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I liked this reply by Tom Szabo to some
comments on his Today in Silver blog:
Market making should be
temporarily and is not the same as manipulation in the sense of trend change.
“Should” is your own totally arbitrary qualifier. Market making
is an activity that provides liquidity to the market, period. Since the trend
in gold has been up for the past 6 years but it was sideways to down before
then, can we conclude that manipulation is actually responsible for the
“trend change” being up? In other words, maybe the central banks
have been trying to manipulate the price of gold higher. Certainly the ECB
gold agreement first put in place in 1999 seems to coincide rather well with
the current bull market in gold.
Prof. Fekete wrote some time ago an article about Barrick’s forward selling of future mining output
pointing out that this hedge is forcing gold prices down and might bankrupt Barrick in the long run.
I would have agreed (and did in fact agree) up to about a year ago but it is
now clear the Professor was obviously wrong about the long run. I’m
willing to make such a conclusion at this point even if we go instantaneously
on the gold standard because Barrick has amassed a
very large near-production gold resource that swamps the remaining hedge
position even though it might represents more than 1 year of production.
While it is very likely that Barrick’s
forward selling was a business decision facilitated by the desire of central
banks to “lease” gold, there was never any secret about this
relationship. I’ll grant even that Barrick
may have hedged in part to purposefully put other gold miners out of
business. That, however, still does not constitute a trust or make its
actions illegal. Note that gold miners who hedged were actually more likely
to go out of business because their hedges, unlike Barrick’s,
were FIXED MATURITY. Meanwhile, Barrick was able to
roll its hedges forward indefinitely as well as to contractually allocate
them to specific projects.
In late October 2008
gold traded at a low around 700$ but no metal was available (possibly except
400 oz bars.) Low prices and shortage do not go together in normal
supply/demand situations.
The vast majority of the gold market by QUANTITY consists of 400 oz. bars.
Your parenthetical admission of “possibly except 400 oz. bars” is
quite relevant in that there was in fact no shortage in gold. In fact, the
price tells us that there was more than adequate supply of gold. And
I’m not talking about paper. Your point is only that there was a
shortage in some gold coins. BIG difference.
A shortage in minting
capacity is not the explanation either since the US mint was able to produce
2 million oz in 2000 and only some 700,000 in 2008.
So what? Annual mine and recycling supply is in the 80 million ounce range.
Total world stockpiles are in the 5 billion ounce range. That makes U.S. mint
production, whether it is 2 million or 700,000 ounces, completely irrelevant
as far as the gold market.
Lundeen’s argument of CB’s leasing
gold can be supported by a statement from Greenspan from 1998 that the
central bank(s) are ready lo lease gold in
increasing quantities if the price of gold increases.
He and you have taken Greenspan’s comment TOTALLY out of context, as
all good conspiracy theorists and others who like to contort basic logic and
common sense for personal gain have done. Greenspan was addressing the role
of derivatives regulation and specifically the idea that derivatives can be
used to extort market players by squeezing the physical markets. In respect
of this, what Greenspan said was that worries about a short squeeze in gold,
a finite market, are misplaced because central banks would be willing to
lease gold to the market so as to make a short squeeze impossible. While
central banks actually being able to do that (especially today) is debatable,
the fact is that Greenspan was arguing for central bank action in gold being
used to support a FREE MARKET (free of manipulators trying to create a short
squeeze). This is exactly the opposite of how this quote has been used, that
central banks stand ready to co-opt the free market by leasing gold in an
uneconomic manner.
Starting around 2000 the
balance sheet of the German Bundesbank shows
instead of gold “gold and gold receivables” without assigning an
amount to either position. This is at least a highly unusual accounting
practice that in normal business life would be unacceptable.
“Normal business life” is full of millions of examples where
things are described in specific ways meant to limit disclosure. For example,
Central Fund of Canada, a private company in “normal business
life”, currently trading at several % premium to spot prices which presumably
means that investors find it a very attractive way to hold gold and silver,
discloses as physical gold and silver holdings even the bullion that is a
receivable from refineries. Is this unacceptable? Clearly not to CEF holders,
many of whom I’m sure would nonetheless have a problem with the Bundesbank practice. In any case, the Bundesbank
actually made an improvement in its disclosure (which is also arguably better
than the current disclosure of the CEF) by moving from a title of
“gold” to “gold and gold receivables”. Yes, a further
improvement would be to actually break out the two numbers but the
improvement itself cannot be used as “proof” that a conspiracy
exists.
There might be
stockpiles of silver around, but if the owner is insensitive to the price and
does not want to sell the metal, why sell it short on paper?
You are kidding right? The owner is insensitive to price but like most people
in this world, he/she/it/they are sensitive to profits.
There is the risk that
the buyer of the contract wants delivery.
At least on a historical basis, this is a tiny, tiny risk. Other than the
Hunt Brothers’ threat of wanting delivery in 1980, there has never been
anything for shorts in COMEX silver to worry about. Even Warren B. was able
to acquire over 100 million ounces of silver mostly over the COMEX and I
doubt any of that came from these “secret stockpiles”. If a lot
of deliveries were constantly taking place, that would be different, but at
it stands only a small percentage of contracts are ever delivered each month.
This is NOT the “fault” of the shorts, but the
“fault” of the longs; there is simply not that much physical
demand for COMEX silver. Besides, no specific contracts can be forced into
delivery and the short position, in the worst case, can be offloaded for
cash, even if it is at a really high price. At least that has been the case
in 100% of the months (with the possible exception of January 1980) so far
since the 1960’s when COMEX silver started to trade, and that is quite
a good track record.
Moreover, the owner of
the stockpile and the short seller are not necessary the same body.
Clearly, Sherlock! The owner of the stockpile uses a bullion bank as an
intermediary, which makes it look like the bullion bank is
“naked” short (since it does not itself hold a large stockpile of
silver) to those who have no concept of how the bullion markets work.
That leaves the bullion
dealer (or fabricator) as legitimate short seller. By selling the equivalent
of his inventory short he takes a market-neutral position. But this assumes
the dealer has no concept of market trends. Why sell short as long as an
uptrend lasts? This is throwing money away. Only in a downtrend short selling
makes sense.
You must clearly be a communist or socialist because you don’t appear
to grasp even the most rudimentary aspect of capitalism. A dealer makes money
by intermediating the spread between the buy and sell. In the case of gold
and silver, the dealer is typically long paper and short the COMEX. That is
the main intermediary play. In commodities like oil or grains, the
intermediate trade is different. But in all cases the dealer makes money on
the spread between the two markets (physical and futures). Of course the
other side of the paper is held by the owner of the physical stockpile. In
effect, the dealer makes a deal to hedge the physical position using the
COMEX. That is why the dealer is called a “dealer”.
A dealer who can call
trend changes correctly should be way more profitable then shorting gains in
an uptrend away.
This is not a dealer, it is a trader. Many bullion banks have both dealer
desks and trading desks. The two are separate although there are
“leaks” between the two, primarily of information that gives the
trader an upper hand in the market. Even without this leak, however, it is
obvious why “sell short as long as an uptrend lasts” —
BECAUSE it won’t last forever. Typically the short selling will
increase during price spikes of a magnitude that have not been historically
sustainable. A subset of longs ALWAYS hopes “this time might be
different” while the shorts simply play the averages. These longs then
make up crazy stories about why they are wrong EVERY SINGLE TIME. I prefer
the credo “blame yourself before blaming others” but that’s
just me.
Bron Suchecki
Goldchat.blogspot.com
Bron Suchecki has worked in the precious metals
markets since 1994, when he joined the Perth Mint as an Administration
Officer in their Sydney retail outlet. In 1998 he moved to Perth to work in
the then fledgling Depository division. He has held a number of roles since
then in the treasury, risk and governance areas of the Mint.
All posts are Bron's personal opinion and not
endorsed by the Perth Mint in any way.
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