[quote=Erik T.]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.
All the best,
Erik
[/quote]
Nope, still following. And although we were quiet, I’m sure we all agree that’s a brillaint idea (the interview).
It would be great if Chris would sift through this thread and take inspiration from various posts and use them in an interview with Jeff Christian.
Comments in this thread have discussed the theoretical possibility of gold declining in price for a perioid at the same time as it is being bought in large quantities and withdrawn from unallocated accounts, in the event of a run on the bullion banks. Yes, I know the discussion suggested that gold would likely be revalued much higher after such an event. And in theory gold will (ultimately) hold it’s value. I just listened to today’s podcast on Financial Sense and there’s an interesting interview with Barry Bannister who makes the general case that the US is the place to be for the next 5 years, and one wants to be invested in large cap stocks, the dollar will do fine compared to the rest of the world, etc. I bring this up because this thread has taught me that it is even more difficult to truly protect and grow your wealth than I believed before. This is where people like Victor have really put me in a confused state. Not because his points themselves are confusing, but because his points about the Euro, gold and the dollar (mostly posted elsewhere) seem to be diametrically opposed to clever guys like Bannister (he’s just one example) and frankly Victor’s arguments do seem to have merit. Hmmm…As a result I’m having a in increasingly hard time trying get a sense for where things are headed over the next few years. Largely thanks to this thread! There might be times where no sector is spared from unbelievable wealth destruction, even precious metals. Maybe you just buy gold and forget about it for 10 years, and don’t look at the price. Even when prices of gold and silver go up nominally, will the precious metals will keep their purchasing power in today’s currency units constantly throughout the coming years? The way I’m starting to see it, there will be longish periods where people have lost wealth in real terms in just about every asset class.
I visit PeakProsperity.com because I believe in the peak oil thesis, and my biggest complaint against so many smart analysts interviewed all over is that they seem to only consider economic issues and pay very little attention to the possibility of declining oil exports and energy issues, apart from some rough idea that energy costs will rise slowly over time. So yes, I’d really love someone smart like Chris Martenson to analyse all these points and see how he integrates them into his understanding of where things are headed. I couldn’t emphasize enough how useful an interview with Jeff Christian would be.
I don’t think OI represents just in the system inventory, it would also cover speculator money and producer hedging. The problem is that the balance of all those three changes over time. Then add in the fact that some of those three can also be done with banks OTC. Then add in the fact that the amount of that OTC business that is covered by the banks on COMEX or is netted out within the OTC market changes over time.
COMEX is worth looking at, but one has to acknowledge that other stuff happens in the OTC market which we can’t see (beyond LBMA’s net clearing figures and ETF volumes) which also affect price discovery.
I think it follows that the market with more volume has more influence in price discovery.
[quote=CPTWaffle]The way I’m starting to see it, there will be longish periods where people have lost wealth in real terms in just about every asset class.
[/quote]
Edit: obviously everything can’t lose value together at the same time, what I mean is that every asset class will take turns and it will be hard to stay on top, in my opinion. I used to believe precious metals were relatively immune to this but I am less certain that they will be. I do believe they come out on top, it’s how they fare on the way there that I am more doubtful about. That said, where else can one go?
I’ll stop rambling now.
As I’ve said before in this thread, Ted strikes me as a really nice guy and a perfect gentleman. I really don’t mean to offend or insult him personally, but honestly this is one area where I am just blown away by some of Ted’s comments. I no longer subscribe to his letter, and to be honest I only read it for the first 2 months when I was a subscriber, because I just couldn’t believe what I was reading.
I think Ted means well, and is sincerely concerned about wrongdoing in the markets. But this price discovery thing is one area where I think Ted’s comments really reveal a serious lack of understanding on his part. I am not intimately familliar with his views because I no longer pay much attention to him. But from what I understand, he theorizes that an injustice exists because according to Ted (in a CM interview), the price is being set by COMEX trading and that is "a violation of commodity law". Ted didn’t cite a specific statute.
Bluntly, I don’t think Ted even understands that "setting the price" and "price discovery" are actually the same thing (Econ 101 stuff). So it comes as no surprise that he is apparently confused about how parallel markets transmit prices to one another through arbitrage (Econ 201 stuff).
So the best I can do to answer this question is to explain how it really works. You can then compare my answer to that question to whatever Ted is saying.
When multiple markets co-exist in parallel, such as COMEX and London, in one sense each market has its own price discovery mechanism. Prices are set on the COMEX based on supply and demand on the COMEX, and prices are set in London based on supply and demand in London. At first glance, that would suggest that each market could have its own price. But as soon as the prices diverge by just a little, a risk-free profit opportunity is created for someone to buy in whichever market is cheaper, and sell in whichever market is more expensive. The people who make their living by watching for and exploiting those little price differences between markets are called arbitrageurs.
A basic and well-known rule of all markets is called The Law of Efficient Arbitrage. Essentially, it says that two markets can never differ in price by more than the transaction cost of the arbitrage trade, because if that risk-free profit opportunity exists, somebody will figure it out and exploit it. Because the arbitrageurs (arb’s in industry lingo) are buying the cheap market, their trades push the price up, and their sales in the expensive market push the price down. So as long as they are on the case, any supply or demand influence from one market is said to be transmitted through arbitrage to the other market.
What all this means is that the price of metals is not "set" in ANY single market. If a bunch of new supply or demand hits one market, the price impact is instantly transmitted by arbitrage to the other market. So in a sense, both markets are simultaneously setting (discovering) the price, and the arbs keep the two in sync.
So to answer the question of which market is actually setting the price, the answer is that it could be either, but at any given moment in time, when a large order (either direction) hits one market, that market is driving the price higher or lower in both markets. To expound on Bron’s point, if both markets are influencing the price, it stands to reason that overall, the larger market (London) has the most influence.
In summary, I hate to say it, but from my perspective Ted is just so far out of touch with how these things actually work that it’s not possible to comment on his theories. But I do think the above accurately describes how the price is set and transmitted from one market to another. Bron will correct me if I got it wrong! 
"Quiet" won’t help. Adam Taggart (Chris’ business manager) is a very customer-oriented guy. He and Chris already have their hands full launching the new site, and another interview is something they are probably only likely to entertain if there is demand for it from enrolled members. I would have suggested interviews with Jeff, Bron and Victor, but I know that 3 is just way too many extra interviews to ask for. Adam has the podcast schedule booked out months in advance already. One more interview seems plausible to me, but it won’t happen unless enrolled members are asking for it. These guys are very focused on doing whatever they think the enrolled membership will appreciate the most.
Erik
Erik and all participants, thank you for this very interesting thread.
I was wondering for a while how a dealer like BullionVault that has its own private market was able to closely follow the spot prices. It’s happening through arbitrage I guess? I’ve noticed sometime that when you buy or sell the deal is done directly with BV so I’m guessing this is happening when bids/asks move too far away from the spot price. So in that case BV would sell/buy on its own market and respectively buy/sell the same amount of gold on the COMEX, London or other external markets?
JPM - $100 trillion in derivatives…what could possibly go wrong?
You have the right general idea, SailAway, but in this case I dobut arbitrage is in play.
Price transmission through arbitrage works between two markets where the bid and ask prices in each market are being set directly by market participants’ bids and offers. So if, hypothetically, BullionVault was designed to show the "bid" price as whatever the highest bidder among BullionVault customers was willing to pay, and BullionVault itself traded alongside its customers in the same bid-offer system, then in theory yes, arbitrage would keep the markets in sync.
I don’t use BV myself, so don’t know for certain, but I highly doubt it works that way. More likely, BV sets its own bid and ask prices based on a small profit margin over a live price feed they get from the exchanges, and when a BV customers buys or sells, BV is almost certainly acting as the counterparty, as opposed to facilitating a transaction between two BV customers (one buyer, one seller), the way an exchange would do it. Again, I don’t use BV so I can’t comment authoritatively on how their system works, but my guess is they set their prices and always act as counterparty to customer transactions.
But there is still an element of "efficient arbitrage" in this picture. If it works as I suspect and BV is setting the prices, if BV were ever to screw up and let their price get out of sync with the global market, the arbs would swoop in and buy or sell as much as they possibly could at the inefficient price. Because those transactions don’t directly affect BV’s price quotes (assuming it works the way I am guessing it does), the result would not be that the markets sync automatically. Instead, BV would lose money until they noticed the problem and got their price in line with the market. Needless to say, they have a strong financial incentive not to offer prices above or below the market, because the arbs would rob them blind if they did.
A different example that does work based on efficient arbitrage is GLD and SLV. These ETFs are priced on their own bid and ask - they are not directly tied to the price of bullion. But as soon as they get just a TINY bit out of sync with the bullion price, a profit opportunity is created for AP’s (the people who actually add and subtract metal from the ETF) to either create or redeem a "creation unit". So the reason GLD and SLV seem to almost perfectly track the price of bullion is that as soon as they get out of sync with the bullion market, the arbs jump in and pull them back into line again. This is another example of parallel markets with mutual price transmission - is the price of GLD being set by the bullion market, or is the price of bullion being set by the GLD ETF? The answer is both - supply/demand shocks to either market are transmitted to the other through arbitrage.
Another related concept is asymmetry of arbitrage for certain instruments. This is near and dear to this audience because PHYS and PSLV are examples of instruments with asymmetric arbitrage characteristics. PSLV and PHYS can easily trade at a premium above NAV, and often do. The reason is that the arbs can’t close that gap. If PSLV is 10% over its NAV, the arbs would love to go short PSLV and long actual bullion. But the problem is they can’t close out that trade. They’d end up with a short in PSLV and a long in Silver, and if you are the arb, you’re not allowed to just show up at Sprott headquarters and say "Hey, I want to close out this short by delivering the metal to you". So when PSLV is trading ABOVE its NAV, the premium cannot be arb’d out because shorts are not allowed to deliver physical to close their short position.
But in the opposite scenario, if PSLV were to trade at a discount to bullion, that discount would instantly be arb’d out of existence. The key is the redeemability clause. If PSLV traded at a 10% discount to NAV, the arbs would be all over it. They would go short on the COMEX, and buy PSLV in equal quantity until the prices converged. Then they would assert their redemption right, pick up their silver from Sprott, and have Brinks drive it down to the COMEX warehouse where they would deliver it against their COMEX short. The arbs pocket the discount, less the transaction cost (paying for the armored car, insurance, etc) as pure profit. That’s why the rule is that prices can only diverge by the transaction cost of arbitrage.
Erik
[quote=Erik T.]So if, hypothetically, BullionVault was designed to show the "bid" price as whatever the highest bidder among BullionVault customers was willing to pay, and BullionVault itself traded alongside its customers in the same bid-offer system, then in theory yes, arbitrage would keep the markets in sync.
I don’t use BV myself, so don’t know for certain, but I highly doubt it works that way. More likely, BV sets its own bid and ask prices based on a small profit margin over a live price feed they get from the exchanges, and when a BV customers buys or sells, BV is almost certainly acting as the counterparty, as opposed to facilitating a transaction between two BV customers (one buyer, one seller), the way an exchange would do it. Again, I don’t use BV so I can’t comment authoritatively on how their system works, but my guess is they set their prices and always act as counterparty to customer transactions.[/quote]
Actually, that is Bullion Vault’s difference, it is a peer-to-peer exchange in that it will allow clients to trade between themselves. However, I don’t think there is much depth of market so BV itself quotes a bid and ask to keep its price inline with the physical market, but you are ultimately relying on their ability or capacity to maintain a bid and ask during high volume and volatile markets as I don’t think, like the ETFs, that there are a number of "market makers" in their system.
[quote=CPTWaffle]what I mean is that every asset class will take turns and it will be hard to stay on top, in my opinion. I used to believe precious metals were relatively immune to this but I am less certain that they will be. I do believe they come out on top, it’s how they fare on the way there that I am more doubtful about. That said, where else can one go?[/quote]You are right, gold will turn out of favour one day. Reason for having a diversified portfolio. If you don’t want the stress of having to pick the next best asset class, then just follow something like the permanent portfolio http://crawlingroad.com/blog/2012/04/02/2012-04-02-gold-in-the-permanent-portfolio-podcast/ and rebalance regularly.
Erik,At BullionVault you can directly buy and sell to another BV customer. There is actually a market order board ( http://www.bullionvault.com/gold_market.do ) where you can see bids and offers available, market depth and spread. BV is just another participant in this market. If it happens that your deal was with BV directly then they disclose it in the contract but most of the time you buy or sell directly to another BV customer (of course BV always takes the transaction fee).
What you describe is actually the way GoldMoney (that I also use) works. GM is acting as the counterparty exactly the way you explained it, you pay spot + transaction fee when you buy.
These are to me the main differences between the two. There is no price spread at GM but the transaction fee is a bit higher. At BV the spread can be a few tenth of a percent during market hours or more when the main markets are closed.
Thank you again for your reply and also the explanation on PSLV /PHYS
Fred
[quote=Strawboss]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.
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]
Perth Mint isn’t a bank - we don’t engage in risky banking type activities. Also, we have never traded futures. We don’t have to hedge our inventory because we don’t own it - out clients do (that’s what our unallocated is - client’s owning our inventory). If we had no unallocated client metal and had to hedge, we still wouldn’t use futures as they are clumsy and costly. We would just borrow gold directly from a bullion bank or central bank. The only reason someone uses futures is because they don’t have a credit rating sufficient enough that a bank will lend them metal unsecured.
The rich guy transaction you talk about probably happens, it is just that those long positions are less than the shorts that JPM has. Also, if you are a rich guy JPM probably wouldn’t offer you futures unless you insisted, as they could just construct a specific forward purchase trade for you with an exact future date you want and thereby you avoid futures contract roll costs etc.
Bron and Fred, thanks for setting me straight on BV’s business model. Like I say, I don’t use them and wasn’t sure.
As I think more about it, your original statement that arbitrage is what’s keeping the markets in line is actually correct in all cases, if you use a broad definition of arbitrage. In the case of GoldMoney, their price is held in line with the bullion market thru arbitrage (in a sense) as well. It’s just that the arbitrageur is GoldMoney itself. In a system like the GLD and SLV ETFs, the issuer leaves it to market makers (called authorized participants) to do the arbitrage. In BullionVault’s case, there is room for outside market makers to be the arbs, but it sounds like BV is acting as the arb themselves. Since they can do it without paying their own transaction fee, they have a natural competitive advantage over outside market makers.
Incidentally, the ETF discussion also reveals yet another fallacy in the GATA rhetoric. GATA has argued that there MUST be something fishy going on and the bullion must be double-counted, because otherwise the APs would have no financial incentive to participate in the system - according to GATA, there would be nothing in it for them to take their metal and put it into the ETF at market price when they could just as easily sell it on the open market. The fallacy of that argument is that the APs are motivated by arbing the small spreads that develop between the NAV and trading price of GLD and SLV. That one appears to me to simply be a case of GATA not understanding how ETFs work in general - the same is true for any other ETF and isn’t unique to GLD or SLV.
Erik
I’m shocked not to see any commentary in the blogosphere about the breakdown below the trendloine that began in 2008. We’re now $75 below it, 4 solid days since the trendline violation, no sign of a re-test, and still falling like a rock.
I think we may be seeing the beginning of a short cyclical bear market in gold that lasts until QE3 is announced. If that announcement doesn’t come till fall, we could easily see $1200 (the OTHER major trendline which started early 2000’s)
If the market holds 1550, I think we have room to ignore the trendline violation and call this a basing pattern. But if we break below 1500, I think 1250 is next. I’d much appreciate feedback from more knowledgable technicians - I’m a macro guy at heart…
Erik
Jesse sees 1570-1580 as the line to watch as to whether gold will break down or up.
http://jessescrossroadscafe.blogspot.com/2012/05/gold-daily-and-silver-weekly-charts_09.html
[quote=thc0655]Jesse sees 1570-1580 as the line to watch as to whether gold will break down or up.
http://jessescrossroadscafe.blogspot.com/2012/05/gold-daily-and-silver-weekly-charts_09.html
[/quote]
Thanks, THC. What surprises me is that none of the PM blogs are talking about the 2008 trendline violation, which seems significant to me. Everyone is focused on the wedge pattern, which statistically is most often a continuation pattern, so an upside break is more likely, suggesting right here at 1575 is a fantastic place to buy. Or at least that’s my non-TA guru interpretation of the wedge formation.
But nobody seems to be talking about the 2008 trendline violation. I tried and tried to include the charts in this post, but couldn’t get them to insert for some strange reason. For the adventurous, go to www.PeakProsperity.com/files/u1968/Gold1.png. Notice how the trendline has held in tact since 2008.
For a closer look, go to www.PeakProsperity.com/files/u1968/Gold2.png. That snapshot was taken earlier, but gold has since touched 1580 on the December contract - about 1573 spot equiv.
Again, TA is not my strongest skill, but I can’t understand why everyone is focused on the wedge and nobody is talking about this major trendline violation.
Erik
Bron wrote,
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.Thank you, Bron! This tidbit was an 'ah-ha' moment that was worth the price of admission by itself.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.
I also agree that an interview of Jefferey Christian would be worthwhile. I am glad he stopped in to comment on this thread.
I see what you’re saying too, but I’m a rank amateur. This looks like a good place to top off with some additional gold purchases but I’m holding off to see which way "the wedge" resolves. With the chance of a significant but temporary drop, I don’t want to rush when waiting a little bit might provide some bargain basement sale prices. I’m 100% sure the upward trend is intact and we’ll see dramatically higher prices soon enough. The fundamentals are all still in place: in fact they continue to strengthen.
I was recently interviewed in this podcast. It’s a general interview, but almost half of it was a discussion of the topics in this thread.
Nothing new here for those who have read this entire bible, but thought I’d post it in case it interested anyone.
Erik
[quote=Michael H]This tidbit was an ‘ah-ha’ moment that was worth the price of admission by itself.[/quote]Thanks. Arbitrage keeps all markets in sync together, guaranteed to work based on greed.
Well, let’s see… I still can’t find ANYONE writing about the major technical signal given by the 2008 trendline violation. Europe opened this morning to a sea of red - 1560 (well below Jesse’s range) and still falling as I type.
But of course the goldbug blogs haven’t had a peep to say about the overwhelmingly strong bearish technical indication I started bringing up in this thread last week, $30 higher than we are right now. But Casey, Sprott, etc. are all out looking for photo ops to tout how this is your buying opportunity of a lifetime. Right here, right now.
My predictions - the goldbugs will come out later today and decree today’s action as a "smack-down whack-down slam-down takedown" perpetrated by the evil-doers on behalf of the central banks. There will be no mention of the fact it was obvious this was coming based on strong technical indications they conveniently forgot to report when they happened. Then we’ll see a flurry of articles espousing why you should drop everything and buy right here, right now.
I expect we’ll get a bounce, and probably a re-test of the other side of the trendline around 1640. But unless we get a really strong hint that QE3 is around the corner, I think the gold market is headed lower until we get QE3. If June 20 (FOMC) comes and goes with no QE3, I think Gold is headed for the $1300’s, maybe lower. This has nothing to do with market manipulation, folks. Deflation is starting to rear its ugly head again, and until we get more CB intervention, I think all risk assets will continue to sell off.
I can’t wait to see how the goldbug blogs cover the action at today’s European open. The opportunity to manipulate the market was BEFORE 3am, when there was far less liquidity. The fact the big selling started after the European open clearly evidences that this is not a stop-clearing run, but I’d be willing to bet the goldbugs will say the opposite. The whole (true) story is told by the fact that oil, equities and gold are selling off together, and by the fact the selling only began after the European open. I bet the coverage you read later today will conveniently ignore these factors (as they clearly rule out "manipulation"), and this will be attributed to another evil-doing JPM "drive-by shooting".
Something worth watching closely will be the extent of price and volume moves on the U.S. open. My prediction is a considerable downspike right at the open (caused by a whole bunch of stops being triggered when GLD opens), followed by a relief rally through most of the morning. There is plenty of time for the people gaming the market to figure out that’s coming, and you can expect a futures ramp to the downside just before the U.S. open - that part is legitimately manipulative, and is designed to artificially lower the opening price and therefore the stop-out price. But it has nothing to do with central bank manipulation - it’s just pro traders who know how to exploit the difference in market hours between GLD and GC trading sessions.
At least I get to be entertained by the goldbugs while I watch the value of my gold decline… 
Erik