that report out of the water.

[Libertarian666]

Right, as long as there is a supply of gold from somewhere, the paper and physical price cannot disconnect.

The question is: where is that "somewhere", and is that supply likely to run out suddenly?

Maybe this is where that "somewhere" is:

http://kingworldnews.com/kingworldnews/ ... _Gold.html

You need to read Bron's linked commentary in its entirety. He blows that report out of the water.

I don't see where he even discusses that report. He discusses a Dutch bank report, not a Swiss one.

[Ad Orientem]

Right, as long as there is a supply of gold from somewhere, the paper and physical price cannot disconnect.

The question is: where is that "somewhere", and is that supply likely to run out suddenly?

Maybe this is where that "somewhere" is:

http://kingworldnews.com/kingworldnews/ ... _Gold.html

You need to read Bron's linked commentary in its entirety. He blows that report out of the water.

I don't see where he even discusses that report. He discusses a Dutch bank report, not a Swiss one.

  Ooops I stand corrected.

[bronsuchecki]

The interesting thing about the Swiss story is the reference to money laundering. It may be a case of the client not having up to date identification documents, which can happen if he was an old client pre-AML rules. Many jurisdictions have a requirement for the client to be properly IDed before any money (or metal in this case) can be paid out.

As usual with stories heard second hand from friends and referencing unnamed banks it is hard to check or find out what details have been left out.

[I Shrugged]

In this latest round of stories, is GLD speculated to be less than fully backed with physical gold?

I know there are always those who say that is the case, but I am asking if there is anything new on this question.  Thanks.

[rickb]

In this latest round of stories, is GLD speculated to be less than fully backed with physical gold?

I know there are always those who say that is the case, but I am asking if there is anything new on this question.  Thanks.

I don't know of anything new on this, however there continues to be a fairly large chunk of GLD sold short (28M shares is the latest number according to http://shortsqueeze.com/).  I think this is about 8.5% of the total.  When shares are sold short, they're borrowed - I think often without the explicit knowledge of the lender (my understanding is if you enable options margin trading in a brokerage account, your broker can loan shares in your account without telling you to facilitate other investors' short sales).  One way some people look at this is that it effectively reduces the gold backing the shares from 100% to about 92% - although in a strict sense the lenders in this scenario don't own shares at all, just an IOU from the borrower.

EDIT: Margin, not options.  And, just for comparison, 28M shares of GLD is about 2.8M oz which is more than 6 times the total reserve of Cyprus (Cyprus's total reserve is about 13.9 metric tons, which is a little less than 450,000 troy oz).

[rickb]

Perhaps Bron could comment about this story: http://kingworldnews.com/kingworldnews/ ... ilver.html.

Turk claims that delivery times for larger orders made during the London fix are increasing - historically have been 2 days and now more like 3-5 days - and concludes that this means there's a shortage of physical metal.

This ties into another story - http://kingworldnews.com/kingworldnews/ ... edown.html - where Andrew Maguire claims the April 15 price smackdown was because one or more LBMA members were in danger of defaulting (not being able to deliver gold they had sold).

These two stories together perhaps imply LBMA members are selling gold at the fix that they don't actually have in hand, and (post sale) have to scurry around and find.

[bronsuchecki]

That piece by Turk is interesting but a bit vague, is he talking about 400oz bars or other sizes.

My main question is if this is the case then why can GoldMoney continue to offer its 400oz bar pooled allocated product and without any premiums? If the market was as short as he is making out then GoldMoney would have to stop selling its product because it couldn't source bars or it would be bidding up a premium on them to get them within the standard 2 day settlement (but I'm not hearing of any premiums to spot being quoted on GoldMoney), or is GoldMoney selling its product and then taking the delay (and risk) of 5 day settlement (I'd doubt they would do this).

I am fed up with this "i've heard rumours from people I can't name" stuff. What I think we all need to hear from Turk and Bullion Vault and others at the coal face is whether or not they are having problems sourcing wholesale metal.

[MediumTex]

For someone who makes a living, in part, by being a market commentator, who would want to read something that says: "The gold market is functioning normally."

[rickb]

That piece by Turk is interesting but a bit vague, is he talking about 400oz bars or other sizes.

My main question is if this is the case then why can GoldMoney continue to offer its 400oz bar pooled allocated product and without any premiums? If the market was as short as he is making out then GoldMoney would have to stop selling its product because it couldn't source bars or it would be bidding up a premium on them to get them within the standard 2 day settlement (but I'm not hearing of any premiums to spot being quoted on GoldMoney), or is GoldMoney selling its product and then taking the delay (and risk) of 5 day settlement (I'd doubt they would do this).

I am fed up with this "i've heard rumours from people I can't name" stuff. What I think we all need to hear from Turk and Bullion Vault and others at the coal face is whether or not they are having problems sourcing wholesale metal.

It seems pretty clear to me Turk is talking about 400 oz bars, traded between LBMA members.

The fine print at goldmoney.com, http://www.goldmoney.com/faq/spot-price-limits.html, seems to say that the purchase price (for any significant amount) is guaranteed only to be the price as of the next London fix - perhaps implying that GoldMoney executes large orders through a LBMA member (so if the LBMA blows up they're toast - which one could surmise may be the reason Turk is interested in this).

The real question here is whether the physical price is leading the paper price or whether it is the reverse.  For example, was the $200 drop on April 12 and April 15 caused by some event in the physical market - or was the physical price simply tagging along behind a decline in the Comex futures (paper) price?  If the latter, one might expect demand for physical to increase - which would tend to deplete current inventory.  What happened at Perth Mint the week of April 15th?  Grant Williams claims (in this video, at 43:09) that sales doubled.  Did you have any trouble filling your customers' orders, or was the gold market in your neck of the woods functioning perfectly normally that week?

[Libertarian666]

That piece by Turk is interesting but a bit vague, is he talking about 400oz bars or other sizes.

My main question is if this is the case then why can GoldMoney continue to offer its 400oz bar pooled allocated product and without any premiums? If the market was as short as he is making out then GoldMoney would have to stop selling its product because it couldn't source bars or it would be bidding up a premium on them to get them within the standard 2 day settlement (but I'm not hearing of any premiums to spot being quoted on GoldMoney), or is GoldMoney selling its product and then taking the delay (and risk) of 5 day settlement (I'd doubt they would do this).

I am fed up with this "i've heard rumours from people I can't name" stuff. What I think we all need to hear from Turk and Bullion Vault and others at the coal face is whether or not they are having problems sourcing wholesale metal.

It seems pretty clear to me Turk is talking about 400 oz bars, traded between LBMA members.

The fine print at goldmoney.com, http://www.goldmoney.com/faq/spot-price-limits.html, seems to say that the purchase price (for any significant amount) is guaranteed only to be the price as of the next London fix - perhaps implying that GoldMoney executes large orders through a LBMA member (so if the LBMA blows up they're toast - which one could surmise may be the reason Turk is interested in this).

The real question here is whether the physical price is leading the paper price or whether it is the reverse.  For example, was the $200 drop on April 12 and April 15 caused by some event in the physical market - or was the physical price simply tagging along behind a decline in the Comex futures (paper) price?  If the latter, one might expect demand for physical to increase - which would tend to deplete current inventory.  What happened at Perth Mint the week of April 15th?  Grant Williams claims (in this video, at 43:09) that sales doubled.  Did you have any trouble filling your customers' orders, or was the gold market in your neck of the woods functioning perfectly normally that week?

The plunge on April 12-15 had NOTHING to do with the physical market. It was created by massive selling of COMEX futures. The physical market has been on fire since then as people who want actual gold are snapping it up while it is on sale.

[murphy_p_t]

In this latest round of stories, is GLD speculated to be less than fully backed with physical gold?

I know there are always those who say that is the case, but I am asking if there is anything new on this question.  Thanks.

I don't know of anything new on this, however there continues to be a fairly large chunk of GLD sold short (28M shares is the latest number according to http://shortsqueeze.com/).  I think this is about 8.5% of the total.  When shares are sold short, they're borrowed - I think often without the explicit knowledge of the lender (my understanding is if you enable options trading in a brokerage account, your broker can loan shares in your account without telling you to facilitate other investors' short sales).  One way some people look at this is that it effectively reduces the gold backing the shares from 100% to about 92% - although in a strict sense the lenders in this scenario don't own shares at all, just an IOU from the borrower.

You don't even have to enable options trading; any account with margin privileges allows the broker to loan your shares out without your knowledge or permission.

Please provide a source for this statement. I ask because it is contrary to what I have read elsewhere. Thank you.

[rickb]

I don't know of anything new on this, however there continues to be a fairly large chunk of GLD sold short (28M shares is the latest number according to http://shortsqueeze.com/).  I think this is about 8.5% of the total.  When shares are sold short, they're borrowed - I think often without the explicit knowledge of the lender (my understanding is if you enable options trading in a brokerage account, your broker can loan shares in your account without telling you to facilitate other investors' short sales).  One way some people look at this is that it effectively reduces the gold backing the shares from 100% to about 92% - although in a strict sense the lenders in this scenario don't own shares at all, just an IOU from the borrower.

You don't even have to enable options trading; any account with margin privileges allows the broker to loan your shares out without your knowledge or permission.

Please provide a source for this statement. I ask because it is contrary to what I have read elsewhere. Thank you.

See, for example, Scottrade's margin agreement (section F) - https://www.scottrade.com/documents/alt ... eement.pdf - or Fidelity's "Important Information about Using Margin" (2nd to last bullet) - https://www.fidelity.com/bin-public/060 ... Margin.pdf.

[bronsuchecki]

For someone who makes a living, in part, by being a market commentator, who would want to read something that says: "The gold market is functioning normally."

I don't think the market is necessarily functioning properly, it is clearly under some stress as premiums for kilobars show, but I think the impression gained from those statements is the core of the wholesale market is not working.

IMHO, GM just needs to be careful that this sort of meme doesn’t result in people questioning their business, eg potential client: “How can you be selling your product if there is no physical to be had? Therefore you must be selling paper!”?

The fine print at goldmoney.com, http://www.goldmoney.com/faq/spot-price-limits.html, seems to say that the purchase price (for any significant amount) is guaranteed only to be the price as of the next London fix - perhaps implying that GoldMoney executes large orders through a LBMA member (so if the LBMA blows up they're toast - which one could surmise may be the reason Turk is interested in this). ...  What happened at Perth Mint the week of April 15th?  Grant Williams claims (in this video, at 43:09) that sales doubled.  Did you have any trouble filling your customers' orders, or was the gold market in your neck of the woods functioning perfectly normally that week?

I am just as interested as Turk is in the state of the OTC London market, as we do use that market like GM does. It is premiums on 400oz bars there that matters. When I see GoldMoney selling gold at say $100 above paper gold prices, then I’ll believe we have a disconnection!

We had a good surge that week, but no problem filling orders or trading in wholesale markets. Physical coin demand has eased off now and we are starting to see net liquidations by Depository clients (nothing major), so I think retail sentiment is still weak.