Harvey Organ: Get Physical Gold & Silver!

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81

Erik - good analysis.  I disagree somewhat with Process #2 in that gold is not necessarily beholden to the US dollar for its value.  I realize its correlation is high, but, it doesnt always move in lockstep.  The USD peaked in 1985 and then declined substantially with the Plaza accords (working from memory here so forgive if the details are a bit off) yet gold remained mired in a bear market for another 15 years.
I more agree with Armstrong in that gold is better viewed as a hedge against geopolitical instability instead of being viewed strictly as an inflation hedge.  We might be splitting hairs in the current environment because we have plenty of both occurring presently (instability and inflation).

Also - as it relates to the relation between energy costs and mining - I think that natural gas be a viable alternative to diesel.  As an example, Caterpiller recently bought out Bucyrus International, Inc. specifically for their natural gas engine expertise.  As more and more machinery is converted to natural gas (especially in North America) I would expect EROI to improve substantially.  That would also have an impact on the quantity of reserves as the total production costs would decrease per ton of rock processed.

Peak Oil is a very interesting subject - no question.  The exponential growth function in a variety of areas - population, wealth, standards of living, etc…) have all been possible because of oil.  As I am sure all of us know - what can no longer rise - doesnt. 

Finally - in defense of Harvey Organ… the man is a vocal supporter of buying and holding physical metal in ones own possession to protect against the various risks involved in paper assets.  Anyone that is an advocate of physical possession of their precious metals is not a charlatan in my book - irrespective of whatever other shortcomings they may have.

82

CPTWaffle,
How do you, Erik (or Victor or anyone else), see the decline in availability of cheap energy affecting the supply of precious metals and it’s affect on gold prices

I don’t think it matters. The reason is that the new supply of about 2600 tons/year is rather small compared to the above-ground stock of more than 100000 tons. Even if there were no paper gold and what’s traded were all physical, the price would not depend on mine supply and jewellery demand, but rather on the trading of the above-ground stock.

Does the price of MSFT shares depend on whether they expand the number of outstanding shares by 2% per year (management compensation) or not? No, this is not what the share price depends on. Same with gold. On top of that, you have the fact that about 95% of all gold trading is contract gold (paper) and only 5% physical (my estimate from above).

Here are some numbers: Mine supply of 2600 tons/year is about 10 tons per trading day. LBMA institutions loco London alone clear about 600 tons per trading day, and the old rule of thumb says that the global OTC market is about 3-4 times bigger than that, say, 2000 tons per day (my estimate of above says that of this, about 100 tons is physical). Forget about mine supply. It simply does not matter.

This argument highlights a basic fallacy that is quite widespread in ‘the market’, namely to view gold as a commodity. Compare this with zinc. You have mine supply plus scrap on the supply side, and you have industrial demand. The dealers store perhaps 6 months worth of mine supply (my guess). There is no other tradeable zinc above-ground. There are no unallocated zinc accounts (there are some futures though).

Of the more than 100000 tons of gold above-ground, there are easily some 60000 tons in bars and coins, i.e. ready to trade. This is about 25 times the annual mine supply. You should even include jewellery in Asia in the investment stock of gold because that’s why they have it: it’s their savings (note that they sell gold jewellery by weight!). Someone at FOFOA’s called it ‘wearable bullion’.

So viewing gold as a commodity gets you on the totally wrong track because it tempts you to take mine supply, scrap, and jewellery demand seriously. You shouldn’t.

I’d even go as far and accuse people of deliberately advertising this misleading picture of the gold market. (Jeff Christian if he still reads this, might correct some of my numbers above - I have written it from memory - but I am quite confident I have the order of magnitude right).

Sincerely,

Victor

 

83

Thanks for responses, gentlemen. 
You are right, Victor, people do speak about gold as a commodity in contexts where they should know better ( eg when Ron Paul questioned Bernanke on whether the Fed watched the gold price he said they do, ‘just as we watch a basket of all kinds of commodities.’

I listened to the podcast again and he said all in costs are $800-$850, about 11 minutes in.

So maybe mining isn’t as relevant to price due to above ground stocks but incidentally, isn’t that a plus for silver if we have far fewer stocks of silver? know you aren’t such a silver fan, But I as a side note I am interested insilver as a 20 year rip-van winlke investment. Chris Martenson used that term somewhere.

In Jeff Christian’s interview he thinks a high gold price, such as we have, will support silver prices because of relative affordability. Since we have far less silver around to trade I imagine silver mine costs and thier influence on supply would have more of an at-the-margin effect on the price of silver. Of course, Process#2, global QE, would still probably be the dominant effect…

I’m going to listen to the rest of the interview again, I recommend it http://www.netcastdaily.com/broadcast/fsn2012-0411-1.mp3

 

 

84

Am I the only one here whose intuition is going off like a blaring klaxon horn regarding the bonafides of some commenter(s) on this thread.  Very interesting information but a little voice in the back of my head keeps saying:
http://www.youtube.com/watch?v=RG0ochx16Dg

85

Gentlemen,

There is a lot to respond here. I will only touch on a couple of points, and leave many of the more interesting, more important topics alone.  

The average operating cost of production for gold in the world at present is around $670 per ounce. Full in costs, including discovery, finance, corporate overhead, interest rates, depreciation, etc., are around $800, maybe $850 per ounce. So, gold mining on average at present is returning about a 100% profit. There’s a long way to go from current prices before production would be constrained. Our view is that gold may not fall that low for more than a decade, and maybe longer. That is based on our views about the long-term outlook for the world’s economy, financial systems and markets, politics, and how investors will buy above-trend amounts of gold for a long time because of problems in these areas.

Also, as someone said, there is around 1.2 billion ounces of gold, physical, in bullion and coin form, held by investors. Central banks hold another 1.0 billion ounces, mostly in bullion. Governments hold some more, in the tens of millions of ounces perhaps, in non-monetary gold reserves that are unreported. Another 2.3 billion ounces of gold is held in the form of jewelry, decorative objects, statues, and religious items, some of which will be sold for their gold content at any given price.

Mine production is around 80 MM oz per year. Another 40 MM oz per year comes from scrap refining. These are important sources of metal – markets are made at the margin, and these are, in a way, marginal supply. Also, investors, jewelry holders, and central banks are not necessarily willing sellers of gold. So while they hold a lot of gold, it does not necessarily have a negative or limiting impact on gold prices. That happens only when they sell. 

Energy is an interesting area to discuss. I happen to not be a ‘peak oil’ believer. Yes, we will hit oil output limits, and annual output will decline globally at some point, but the major constraints on production at present are political, not geological. Russia, Venezuela, Mexico, Nigeria, and some other major producers have seen sharp declines in their oil output over the past decade. In each case, the declines reflected human actions, political or otherwise, and not geological constraints on production. We also have reasons to believe that Saudi Arabia has vastly more oil resources than is commonly believed and assumed.

Our major energy outlook at CPM Group has been that energy supplies would remain constrained relative to growing global demand for decades to come, and this would push energy prices higher. Over the past year or so we have been focusing on an alternative energy scenario, in which oil production rises over the next decade or so, natural gas production rises, natural gas takes market share, clean(er) coal technologies come into play, LED lighting and flat screens cut energy consumption in half for many lighting and screen applications, other energy conservation efforts reduce the growth rate in energy consumption, and nuclear power increases its share of energy supplies… and all of these things lead to a period of three to 10 years of lower oil and energy prices. Sort of what we saw in the 1980s, 1990s, and into the 2000s. There’s a lot more behind that headline conclusion, but we have begun paying more attention to an energy scenario that does not have oil prices rising more than 50% in the next five years, as our main scenario projects. Interestingly, we are finding more and more energy industry professionals that nod their heads knowingly when we discuss such an outcome. I gave a speech outlining this possibility in Abu Dhabi in February. i thought that might have proven unwise. The overriding reaction was that ‘yes, we have been thinking about these same possibilities.’ So, the future for energy prices may not be as dire and certain as we all have been thinking, and its effects on gold and energy may not be as we have been expecting… Just something to keep in mind.

Jeff

 

86

[quote=ao]Am I the only one here whose intuition is going off like a blaring klaxon horn regarding the bonafides of some commenter(s) on this thread.  Very interesting information but a little voice in the back of my head keeps saying:
http://www.youtube.com/watch?v=RG0ochx16Dg
[/quote]
Hi AO,
Glad to see you on this thread, but a little confused by your comment. (Though I quite enjoyed the Lost in Space clip - brought back childhood memories!).
So what exactly do you mean "regarding the bonafides of some of the commenters"? Are you questioning whether they really are who they say they are, or are you questioning the veracity of their statements? I can attest based on backchannel e-mail verification that both Jeff Christian of CPM Group and Bron Suchecki of Perth Mint are indeed participating in this discussion.
If you’re questioning veracity of identity, please elaborate on which commenters you’re suspicious of. If you meant something else, please clarify.
Thanks,
Erik
 

87

Victor touched on some of the advantages of unallocated, being private, lower costs, ability to use as collateral and customisable leverage. To that I would add that trading OTC is far more flexible. You are not stuck with set futures expiry dates or option strikes etc, when dealing OTC you can do a forward to a specific date or choose a specific option strike price and date and the bullion bank will price that custom trade. For a seriously large trader this is better than dealing with the (necessarily standardised) exchanged traded contracts. Any bullion bank will have desks across the globe, so 24hr trading is possible.

For the industry, unallocated accounts are necessary for settlement of transactions which facilitate the operation of the value chain. For example, for a client looking to move some physical metal from a Swiss depository to Perth, we could arrange for the Swiss to give the Perth Mint unallocated into our London metals account (and they take possession/title to the physical) and we then give the client physical in Perth. This avoids the cost of shipment.

But for the small to large investor who is more of a buy and hold and not interested in fancy trading, the unallocated probably is inferior.

There is a material difference between unallocated held with a bank and unallocated (or pooled allocated) held with a non-bank. If you’re not comfortable with ETFs there are so many options on the second front – Perth Mint, GoldMoney and Bullion Vault for example – that I don’t think there is really any reason for the conservative investor to hold unallocated with a bank who cannot guarantee physical backing and redeemability.

Just something to add to the arbitrage mechanism you described. Note that there is a cost to the AP for creation/redemption. Therefore there is some incentive to “build up” stocks of either OTC metal or ETF metal and only create/redeem when absolutely necessary. This means that ETF inventory changes have some lag in them, upsetting any correlation/relationship to prices in the short term.

For example, if an AP sees a general trend of net buying of an ETF but encounters a sequence of days with net selling, they may buy the ETF shares and not take delivery but in the OTC market lease gold and then sell it. They are long ETF but short OTC unallocated – no net position. They would accumulate ETF shares with the intent of selling them later into any return of net buying of the ETF (at which point they would sell the ETF, they then buy OTC unallocated and use this unallocated to repay the lease).

The above trade (which is another example of how unallocated is used) saves the AP the ETF redemption and subsequent creation costs but they have a lease costs. With lease costs so low, it may make sense to hold ETF shares in the face of selling for a number of days, which means we don’t see the actual investor selling reflected in ETF redemptions.

If the AP is wrong and the selling of the ETF continues, then they may make one large redemption request and use that to repay the OTC lease. When micro analysing ETF inventory movements the approach above does need to be considered.

88

CPTWaffle,
people do speak about gold as a commodity in contexts where they should know better ( eg when Ron Paul questioned Bernanke on whether the Fed watched the gold price he said they do, ‘just as we watch a basket of all kinds of commodities.’

This is not what I meant by the way. Poor Ben. What can he say? I suppose he gets an extra beer from his colleagues whenever he has endured one of these horrible sessions with Ron Paul without blinking. You see, no U.S. official is allowed to mention the word ‘gold’ in the context of the monetary system. According to international law still in effect today, the international holders of dollars can claim the U.S. gold at $42.22 per ounce. Even at today’s market price, there is no way the U.S. can possibly defend the dollar. They just inflated the dollar too much. Already during the late 1980s it must have been beyond the point of no return.

So the best they can do is call it ‘deep storage’ and try not to mention the word. As soon as the the U.S. would put the gold back on the negotiating table, there would be long line-ups of foreigners who present them some $3000bn to $8000bn for redemption in gold. This won’t happen. This is also the reason why the U.S. have never again sold part of their own gold - the last sale was during the late 1970s. There was a rumour that the Bundesbank told the Carter administration that if the U.S. offered to sell more of their gold in order to stabilize the dollar (rather than stopping the excessive creation of credit money), the Bundesbank would buy all of it and then some. No, I suppose the dollar will first go down substantially in real terms before the U.S. gold will come back into play. And then, they may even prefer to sell it domestically - if I remember correctly, this is a way of avoiding the international claims at $42.22/ounce (but I should say I am not an expert on the legal stuff). Even if you don’t care about the old agreements, this is a way of keeping it out of the international cross fire. By the way, if this idea is right, this also tells you that the U.S. will neither confiscate the private gold nor tax it excessively because then they need a liquid market of private gold in order to cover the necessary imports.

What I meant was all these official looking studies by GFMS or CPM (with all respect, Jeff, I do mean it) and what the media usually extract from them. Gold is officially presented as a commodity, and the media parrot this skewed view. I actually have further comments which I am not going to spell out here.

but incidentally, isn’t that a plus for silver if we have far fewer stocks of silver?

No, I don’t think so. Scarcity doesn’t necessarily imply value. Gold is good as a store of value because the available above-ground stock does not change much from mining or industrial consumption. So it is very stable. Silver is not that good as a store of value because fluctuations in mining and consumption have a much bigger effect on the available stock. So silver is less stable. Presumably for this reason, governments and central banks own gold, but not silver. And they have been planning for the time after the U.S. dollar, when it will have lost its reserve function, and they have chosen gold as the future reserve. That’s actually the main argument against silver - the decision has already been made. Silver will not be an international reserve.

In Jeff Christian’s interview he thinks a high gold price, such as we have, will support silver prices because of relative affordability.

This is a fallacy in my view. If I don’t have $1650 today for an ounce of gold, but if I want to get out of credit money, I can buy a one gram bar of gold for $53 (plus spread). This is even better than one or two ounces of silver, for several reasons: Firstly, it doesn’t oxidize and become ugly. Secondly, it is much smaller and lighter and easier to hide. Even at today’s price, I can carry one million dollars worth of gold in a backpack. Try this with silver. Do you own a forklift? Can you cross the border at night and in the forest with that forklift?

With increasing gold price, they will offer smaller and smaller coins. It won’t be long, and they will offer some 1-cent size alloy coins that contain 1/10 gram of fine gold. No need for silver. Affordability is merely a psychological factor, not to say a marketing slogan. This is not to say that the leveraged speculators will not drive paper silver beyond $50 once more should there ever again be enough excess liquidity.

Sincerely,

Victor

 

89

[quote=victorthecleaner]According to international law still in effect today, the international holders of dollars can claim the U.S. gold at $42.22 per ounce.[/quote]Victor, please clarify what you’re talking about. I think everyone here understands the basic history - that foreign holders of USD were able to redeem gold (although I thought it was at $35/oz) through 8/14/71. But all that ended when Tricky Dick declared force majeure and unilaterally ended that convertibility on 8/15/71. Actually, Nixon’s exact words were "…to suspend temporarily the convertability to gold…" I guess 41 years still falls within a politician’s definition of temporarily.
So when you say "still in effect today", do you mean some other law or treaty came into play after '71, or are you just saying that’s what the Bretton Woods agreements called for before Nixon effectively defaulted on them? If the latter, I really don’t see your point - regardless of the dubious ethics of unilaterally changing the rules, it’s clear and universally accepted that the USA’s policy for over 40 years has been not to honor redeemability.
And where does the $42.22 number come from? I could easily be mistaken, but I thought the number was still $35 right up to '71. No?
Finally, I just can’t resist:

Yes, actually. A Clark 12,000# model with 48" forks. Thanks for asking.

No. I frequently get it stuck in my own driveway, and it’s a bitch to dig out.
Best,
Erik

90

[quote=MetalsFacts]Energy is an interesting area to discuss. I happen to not be a ‘peak oil’ believer. Yes, we will hit oil output limits, and annual output will decline globally at some point, but the major constraints on production at present are political, not geological. Russia, Venezuela, Mexico, Nigeria, and some other major producers have seen sharp declines in their oil output over the past decade. In each case, the declines reflected human actions, political or otherwise, and not geological constraints on production. We also have reasons to believe that Saudi Arabia has vastly more oil resources than is commonly believed and assumed.
Our major energy outlook at CPM Group has been that energy supplies would remain constrained relative to growing global demand for decades to come, and this would push energy prices higher. Over the past year or so we have been focusing on an alternative energy scenario, in which oil production rises over the next decade or so, natural gas production rises, natural gas takes market share, clean(er) coal technologies come into play, LED lighting and flat screens cut energy consumption in half for many lighting and screen applications, other energy conservation efforts reduce the growth rate in energy consumption, and nuclear power increases its share of energy supplies… and all of these things lead to a period of three to 10 years of lower oil and energy prices. Sort of what we saw in the 1980s, 1990s, and into the 2000s. There’s a lot more behind that headline conclusion, but we have begun paying more attention to an energy scenario that does not have oil prices rising more than 50% in the next five years, as our main scenario projects. Interestingly, we are finding more and more energy industry professionals that nod their heads knowingly when we discuss such an outcome. I gave a speech outlining this possibility in Abu Dhabi in February. i thought that might have proven unwise. The overriding reaction was that ‘yes, we have been thinking about these same possibilities.’ So, the future for energy prices may not be as dire and certain as we all have been thinking, and its effects on gold and energy may not be as we have been expecting… Just something to keep in mind.
Jeff[/quote]
Jeff,
I’ve been following this thread with great interest. I’m glad that you, Erik, and Victor have shed light on the arcane underworld of gold. Gold is a worthless, shiny metal that is hard to bring to market. It has little utility other than jewelry and some minor industrial applications. It’s biggest asset is its rarity. The amount of additional supply that is brought to market is on the order ot 2–3% per year. If it were much higher, the price it commands would be lower. Conversely, if the cost of extraction increases to the point that mines announce that it is no longer profitable to produce at expected levels, the price should increase.
I am convinced that peak oil is upon us. Although the other energy sources are currently available, the current infrastructure needs oil to power the machines that do our bidding. It will take a considerable amount of time to convert to natural gas. Even then, natural gas will eventually reach its own peak and we’re in the same boat. The free lunch doesn’t exist.
Market prices are driven at the margin. If the cost of extracting gold (or silver) increases due to energy costs, the price of PMs should respond positively. If you look at a balance sheet of gold without a small, but predictable increase in supply, you could conclude that the increase is irrelevant. Wouldn’t speculators (such as me) read much more into the decreased production and then bid the existing stock higher?
I agree that the price of oil won’t rise much more than 50% in the next five years. There is considerable demand destruction as the price rises beyond an affordable price. Even at $4.00 +/- per gallon in the US, demand has dropped 10%+ in the past 4 years. It will drop considerably more if the price were $6.00 per gallon. At the same time, mines will find that less productive ore bodies are no longer profitable at these prices … unless the price of gold increases enough to justify the expense of procuring it.
As a result, I have a difficult time seeing that gold prices aren’t intimately tied to oil prices and should follow the general price increases. I’d appreciate your comments for "buy and hold" guys like me who are looking at gold as a store of value. I’m not particularly interested in the daily fluctuations, but rather the intermediate and long term outlook. Eventually, I want to convert my hoard into something more worthwhile.
Any and all insight from anyone is greatly appreciated,
Grover

91

How long do you intend to live?
Silver is at $1000/kg at the Perth Mint today. Stoneleigh says that silver should go to $2/oz as things go pearshaped. That is about $60/kg. That is a buyers market.

And then wait for the rebound.

If you live.

92

Bron,
thanks for the remark on the GLD arbitrage. It makes sense that the APs are temporarily hedged in paper, and this may explain why the GLD puke indicator does not work as advertised. Nice explanation. I feel better now (having wasted a few evenings on trying to confirm the indicator).

Erik,

The official U.S. gold price was adjusted to $42.22/ounce once more in March (?) 1973, i.e. well after Nixon had suspended convertibility. Yes, the international agreements were never amended. The U.S. owes foreign governments and central banks 1/42.22 ounce of gold per U.S. dollar presented to them.

Yes, of course, everyone has noticed that the U.S. do not intend to honour the agreements. But note that starting with the early 1970s, the majority of the world’s inflation originated from the U.S. The others, i.e. at that time Europe and Japan, tried their best to keep their currencies at least a little bit stable but were always frustrated because whenever the oil price increased, the U.S. just created more dollars, pocketed the oil and left the rest of the world alone with the inflation.

Old bankers never forget. Now imagine what would happen if the U.S. would ever start trading their gold reserve. If I was China, I would try to cash in. This would create a huge run on the gold. There are just too many dollars abroad.

Jeffrey,

We also have reasons to believe that Saudi Arabia has vastly more oil resources than is commonly believed and assumed.

This is in fact an important comment on the gold market. I have seen such a statement only from one other source so far (guess whom?). The official view pushed by the media and not objected to by U.S. officials is rather the opposite, that Saudi Arabia has no further excess capacity (well that may even still be accurate) and that they overstate their reserves for political reasons, for example, because of the way OPEC quotas are determined. Now this is the opposite of what Jeffrey alludes to.

Before I explain why I wrote gold market above, let me finally comment that somebody has worked hard in order to keep oil supply off the market. Right now, it is happening again to a certain country. Also, a certain neighbouring country got involved in three full-scale wars within 25 years and is probably chronically under-developed and under-explored. Cui bono?

And the U.S. have a track record for driving the oil price up. I owe the following to FOFOA. Here is the transcript of a CNN interview with Sheikh Ahmed Zaki Yamani, Saudi Oil Minister during the 1970s:

http://www.bi-me.com/main.php?c=3&cg=4&t=1&id=48966

He basically said the same thing a few years earlier in the Guardian:

http://www.guardian.co.uk/business/2001/jan/14/globalrecession.oilandpetrol

Apparently, even the U.S. ambassador to Saudi Arabia at that time, James Akins, figured it out one day (and was then promptly fired by his boss, Secretary of State Henry Kissinger). Here is Akins’ obituary in the NYT:

http://www.nytimes.com/2010/07/25/world/middleeast/25akins.html?_r=2

Now back to gold. It is mentioned in Akin’s obituary, but many must have thought about this independently. Once the dollar was not longer backed by gold, what does an oil exporter do with the dollar revenues? They will certainly want to import some goods, for example, technical equipment (and arms) for which they need dollars. So they will export some oil for dollars in order to be able to afford these imports. But does it make sense for them to export more oil, just in order to accumulate dollars? These dollars represent debt after all. Why give up your oil reserves in the ground (which can last an eternity) if the only thing you get is debt (which will eventually default or be debased, at least in the medium to long run).

Oil in the ground is as good as gold in the vault. So exporting more oil than is needed in order to pay for the desired imports, makes sense only if these dollars buy something that is for eternity as well. Gold. In fact, what they have probably done with their oil revenues is this:

a) use it to buy all sorts of technical equipment and gadgets, from refineries to tanks and fighter planes

b) use it to buy some portion of gold

c) but they also accumulated a lot of dollars

So how could the U.S. convince them to accumulate dollars (c) if it was clear that the dollars would not last forever? The answer must be that either the Saudis are stupid or the price that was paid for the oil, if measured in gold, was too high.

In my view, this is the key to the future oil market. So far, i.e. under the U.S. dollar standard, oil is too expensive in dollars and gold is too cheap in dollars. Once the dollar is out of the picture, oil should become a lot cheaper if measured in gold. Notice how it was Europe that opted out of the dollar scheme first. And notice that they set up their gold as a floating reserve. As I said in my article about Rickards’s book, this prevents the U.S. from suppressing the gold price in the long run. If you think about the oil, this suddenly makes twice as much sense.

Also, if oil countries are reluctant to pump more oil although they have both the required capacity and the reserves, then this does tell you something about the payment they receive for their oil these days, doesn’t it? They may just keep pumping in order to avoid a serious recession (which would be bad for everyone), but not because they are happy with the form of their revenues.

Sincerely,

Victor

 

93

I guess some of us will have to agree to disagree.
Victor, Jeff, Erik and others here are smarter and more knowledgeable than me. Nevertheless, I still don’t see enough out there, when I try to weigh the evidence, that undeveloped oil in Iraq, as Victor was alluding to, or the fact that human actions and not geology have held back oil production in places like Nigeria and Russia, or new technologies to extract hard oil and gas will compensate for declining oil production going forward.

I highly recommend Jeff, Bron and Erik read some of Victor’s articles on his site. Would be great to see some interaction from you guys on Victor’s analysis of how the Euro setup actually prevents the dollar from returning to a gold standard as Jim Rickards suggests.

We need more smart discussion and debate of what happens in the precious metals market, and what happens in the markets in general. From reading Zero hedge, one would think the world is going to blow up tomorrow; reading KWN is like the MTV of gold and silver. It seems Chris Martenson and select friends (I count you here Erik) are some of the only people who have a sophisticated understanding of BOTH energy and markets (and precious metals). So it’s no wonder other plebs like me get taken in by all the nonsense out there!

 

94

I felt it was wrong to be openly questioning the credibility of others behind their backs, and accordingly e-mailed both Ted Butler and Harvey Organ to make sure they were aware of this thread, and had the opportunity to defend their views if they felt so inclined. My note to Ted and his reply are reproduced below:
My note to ted:

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From: Erik T
To: fasttedb
Sent: Wed, Apr 25, 2012 11:13 pm
Subject: Calling your attention to you and your work being discussed very actively online

Hi Ted,

I hope this finds you well. As you may recall from our e-mail exchanges a couple of years ago, although I am outspoken in criticizing viewpoints I disagree with, I also feel an obligation of fair play and personal respect. I therefore try hard to make sure I never criticize people behind their backs.

Accordingly, I’m writing to make sure you are aware of the very lively conversation in the comment thread in reaction to Harvey Organ’s recent interview with Chris Martenson. Quite a few notable personalities from the precious metals industry including Bron Suchecki and Jeff Christian are personally participating in the discussion, which is rather unprecedented for an open internet discussion forum. There are also a couple of notable bloggers there.

I felt obliged to make sure that you’re aware of the conversation, because frankly your credibility is being challenged by several people, including myself. While I make no apology for criticizing what I see as bogus commentary, I also feel it’s wrong to talk about people behind their backs, so I wanted to make sure you were aware of the discussion. I’ve also gone out of my way to publically challenge Jeff Christian’s view that you are disingenuous and engage in intentional deception of your readers. I think Jeff is badly mistaken on that point; my view is that you’re a very nice guy with sincere intentions who just happens to be wrong. I tried to come to your defense in a limited way, although you should know that I too have been extremely critical of your views on PM market manipulation.

I hope that you’ll feel inclined to come join the discussion and defend your views. Given that you choose to be a public figure on this topic, I feel that critical analysis of your views is entirely appropriate, but I don’t think it’s fair to have a one-sided conversation. If you’d like to join the conversation, rebuff the criticisms of myself and others, etc. the link is https://peakprosperity.com/blog/harvey-organ-get-physical-gold-silver/73933?page=0#comments. Please come join the conversation!

All the best,

Erik[/quote]

And Ted's reply:

[quote=Ted Butler]

From: fasttedb Sent: Thursday, April 26, 2012 11:47 AM To: ErikT Subject: Re: Calling your attention to you and your work being discussed very actively online

Erik,

I vaguely remember exchanging emails with you in the past. I did read your thread and I’m taken back by your personal insults (but not by Jeff Christian’s lies). I don’t think you realize how insulting your words are. You listened to an interview with Harvey Organ that you disagreed with and used it to label me as either a charlatan or incredibly stupid. That’s a fine damn choice. Then you invite me to participate in a warped debate with that same theme. Marvelous.

While my time is occupied with my private research, there are enough of my articles in the public domain that you are free to disagree with, if you are able to do so objectively. I find it fascinating that, in the thread that you sent me, it all seems to be centered on personal attacks. If you can’t attack the message, attack the messenger, so it would seem. You guys should be ashamed of yourselves.

I’ve made the case for a silver manipulation in the most convincing manner possible and at the highest levels I could reach, including the CFTC, CME and JPMorgan.  Many thousands of market participants and observers have concluded that I have it right. I’m not running for public office and I don’t need everyone’s vote. You are free to disagree with me, but I know you are wrong. But if you hope to convince others (or yourself) that I am wrong, you should leave out the personal insults and try to stick to the facts.

Ted

[/quote]

 

I find it interesting that both Ted and several commenters here have taken such offense to my characterization of Ted and others who promote similar ideas as charlatans. (The only other "name" I've called him is "a nice guy").

[quote=Dictionary.com]

char·la·tan

[shahr-luh-tn] Show IPA
noun
/ a person who pretends or claims to have more knowledge or skill than he or she possesses; quack.[/quote]
 
To be clear, I do not intend to insult anyone's character or persona in any way. These men clearly represent themselves to be experts in precious metals markets, but an objective review of their arguments reveals to me that their knowledge is closer to novice than expert. I have cited several objective examples of their flawed arguments, but perhaps the most glaring is this price discovery business.
 
 
Both Ted Butler and Harvey Organ have made a really big deal about their belief that [paraphrased from both of their interviews] The futures market is not supposed to set the price - it's only supposed to discover the price! In Ted Butler's case, he has expressly said that this is a matter of "commodity law", but he has failed to offer any citation to a specific statute or doctrine of law.
 
 
I maintain that this allegation is specious, and the only explanation I can fathom for why these men seem to think this is an issue is that they must somehow be unaware that price discovery is nothing more than a fancy economic term for setting the price of something through a system of matching buyers' bids to sellers' offers. Again, the definition from Wikipedia:
 
[quote=Wikipedia]
The price discovery process (also called price discovery mechanism) is the process of determining the price of an asset in the marketplace through the interactions of buyers and sellers.[1]

Price discovery is different from valuation. Price discovery process involves buyers and sellers arriving at a transaction price for a specific item at a given time. It involves the following: [2]

  • Buyers and seller (number, size, location, and valuation perceptions)
  • Market mechanism (bidding and settlement process, liquidity)
  • Available information (amount, timeliness, significance and reliability) including
    • futures and other related markets
  • Risk management choices.
In a dynamic market, the price discovery takes place continuously. The price will sometimes fall below the duration average and sometimes exceed the average as a result of the noise due to uncertainties.

Usually, price discovery helps find the exact price for a commodity or a share of a company. The price discovery is used in speculative markets which affects traders, manufacturers, exporters, farmers, oil well owners, refineries, governments, consumers, and speculators.[/quote]

I don’t know how to make my argument and more clear, any more objective, or any less personal. I have no axe to grind with these men personally. My contention is simply that this price discovery thing and numerous other objective arguments I have set forth both here and elsewhere clearly evidence that these men are not the subject matter experts they profess to be. To the contrary, it is obvious to me that their comprehension of markets is poor at best, and I base that observation on the many logical inconsistencies in their arguments, which I have objectively challenged both within this thread and elsewhere.

This seems very much the norm for the PM manipulation "community". For example, when I published an article debunking GATA and KWN a couple of years ago, I received an angry e-mail from Bill Murphy telling me I was about to get egg on my face because Adrian Douglass had just uncovered something "new" that was so damning that it would end any question of whether the banksters were up to evil no-good for once and for all. What did this "new" bit of damning evidence turn out to be? The fact that unallocated bullion accounts can be and routinely are hypothecated and fractionalized! That’s very basic information, but it apparently took the GATA guys 30 years in the business to figure it out. This exemplifies why I feel the word charlatan perfectly describes them. As I’ve said repeatedly, I strongly disagree with Jeff Christian’s view that the dissemination of obviously wrong mis-information from these people is intentional. I am convinced that they believe every word of it themselves, and they they truly believe they are doing the world a great service. I just hate to see so many people being duped into thinking they actually know what they’re talking about, as it’s very clear to me that they don’t.

I reiterate my invitation to Ted and Harvey: If you guys think I’m the jerk here and that my characterization of you as charlatans is unjustified, why don’t you come join the thread and explain to us what you mean when you say that as a matter of "commodity law", the futures market is prohibited from setting the price of metals. It sounds like you have a definition of price discovery that differs from the one that is commonly accepted in economics. Why don’t you share it with us, and show me up? 

All the best,

Erik

p.s. I thought there was a way to edit the HTML directly to get rid of those tags at the top of the e-mails, but I couldn't find it. Sorry for the clutter.
95
You said, "Finally - in defense of Harvey Organ... the man is a vocal supporter of buying and holding physical metal in ones own possession to protect against the various risks involved in paper assets.  Anyone that is an advocate of physical possession of their precious metals is not a charlatan in my book - irrespective of whatever other shortcomings they may have."
I feel very much the same.  Although I see Erik's technical definition of the word... I think Charlatan has stronger negative connotations than the technical denotation would suggest.  Harvey is a Pharmacist who provides a free blog... you can take it or leave it.  If you listen carefully to the CM interview, you can pick up one quick exchange that is a perfect example of the kind of useful observation that somebody like Harvey can make.. due to his closeness to the Comex, and long history of watching it.  He says, and I am paraphrasing here.. .that "deliveries used to occur in the first two days of the delivery month.. and now they spread them out all month".  The implication is that Silver for physical delivery is hand-to-mouth.  If you take a long term view of the decline of inventories of deliverable Silver, then his observation fits with these other facts in painting a picture.  Eric Sprott made the same comment last year when he made one of his (infamous) additions to PSLV.. how long it took to get the bars.. and the fact that they were freshly poured (date stamped).  

All of you may work differently in building a worldview… but I gather lots of information from different sources in order to assemble a picture of what is happening.  Some of Harvey’s information has been helpful to me… and even after following this entire thread… I still believe that to be the case.    

96

[quote=Erik T.]I find it interesting that both Ted and several commenters here have taken such offense to my characterization of Ted and others who promote similar ideas as charlatans.
[/quote]
It’s not offense, Erik. It’s an observation that your tone seriously gets in the way of your message. Seeing as several people here have now tried to make you aware of it, one would think you might entertain the possibility that they are making a valid observation. I don’t need to be an expert in financial or monetary markets to see when someone is behaving arrogantly and calling names. And I do believe we are all intelligent enough here to understand both the definitions and the common usage of words. Again, nobody is freaking out here, and I really don’t care if you personally are seen as an expert. If you refuse to listen to impartial feedback, it’s your loss.
And since you apparently aren’t aware, the readers here aren’t all "gentlemen" either.
I am very glad for the links to Victor’s blog however - a very clear thinker without a whisper of scorn for the lowly folk out there.

97

Harvey Organ has been smart enough to figure out that the BEST option for a "average Joe" investor is physical metal held in their personal possession.  I would consider that judgment to be very, very wise and definitely not something that a "novice" would arrive at.  In fact - most novices would follow a recommendation to buy GLD - even though it is fraught with danger and counterparty risk.
Ted Butler has probably forgotten more about the machinations in the silver market than I have ever learned.  I have studied the market more than I would care to admit and I am convinced that it doesnt function like a free market.  I am appreciative of his efforts and insights and have great respect for the mature respectful manner in which he addresses the issue.  He has never, in my experience lowered himself to address anyone in a condescending fashion.  The man has conducted himself with elegance and class.

I noticed that you havent yet addressed my previous observation that gold rarely - if ever - is allowed to rise in price more than 2%.  In a bull market more than 11 years in the making, dont you find it curious that you can count on 1 hand the number of times that gold has risen more than 2%?  I would really like to hear your commentary on that.

For anyone and everyone else that happens to read this - BUY PHYSICAL metal and insist on holding it in your possession - OUTSIDE of the "system".  That is the ONLY avenue that will allow you to sidestep all the machinations and deceit that is systemic in todays monetary world.

98

I’ll address several common issues rather than quoting and responding to Jim H, shudock, and Strawboss directly.
Use of "Charlatan":

I don’t know how to respond to Jim’s view which is apparently shared by others here, i.e. that the word charlatan carries connotations beyond its meaning as defined in the dictionary. But I want to be emphatically clear that my gripe is that these individuals represent themselves as experts with great knowledge of the PM business, when in fact they are not experts of any kind, and critical review of their work clearly shows that they suffer numerous misconceptions about how these markets function. I further allege that a whole lot of very smart people who truly are experts have tried to help these people to see that their analysis is completely flawed, but they have steadfastly refused to accept that assistance, instead insisting that those who have tried to help them have ulterior motives.

That’s it - no offense or criticism of anyone’s individual personality or character was intended, although I would say I am very disappointed that these people get so caught up in their theories that they refuse to listen to reason when bona fide experts try to help them see the fallacy of their theories.

If others here feel that I have personally sleighted the character of these men or personally insulted them in any way, please know that was never my intention. If you feel that my choice of the word charlatan makes me guilty of personally insulting anyone, I think you’re wrong to think that, but it’s your prerogative to feel however you like. I humbly observe that the dictionary appears to be on my side on this one.

Who’s an "expert" and who’s not:

A few comments seem to imply that I have represented myself to be an expert on these markets. Nothing could be farther from the truth, and I have said no such thing. I am a private investor with a cursory knowledge of precious metals markets, and very definitely not an expert. What I have pointed out is that even as a person with only limited knowledge of these markets, it is resoundingly clear to me that the people I’ve referred to as charlatans are not experts of any kind, and I have expressed the opinion that they do a great disservice to the investment community when they publicize viewpoints that are easily debunked as nonsense, representing themselves as experts when in fact that are not.

My tone:

I confess that this is a topic that infuriates me, and I apologize if my frustration comes across as arrogance. I acknowledge that I do sometimes allow my passion for truth to charge my words with emotion, and I concede there is plenty of room for me to improve in that regard.

Having said that, my tone pales in contrast to the absurd allegations these people have made, publically characterizing JP Morgan and others as evil enemies of the people, when in fact those allegations are based on absolutely nothing substantive. So while I do admit (and apologize to this community for) my own tendency toward strongly stated language, it is in response to far more damning and completely baseless criticisms those same people (particularly GATA) have made of others.

Good Advice derived from Faulty Logic:

Several people have pointed out that, at the end of the day, the core message from Harvey and GATA is that you should buy physical bullion and take delivery. I think everyone here agrees that’s excellent advice, even if it’s given for bogus reasons. It is precisely because of this that I stopped writing articles debunking these guys - their theories are absolute nonsense, but at the end of the day, they still give what amounts to good advice.

But there is very real and serious damage being done here, too. A perfect example is the disinformation that has circulated relative to PSLV. When the premium was 30% over spot, articles were being posted with headlines like "Phyysical Silver Surges to 30% premium over spot", when in reality the truth was exactly opposite the headline. PSLV, a paper silver product, had surged to a completely unjustified 30% premium over physical a/k/a spot. The commentary from the people I’ve referred to as charlatans was geared mostly toward making the utterly ridiculous arguments that "paper was decoupling from physical" and that the 30% premium "proved" that investors were willing to pay more to get physical instead of paper. The irrefutable reality of that situation was that investors were paying 30% more for paper with a "P" in its ticker symbol than they would have paid for real, actual physical metal (spot price). The only reason it occurred is that the same cast of characters had successfully disseminated so much false information that a very large number of retail investors were making foolish investments in something they clearly didn’t understand.

This is why I feel so strongly about this. When I see good, hard-working people duped into believing this nonsense and investing their life’s savings in PSLV at a 30% premium, I knew in that moment they would lose that premium when reality sank in, which it did as soon as Sprott launched his shelf registration offering. Good people are getting screwed out of a lot of money because other people who don’t know what the hell they are talking about are filling their heads with utter nonsense. That’s the problem, it’s a big problem, and the people I’ve labeled as charlatans are responsible for causing it, regardless of whether they did no maliciously or not.

Critical Thinking:

I started this discussion by trying to point out that the most important thing an investor can learn (in my opinion) is that the world is full of self-described "experts", and that some of them truly are experts, while some are not. In the latter group, some are malicious, and some mean well but just don’t know what the hell they are talking about. Learning to think critically, check facts, and figure out which group is which is the most important skill for investors. Or that’s my opinion, anyway. Organ vs. Tustain offered a perfect opportunity to illustrate that point.

Jim H has said clearly that he forms his worldview by listening to lots of views, and finds them all helpful. Even after he has seen that much of what some of these people say can be easily disproven. Jim, that’s certainly your prerogative, and I wish you well with that strategy. What has worked best for me is to evaluate people with an open mind, check their story, and decide if they are credible. For example, I bought Ted Butler’s story at first, and subscribed to his newsletter. After a few weeks, it had become clear to me that Ted had no idea what he was talking about in several areas. When I observe that a person professing to be an expert confidently makes several assertions that can easily be dubunked as factually inaccurate, I stop listening to anything else that person says, because I know their credibility is dubious. That’s my strategy for this investing game, and it’s worked well for me, but if you guys prefer to continue to listen to the writings of people even after many of their views have been clearly disproven, that’s up to you.

Bottom Line:

Respectful intellectual discourse between interested parties is the best way I know to get to the bottom of anything, and that’s why I participate in these discussions. I sincerely apologize to anyone who has been offended by my admittedly impassioned views about how much damage GATA and others have done to the investment community. I admit, publically, that this pisses me off so much that I sometimes start to lose my cool. But I still stand by my primary argument: These guys are anything but experts, and most of what they say is factually inaccurate nonsense that misleads the good people who have placed faith in them. Unlike Jeff, I don’t think they do it maliciously - I think they are well meaning people who are out of touch with reality and don’t realize how much damage they are doing.

It’s certainly true that their primary advice (buy physical) is excellent advice, albeit for different reasons than they state. But it’s also true that the misinformation they promulgate is responsible for encouraging some very, very damaging decisons, such as paying a 30% premium for paper from Sprott because you thought it was somehow more valuable when it wasn’t.

All the best,

Erik

[Moderator’s note: This thread is fruitful and fact-rich.  This discussion was made possible in large part by Erik, who makes clear above that his intention was not to question anybody’s character.  Nevertheless, this is an appropriate opportunity to remind everybody about the importance of words. 

The word "charlatan" often refers to a person who claims knowledge or ability which they do not possess, knowingly and intentionally, for the purposes of dishonest personal gain.  The word is synonymous with "fraud," "cheat," "swindler," or shyster," and carries the strong implication of a morally deficient character who would knowingly defraud another person.

We are quite certain that Mr. Organ, our guest, is earnest in his views.  We have no reason to believe that he intends to mislead or defraud anybody.  To suggest otherwise is to impugn his personal character in a way that would not be appropriate.  Our guests are to receive the same politeness and courtesy which is due to any regular member of the community.  Going after the message is fine, but not the messenger.

For the benefit of all, we will say clearly and emphatically that using the word "charlatan" to describe a guest, left uncorrected, would be inappropriate.  Thank you, Erik, for clarifying.]

99

Thanks anyway Erik, but I don’t need you to teach me how to think. 

100

You did save me quite a bit of money with your persistence in pointing out the irrationality of the PSLV premium at times… I think without your contributions here… I would probably not have sold it when the premium was ~ 35%… which allowed me to buy back in at < 5%.  I, like many others… still find plenty of evidence to suggest that there is a more direct link between the shares I own, and serialized Silver bars in a vault, in the case of PSLV, vs. SLV.  I will not say PSLV is completely devoid of counterparty risk… just that in the case of SLV… good luck even figuring out who the counterparty that holds the Silver actually is.  For me, outside of a SHTF situation… I would not want to hold PSLV much above the historical norm 12 - 15% premium if other funds like CEF are still available at lower premiums.