Travlin,
I don’t know where kitco get their lease rates from - I don’t think they will lend me gold without me having to post any collateral. And so I suppose what they are doing is the following.
Usually what is called the lease rate is LIBOR minus GOFO. LIBOR is the interest on a fixed term unsecured US$ loan. GOFO is the rate I need to pay if I borrow US$ and lend gold for a fixed term. You can view GOFO as the interest you pay on a fixed term US$ loan for which the gold serves as the collateral (not quite ‘collateral’ really because the counterparty gets title to the gold for the term of the swap). Note that the gold part of the swap may be unallocated.
So if you ask the same counterparty to quote the interest rate on an unsecured loan as well as the rate for a gold swap, and you subtract the two, the result can never be negative. This is just because no sane person would give you an unsecured loan at a rate lower than that of a loan for which you have to post collateral.
But often, when people quote the lease rate, they just take the published figures for LIBOR and GOFO and subtract them. But these numbers have totally different origins, the groups of banks that report them are different, etc.
Hi Erik,Yes, I am referring to James Turk, GATA consultant. And no, Central Banks that hold gold in size do not and never have reported gold leases on their balance sheets. As such, it could be considered a surreptitious means of supplying gold to the market. Fair play to the Aussies, though!
This thread has also concluded (as GATA did years ago) that the bullion banking system is leveraged like a traditional fraction reserve system. Their reserve ratio is considerably wide of the mark at 100:1, but it was a famous ‘misspeak’ from Jeff Christian that gave them this number. They just chose to run with it. It’s obvious now that Jeff was referring to trading volume, rather than reserve ratios, so this hardly ranks as GATA’s finest hour.
To give you just the smallest snippet of public evidence, consider: Maybe the most brazen admission […] was made by the head of the monetary and economic department of the Bank for International Settlements, William S. White, in a speech to a BIS conference in Basel, Switzerland, in June 2005. There are five main purposes of central bank cooperation, White announced, and one of them is "the provision of international credits and joint efforts to influence asset prices (especially gold and foreign exchange) in circumstances where this might be thought useful."
What does White mean here? What did Alan Greenspan mean when he said "Central banks stand ready to lease gold in increasing quantities should the price rise"?
Until we know how much Central Bank gold has been leased to which they no longer hold legal title (which is obviously fundamental to this whole debate), I’m not really sure what has been ‘debunked’ on this thread. The thread does reflect, however, a need for more clear and objective analysis of the gold market, free from exaggeration and conjecture. Of that there is no doubt.
Regards,
Q
[quote=Erik T.]
A 10% correction in gold (and yes, a big risk selloff will pull gold down with it, unless there is big political unrest at the same time) is enough to trigger many technicians to sell, in turn triggering the waterfall effect. … the "bottom falling out of the market" phenomenon is indeed possible…[/quote]
This morning’s price action violated the 2008 trendline. Doesn’t mean anything if we see a reversal day here, but if the price moves south of $1600 and stays there for a few days, it will be a strong technical signal prognosticating a further, perhaps very significant sell-off.
Erik
I appreciate your warnings… the paper pricing system does appear to have less floor underneath the current price level than many Gold pundits would suggest. We’ll see if we get a gut wrenching conclusion to all this or not.
Thanks, Bron, for the added details on the OTC market. The way you describe it, it does not seem like it would take too long to set up an alternative round-the-clock gold quote mechanism based on physical metal alone.
Ooooooops. I made a mistake in what I wrote about the lease rate, and I do need to correct it (already done in my lease rate article). Here is the correction.
The lease rate can indeed be negative if the leased gold is allocated and there are storage fees due. This is for the following reason. The interest on an unsecured US$ loan (let’s call it LIBOR) is
LIBOR = (risk-free yield on US$) + (risk premium for US$ loan)
The swap rate if you swap gold for US$ can be derived from a no-arbitrage condition and is equal to
GOFO = (risk-free yield on US$) + (risk premium for US$ loan) + (storage expenses for the gold) - (risk premium for lending gold)
So if you calculate the Gold Lease Rate as GLR = LIBOR - GOFO, you get
GLR = (risk premium for lending gold) - (storage expenses for the gold)
which can indeed turn negative.
The problem that the LBMA polls different groups of banks for GOFO and LIBOR and does that at different times of the day remains.
Apologies for the confusion. I hope Bron agrees with the corrected version as well
I’d like to pick up on another point if I may. It’s been asserted on this thread by Erik T and Jeff Christian that gold is vulnerable to ‘bad bankers’ dumping contracts into thin markets to pick up cheesy profits. No conspiracy required. This sounds plausible and well within Wall Street’s ethical framework.
But gold comprises over 60% of the Eurosystem’s FX reserves. It trades like an international currency on an opaque OTC market, the scale of which was secret until 1997. The major owners of gold are the central banks themselves.
My question is, if you’re ‘playing around’ with the gold market to pick up some pennies, don’t you get a phone call from someone? Or do you need tacit approval? We’re not talking about pork bellies and orange juice here. Obviously I’m not expecting anyone to the know the answer. But you would think serious people might take issue with some coked-up MBAs screwing around with your monetary system’s reserves on a weekly basis.
Frankly, I view the "it’s just some naughty bankers, nothing to see here" line with a good degree of scepticism. It doesn’t seem to fit the gold market’s profile.
[quote=50sQuiff]
My question is, if you’re ‘playing around’ with the gold market to pick up some pennies, don’t you get a phone call from someone?[/quote]
You can even get a phone call saying that they won’t roll the leases and you better return the gold by the deadline. I think it is absolutely clear who is running the show. They will probably let you alone with your intra-day activities, but they can withdraw your liquidity if they want to size you down.
I think you should read the Thoughts and the Gold Trail. You will find this
"Date: Wed Nov 12 1997 20:41 ANOTHER (THOUGHTS!)
A BIS meeting was held and from those doors the world did change. The Bundesbank has now made clear to all what will now be policy for CBs. A crisis is at hand! All physical gold sales will stop. All gold lending will wind down."
and this
"Date: Wed Nov 12 1997 14:08 ANOTHER (THOUGHTS!)
A person thinking of purchasing physical gold should see the Bundesbank statement as fact. They openly admit to lending in the past and no chance of selling real gold in the future. This is a clear indication that a solid decision was made at the BIS meeting ( see my post ) ! All CBs will now slowly stop all leasing operations and allow the market to size itself."
and you can think about them for a while.
Sincerely,
Victor
[quote=50sQuiff]But you would think serious people might take issue with some coked-up MBAs screwing around with your monetary system’s reserves on a weekly basis.[/quote]The central bankers don’t care with these short term games. They hold gold for the long term and strategic reasons. That’s why they are OK to lease it out for a few years (that’s short term to them) and it doesn’t matter to them if this is used to push the price down over that time as such actions will have to be unwound (a short is just a buyer in the future). Some may well want such short term drops.
I think it is also worth noting that CBs are not all the same and have different motivations. Consider the Reserve Bank of Australia, who is explicit about what they have physically and what is leased out and the risk rating of those to whom it is leased. Then in recent years they pulled back all but a tonne of their leases because the risk/return tradeoff wasn’t sufficient. Then you have China and other emerging countries buying gold.
I can see some CBs engaging in short term tactical manipulations but a coordinated global (or block of countries) strategic (ie ongoing) manipulation? I’m not so sure any group has the firepower to maintain that.
[quote=victorthecleaner]
GLR = (risk premium for lending gold) - (storage expenses for the gold)
which can indeed turn negative.
The problem that the LBMA polls different groups of banks for GOFO and LIBOR and does that at different times of the day remains.
Apologies for the confusion. I hope Bron agrees with the corrected version as well ;)[/quote]
Storage can be a factor, but it is so low for large players that it can’t account for significant negative lease rates. I think the fact that GOFO and LIBOR are topped & tailed averages means the dervied GLR has a fair magin of error as to actual lease rates. All i can say is we don’t see anyone quoting to pay us to borrow gold.
To the many people who have expressed desire for CM to comment:
I appreciate the desire of many of you to hear Chris Martenson’s take on all this, and I too hope that he’ll have time to chime in at some point. But I’d also like to suggest something I believe would be even more valuable.
Let’s face it: Jeff Christian has been outspoken in denouncing the veracity of most of the goldbugs’ theories, but nobody has ever really challenged him to back up his arguments in detail. The Murphy vs. Christian debate on FSN a couple of years ago was interesting, but frankly Bill was poorly prepared, and even the most staunch GATA supporters commented after the fact that Chris Powell would have been a better choice to represent GATA. Murphy was slinging inuendo like "Jeff, if the price goes up, will you finally admit you were wrong?", but never really pushed the hard technical questions about leasing, double-counting, etc. In short, I don’t think anyone has ever really put Jeff Christian thru his paces and asked him to substantiate in detail on why he disagrees so strongly with the many goldbug arguments, including the leasing topic that has come up in the last few posts here.
What I think the investment community really needs is for a SMART interviewer who REALLY KNOWS HIS STUFF, and understands the various gold manipulation theories in fully nuanced detail, to interview Jeff Christian and really put him through his paces. By that I mean challenging Jeff to substantiate his arguments dismissing the goldbugs with cogent, well-reasoned logical arguments. I’m not talking about a debate per se, but rather a very in-depth interview where the interviewer knows the pro-manipulation arguments inside out and backwards, and can really hold Jeff accountable to fully address them. It should feel like polite, reasoned intellectual discourse along the lines of how scientists with differing viewpoints "argue" their hypotheses to both enrich their own views and enlighten their colleagues. So let’s take stock of what’s needed: the interviewer has to be really smart, has to know and understand the PM manipulation theories in full detail, and has to have the professional maturity to really put Jeff through the intellectual wringer, while at the same time maintaining a polite, professional atmosphere that combines interpersonal respect with aggressively challenging Jeff’s viewpoint on substantive logical and factual merits.
I ask everyone here to just look at the underlined words in the above paragraph. Can you think of anyone better suited than Chris Martenson to be the interviewer? I sure can’t.
I’m not sure if Chris and Adam are even following this thread at this point. I’ll e-mail a copy of this post to Adam to make sure he’s aware of the suggestion.
Best,
Erik
EDIT: I also think the interview should start with Jeff describing the kinds of manipulation he does agree happens.
Admittedly off topic from the manipulation discussion, but I must say the gold chart is really looking scary. As I draw the line (and I’m NOT a TA guru by the way), the only other trendline violation since Oct 2008 was in the overnight session during the last few days of Dec, and that very quickly proved a false breakout, with only one daily bar dipping below the trendline.
We’re now fully $50 below the trendline, with two daily bars solidly below and as I type this (1am Eastern), the trend is still clearly down. I would say this very clearly qualifies as a breakout below the 2008 trendline. There’s still room for it to be proven a false breakout, but we need to see a reversal pretty quickly.
I suppose a counter-argument is that we’re looking at a descending wedge with a base around 1550, but even so, the prior test of 1522 was just barely below the 2008 uptrend. This one is a clear and obvious breakout below that trendline. I’m not sufficiently expert on TA to say with any authority how many daily bars it takes to confirm a downside breakout, but to my eye this is the most concerning move we’ve seen since the bull market began in Oct’08.
I guess the next thing to expect would be an up-move to re-test the trendline which by my chart is around 1645 now. If we re-test that but can’t break through it to the upside, I think it spells very bad news.
On the fundamental side, Goldman is again reaffirming their call for a June 20 QE3 announcement. If we DON’T get QE3 at the June meeting, I think a big sell-off is quite likely. I agree with Strawboss that they are certain to print eventually, but I don’t think the gold bull is going to wait past June without some major convulsions.
Ted had a really good commentary this week and made a couple of points that I hadnt considered.
Firstly, he says that the purpose of the futures market is to allow producers to offload risk onto the speculators. Farmers and Ranchers use this mechanism for obvious reasons. In silver and gold - virtually NONE of the miners are hedging their production. This means they are NOT active in the futures market. Yes, the bullion banks like Perth and Kitco would probably use futures as would coin dealers - but, no wheres near the level of OI as is present on the COT report.
The label "commercials" is a misnomer in gold/silver because the elephants in that category arent the miners - its the banks like JPM. And they arent offloading risk onto the speculators (the intention of the futures market) - they are taking the opposing side of the speculative bets and then manipulating price action to the detriment of those speculators.
Secondly, he makes the claim that the "commercials" aka banks are acting in collusion with each other - trading in a syncronized fashion. I have to admit that his evidence for this claim is thin and its mostly conjecture on his part - but, it does make a certain sense.
Dumping contracts in thin markets, HFT always undercutting the asks, triggering stops, all the usual squid hijinks.
You would think that in a fair market, in the commercial category where hedging by the producers is practically non existent - that the ratio of longs to shorts would be more evenly balanced. Some banks would be long - other banks would be short and it would roughly balance out (at least some of the time). Instead - the commercials are always net short - simply a matter of degree as to how much they are short.
Those are the 2 points that made sense to me.
The argument that the reason banks are net short is because they are hedging their exposure to their clients whom are making bets through them…that doesnt make sense to me. I think it was Jeffrey Christian earlier this thread that posited that rationale.
Lets say I am a rich guy and want to buy silver because I think its gonna go sky high. So, because I am not an expert on these things, and because I want to be a big shot - I call up JPM (because I heard they are the BEST) and tell them I want to buy 1000 silver futures contracts. So, JPM sells me 1000 contracts. I am now long 1000 and they are now short 1000. But, because they want to hedge their risk to me - they go on the COMEX to hedge that risk. They would do this by BUYING 1000 futures. If JPM offered this service to several of their clients - they would have a large short position with their clients which they would hedge with a large LONG position on COMEX.
But, they dont have a large LONG position according to COT. Instead - the commercials (banks) are ALWAYS net short - usually by a rather large margin.
[quote=Strawboss]Firstly, he says that the purpose of the futures market is to allow producers to offload risk onto the speculators. Farmers and Ranchers use this mechanism for obvious reasons.[/quote]That’s not quite accurate. That is the historical reason that the futures market was first created. But to say that’s the purpose or reason for its existence simply isn’t accurate. To wit, consider that index and interest rate futures are traded on the CME. There is no such thing as an interest rate "producer" or "farmer". The futures market has evolved over the decades to provide a mechanism for all sorts of traders to hedge and speculate about almost anything.
What makes Ted think that? I fear that he’s misinterpreting the data. Again. Hedging by producers would show up as short OI by commercial banks, not as direct OI held by mining companies themselves. The reason is that the producers hedge their forward production with bullion banks, or with smaller niche outfits like CPM Group. The idea is that the bullion bank can offer one-stop shopping for all their financial needs, including hedging. The bullion banks, in turn, gain long exposure directly to the producers (because they are market-making, and thus taking the opposite side of the producer’s shorts). So the bullion banks would have net long exposure because of their banking relationship with the producers, but they don’t want net long exposure because they’re not in the speculation business. So they delta-hedge their exposure to flat net notional. How do they do that? By maintining a large short OI in COMEX futures, which Ted seems to keep misinterpreting as a prop position.
Most of the OI in the COT comes from bullion banks delta-hedging their other exposures in OTC relationships.
Why do you/Ted think that? What makes you think the banks aren’t doing exactly what Blythe Masters, Jeff Christian, and everyone else have explained them to be doing: offloading risk on behalf of the commercial producers who are their clients onto speculators in the futures market?
This is what drives me nuts about Ted’s "analysis". To speculate that the commercial banks might be acting in collusion is a very worthwhile thing to do - we certainly need some sort of watchdog to keep an eye on them, and I wouldn’t put anything past them. But instead of doing deep investigation and looking for actual evidence that this might really be happening, Ted makes up a story in his head about what might be going on, then reports it as news. Ai yi yi…
The commercial banks always being net short makes perfect sense, and should surprise nobody who actually understands the market. The primary hedging function the banks offer to producers is to hedge their forward production, meaning to allow the producer to lock in a price today and secure financing to run the mine, based on production that will actually occur later. That is inherently a function that puts the producer (and thus the commercial banks, acting as their agents) on the short side of futures contracts. Why would you expect anything else?
[quote=Strawboss]The argument that the reason banks are net short is because they are hedging their exposure to their clients whom are making bets through them…that doesnt make sense to me. I think it was Jeffrey Christian earlier this thread that posited that rationale.
Lets say I am a rich guy and want to buy silver because I think its gonna go sky high. So, because I am not an expert on these things, and because I want to be a big shot - I call up JPM (because I heard they are the BEST) and tell them I want to buy 1000 silver futures contracts. So, JPM sells me 1000 contracts. I am now long 1000 and they are now short 1000. But, because they want to hedge their risk to me - they go on the COMEX to hedge that risk. They would do this by BUYING 1000 futures. If JPM offered this service to several of their clients - they would have a large short position with their clients which they would hedge with a large LONG position on COMEX.[/quote]
You’re not getting it. The typical bullion bank client is not a rich guy with a bullish outlook. It’s a producing mining company that needs tens or hundreds of millions of $ to finance building their mill or tailing pond or whatever they need to do before they can actually produce the metal. They need bank financing to do that activity - whatever it might be. The bank isn’t about to take on market risk and give them big $ to build their mill (or whatever) and then see the metal price crash so the miner can’t repay the loan. So the bank enters a transaction with the miner where they hedge the miner’s forward production, meaning they figure out how many ounces of production need to be sold at today’s price in order to finance the deal, and they lock in that price in an OTC contract between the bullion bank and the mining company. This is the essential ingredient needed to facilitate the bank also financing the miner’s projects. Because the miner is going short (planning to deliver future production to satisfy the short contract), the commercial bank has taken on considerable long exposure. They delta-hedge to flat net notional by going short on the COMEX. That’s why there is always a large short OI held by commercial banks. The only time it would ever go away is if the miners never needed financing for their projects.
Now, if what Ted really means (and I don’t think he does) is that the mines really aren’t hedging their forward production, and the short OI held by commercial banks is not really delta-hedging the banks long exposure in OTC contracts with producers, then Ted should do some investigative reporting and find out from the mining companies the extent to which they really are hedged, then compare an industry exposure estimate to the net OI on the COMEX.
But even that analysis wouldn’t prove anything, because producing miners are just one example of a bullion bank customer. Another possibility is someone who has vaulted a huge amount of metal with a bullion bank, and wants to hedge market risk. Again, the large physical holder goes short with the bank, which in turn goes short on the COMEX. Ted seems to think that OI he has traced back to JPM means that JPM is exposed to the net COMEX position. That’s not how it works. JPM is almost certainly flat or close to flat on a net basis. The reason they are net short on the COMEX is that they are net long with their clients, and that is to be expected given the nature of their business. No mystery, no conspiracy, and no manipulation theory required.
My sense is that Ted’s analysis is more simplistic than that. I think he just sees that the COMEX OI is coming from commercial banks, and based on that he assumes the producers are not hedging. If that’s true, he’s simply failing to see the very obvious fact that the commerical banks are effectively hedging in the COMEX on behalf of producers, exactly as Jeff Christian and Blythe Masters have repeatedly said.
All the best,
Erik
Erik,
The latest GFMS mine hedge book survey http://www.gfms.co.uk/?page_id=78 has the global mine delta adjusted hedge position at only 5.27 million ounces, down from 103 million ounces in 1999, so I don’t think that is the driver of the short position.
I would guess however that much of the metal tied up in the working inventories of US industrial users, mints, jewellers etc would all be hedged on COMEX, but I don’t have a handle of what that is ounce wise. Note it would fluctuate but should be reasonably stable, so should account for some base short position.
While I agree that the bullion banks have clients who want to be short and do so with them rather than directly on COMEX, I think this ignores the possiblity that the flow is the other way. That is, it is not just a case of bullion banks pushing their client positions onto COMEX, but that the bullion banks are taking or pulling long demand from COMEX into the OTC market.
If you have a lot of speculators (retail and professional) going long futures, this pushes the futures price up, creating an arbitrage profit relative to the physical market. A bullion bank seeing this then responds (not drives) by selling futures and buying physical in the OTC spot market.
This would be observed as bullion banks selling when everyone else on COMEX is buying and buying when everyone else is selling. This is not to argue that bullion banks may play trading games and probe stop loss levels etc and in that sense initiate moves (on which they take a relatively small prop position) but the remaining buying or selling they are doing is just performing their arbitrage function to keep OTC spot andCOMEX futures prices together in their mathematical relationship based on US interest rates and gold lease rates.
This theory could be tested by looking at periods (say during 1980s bear market) where everyone else is short. During those periods the bullion banks should have been maintaining a consistent long position. Don’t have that data to hand, but I assume Ted would have.
The above is not meant as a total explanation, just that we have to look at the market from all angles. It would guess that the flow of trades would change over time, sometimes OTC trading is being driven into COMEX, sometimes COMEX volumes dominate and are driven into the OTC market.
THanks for sharing the data, Bron. I wasn’t aware that the miners’ forward hedge had fallen that low, and I agree it’s not enough to explain the commercial short OI on the COMEX.
But more to the point, you’re talking reality here - bringing up entirely plausible explanations such as hedging working inventories of commercial users, etc. Your arb scenario makes the most sense to me. The real point here, however, is that you obviously know the market, and understand how it functions. I’m embarassed to admit that I hadn’t thought of the arb explanation, although it now seems obvious in hindsight. Contrast with Ted’s entertainment letter, in which the explanation for just about everything that happens in the market is that the evil-doers at JPM are orchestrating yet another smack-down crack-down take-down of the markets.
I’m sorry to say it, but I would actually find it ironically entertaining if it turned out that all of Ted’s COT-watching over the last few years were actually nothing more than Ted observing the arb flows as speculative interest in the COMEX is being absorbed thru arbitrage by the much larger London market. Bron, it doesn’t sound like you’ve read Ted’s letter. He breaks down each COT report and "analyzes" it, observing how many net short contracts were gained or lost by the commercials each month. He then attributes "meaning" based on his "analysis", and that "meaning" almost always involves evil-doing bankers planning "take-downs" of the market. Sounds like a much more plausible explanation is that he’s just looking at arb flows between LBMA and COMEX, and doesn’t realize what he’s looking at.
Seems like this thread is dying - nobody but Bron and me contributing at this point. I’m actually quite surprised nobody commented on my suggestion that CM should challenge Jeff C to a very thorough interview, but so be it. I hope at least one person opened their mind to the possibility of a new viewpoint from this thread. I certainly learned several new things from Bron and Victor.
Erik,
Sorry I didnt mention it earlier - I think it would be a great idea to have an in depth debate between Chris and Jeffrey. Not a debate along the lines of the presidential farces we are subjected to, but where Jeffrey is in the witness box and Chris is performing cross examination.
Truth should be able to withstand a vigorous cross examination. Our legal system is predicated on that fact.
Taking your thought process a step further.
Is it reasonable to assume that the total OI represents the amount of silver that is currently "in the system" (except for the retail holdings as most little guys are probably not hedging their exposure). It would make sense that the refiners, the bullion banks, the manufacturers and the larger coin shops would hedge their inventory.
Erik - what are your thoughts related to Ted’s assertion that COMEX is where the price is set - not London. London may have more volume but its COMEX that sets the price.
