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In gold we trust is a
special report by Ronald-Peter Stöferle of Erste
Group Bank. It is very comprehensive and well worth
a read because it covers across its 65 pages all key factors influencing gold
prices, leading to their conclusion that:
"The risk/return
profile of gold investments remains excellent. ... Our next 12-month target
is USD 1,600. We expect the parabolic trend phase to still be ahead of us. At
the end of this cycle the price should reach our target of USD 2,300."
In the section "Paper gold vs. physical gold" (pages 36-37) however
I would debate the following statements:
"At the moment
physical gold commands a premium of up to 20%."
In the wholesale physical market the Perth Mint is not seeing anything
abnormal. Even in the retail market premiums are back to normal (subscribers
to Sharelynx can see this for themselves at the CoinPremiums page). I have
asked Ronald-Peter where he is getting this number from but no response as
yet.
"According to Paul
Mylchreest the London OTC market trades 2,134 tonnes of gold every day. This
is 346 times the daily production and close to the global annual
production."
This point is presented as proof of a discrepancy between the physical market
and paper gold market. As discussed in this blog post, I
don't see any problem with this rate of turnover. In his report Mylchreest
concluded that gold's 12.7% turnover "is excessive and doesn’t
pass the smell test." My alternatively conclusion is that "the very
fact that gold is no one’s liability and cannot be printed means it
attracts a disproportionate amount of trading and speculation. ... Could not
the 12.7% figure be proof of the special monetary nature of gold, proof that
it is the King of Currencies?"
"According to Jeff
Christian, founder of CPM Group, the trade on the LBMA is based on a leverage
factor of 100:1"
Mr Christian has stated that he was talking about COMEX paper trading versus
physical COMEX deliveries. There are some who think he is trying to
retrospectively cover up his admission. My view is that a 100:1 fractional is
ridiculous considering the crucial role London plays in the physical market.
London unallocated simply could not function on a 100:1 ratio in my view.
Those who accept this number do not appreciate to amount of physical delivery
made ex-unallocated accounts by the trade. In any case, Mr Christian actually
confirmed the fractional/leverage ratio of bullion banks at around 10:1. See
this blog post.
"The volume of gold
derivatives is worrisome as well. According to the Bank for International
Settlements, the nominal value of all gold derivatives at the end of 2009
amounted to USD 423bn."
I have often seen the nominal value referred to and while it produces an
impressive number the way it is presented is often misleading on two fronts:
1. Common interpretation of these numbers is that the market is short $432bn
worth of gold. In fact the nominal value is the summation of both long and
short positions, it is not a net figure. If one looks at the BIS figures it can be seen
that bought and sold options somewhat net out (although it is not that simple
because of differences in dates and strikes).
2. Nominal does not equate to actual value at risk. As per the BIS report: "Nominal
or notional amounts outstanding provide a measure of market size and a reference
from which contractual payments are determined in derivatives markets.
However, such amounts are generally not those truly at risk. The amounts at
risk in derivatives contracts are a function of the price level and/or
volatility of the financial reference index used in the determination of
contract payments, the duration and liquidity of contracts, and the
creditworthiness of counterparties."
They note that "Gross market values provide a more accurate measure of
the scale of financial risk transfer taking place in derivatives
markets" and if one looks to page six of the report it states that the
gross market value of the $432bn nominal figure is actually $48bn.
There is also the issue of what is the actual delta-adjusted position (see
page 10 of GMFS Hedge Book for
an explanation) of the $432bn nominal gold derivatives and its real (past)
impact on the spot market, but that is getting a bit technical. The point is
don't get over excited by the $423bn figure and assume it means the market is
short 10,000 tonnes of gold.
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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