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Wikipedia: A furphy, also commonly
spelled furfie, is Australian slang for a rumour, or an erroneous or improbable story.
In Gold Stocks: Ready, Set,
Eric Sprott and David Baker say that "While
the futures market is comfortably forecasting a continuation of today’s
levels, the majority of sell-side analysts refuse to update their gold price
estimates to reflect its recent strength."
It is futures 101 that futures prices are not a forecast by the market, they are just a mathematic derivation from the
spot price, interest rates, freight and storage costs, with gold interest
rates and dollar interest rates being key components. Backwardation is when
gold interest rates are higher than cash rates. Contango
is the reverse. Either way, the futures price isn't forecasting anything. See
this blog post for
more on backwardation.
In that same article, Sprott raised the
"excessive turnover" meme which Eric seems to be running recently -
he must think he is on a winner with this. I dealt with it in this post and
to that I'd like to add another counterpoint. First, the quote:
"In the LBMA market, for example, market participants traded an
average 19.6 million ounces of gold PER DAY in July 2011. Keep in mind that
the total gold mine production in 2010, globally, was approximately 86.5
million ounces. ... so the LBMA is essentially
trading a year’s worth of production in less than a week"
I think it is misleading to relate turnover only to new mine production. This
assumes that there is no sales by any of the
investors who hold above ground gold. Eric should at least be including
privately held gold stocks of 30,000t, or 965 million ounces. Adding that to
the 86.5moz then the 19.6 moz represents the
"LBMA" turning over the stock once every 54 days, or 7 times a
year. Not as dramatic, is it. If we included the 30,000t or so of central
bank holdings then it is even less so. But don't fear Eric, help is at hand.
The funny thing about the "large turnover is bad" idea is that in
most markets this is seen as a good thing, as it indicates the particular
market is liquid. On this line of thought, note that the recent Loco London Liquidity Survey was
undertaken by the LBMA at the request of the World Gold Council "in
order to strengthen its argument that the gold market is sufficiently deep
and liquid to justify gold’s characterisation
as both high quality and liquid" with the objective of getting gold
included in the Basel liquidity buffers for banks.
What did their survey show? "The average daily trading volume in the
London market in this period was 173,713,000 ounces or $240.8 billion."
I can see Eric getting his calculator out now and dividing 86.5 by 173.7 and
getting really excited. When you hear that the "paper" markets turn
over annual mine production every 12 hours, remember you heard it here first.
The other thing I find interesting is the different way Sprott
pitches this meme. For the gold/silver bugs we get:
"... I think all the paper markets are a joke. As you are probably
aware, we trade a billion ounces of silver a day. A billion ounces. The world
produces 900 million a year." (link)
But in the Markets at a Glance article with Sprott
branding on it for a more wider market it is less
breathless and a bit more sophisticated:
"When price discovery is dictated by levered paper contracts with no
physical backing, it’s extremely easy and relatively inexpensive to
jostle the spot price around."
Interestingly, the LBMA survey revealed that 90% of trading was spot, not
forwards (sort of the over the counter markets version of futures), which
equals 156moz. COMEX average daily trading during August was 278,000
contracts, or 27.8moz. 156 versus 27.8 - who do you thinks jostles who?
Continuing on with futures, we get this from Patrick A. Heller: "Increases
in margin requirements make sense as prices are rising, as that helps keep
the market in order, but it does not make sense when prices are
falling."
Now this is a very common misunderstanding. Margin increases (or decreases)
are to do with volatility of the price, not the direction of the price. Dan Norcini
explains it well:
When you get a market like silver that drops 15% in ONE DAY, you are going
to get margin hikes. The reason - the very integrity of the Clearinghouse
comes into play.
Silver closed down $6.48 today. In a single session, one long contract in
this market cost the buyer a paper loss of $32,400! That is enormous. If you
consider the fact that the previous old margin was $21,600, that was wiped
out and then some.
During the clearing or settlement process, the winners get paid (have their
accounts credited) by debiting the loser's accounts. If the losers do not
have sufficient funds in their accounts, the whole process breaks down.
Zero Hedge has really went downhill in the past few years and this post by
them I found very funny and symptomatic of the sort of readers they are now
attracting:
We are only putting this up because we have been flooded with emails about
an event which for some reason readers believe is relevant. The event in
question is that according to its website, the London Gold Exchange
("LGE" or the "Joke") has closed. The one thing we would
like to say about this is that the LGE is neither an exchange, nor does it
trade gold.
You have only yourself to blame Tyler. While he didn't meant he post to be
ironic, I read it that way. Yes, Tyler, your readers can't tell between real gold news and rubbish, but guess what, neither can you,
IMHO.
To close, I'll quote myself from Ed Steer's Gold & Silver Daily on
the recent sell off in precious metals:
Here's an interesting comment that I got from my friend Bron Suchecki over at The Perth
Mint yesterday. I'd sent him an e-mail on the weekend asking him how sales
were both on Friday...and their Monday, which started Sunday night here in
North America. This was the reply that I got...
"The Perth Mint has been very busy this Monday morning with a lot of
buying [but also some selling], however buying is outweighing selling by a
fair margin [pun intended]...and the decrease in the AUD/USD has taken some
sting out of the drop for Aussie investors.
I see this sell-off driven by leveraged “weak hand” money. In
contrast, average investors [the real smart money] are looking at this as an
opportunity to buy in or top up at cheaper prices. These buyers are
“strong hands” and have been the ones who have been driving the
trend all these years."
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