- foorex2day

Dead End

Credit Restriction

<div align="justify">From Prosperity and Depression: A Theoretical Analysis of Cyclical Movements, G Von Haberler, rev ed., 1939, published by League of Nations: Prosperity comes to an end when credit expansion is discontinued. Since the process of expansion, after it has been allowed to gain a certain speed, can be stopped only by a jolt, theere is always the danger that expansion will be not merely stopped but reversed, and will be followed by a process of contraction which is itself cumulative. If the restriction of credit did not occur, the active phase of the trade cycle could be indefinitely prolonged, at the cost, no doubt, of an indefinite rise of prices and an abandonment of the gold standard. Well, we abandoned the gold standard, had unrestricted credit, so now we wait for an indefinite rise of prices? Bookkeeping is more or less based on the assumption of a constant value of money. Periods of major inflations have shown that this tradition is very deeply rooted and that long and disagreeable experiences are necessary to change the habit. One of the consequences is that durable means of production - such as machines and factory buildings - figure in cost accounts at the actual cost of acquisition, and are written off on that basis. If prices rise, this procedure is illegitimate. The enhanced replacement cost should be substituted for the original cost of acquisition. This, however, is not done, or is done only to an insufficient extent and only after prices have risen considerably. The consequence is that too little is written off, paper profits appear, and the entrepreneur is temptted to increase his consumption. Capital in such case is treated as income. The paper profits are also likely to add to the cumulative force of the upswing, because they stimulate borrowers and lenders to borrow and lend more. The foster the optimistic spirit prevailing during the upswing, and so the credit expansion is likely to be accelerated. This phenomenon has its exact counterpart during the downswing of the cycle. Those interested in the above may also find Professor Fekete's paper <a href="http://www.professorfekete.com/articles/AEFIsOurAccountingSystemFlawed.pdf">Is Our Accounting System Flawed?</a> of interest.</div>

From Prosperity and Depression: A Theoretical Analysis of Cyclical Movements, G Von Haberler, rev ed., 1939, published by League of Nations:...

Metal Accounting I

<div align="justify">This article discusses the issues associated with keeping track of precious metals. I call it metal accounting because the point is to ensure that ounce debits (ie assets) always equals ounce credits (ie liabilities). This should be of interest to anyone holding unallocated metal because the extent that your "custodian" doesn't have control over their metal activities is the extent that your holding is not backed and thus the custodian is exposed to precious metal prices. If this exposure is excessive, and the price rises, they go bankrupt. I put custodian in inverted commas because unallocated metal, even if backed 100% by physical, is not the same as a true custodial service, commonly referred to as allocated metal. With allocated, you hold title to the physical metal and the storer is just a safekeeper of your metal. It is off the balance sheet of the storer and control of it is a very simple process: run listing of how many bars your are holding for a client, do a count of the bars in the vault, the two should equal. Unallocated metal, on the other hand, is on the balance sheet of the storer. This is why it is so important that debits equal credits, from an ounce point of view. At first you may think that the controls around keeping track of allocated should apply to unallocated - if you owe 100oz to clients, then you should have 100oz of physical gold on site. What this article hopefully reveals is that it is not necessarily that simple and an appreciation of the need for stronger controls. The Golden Table Let me start with an imperfect analogy for the manufacture of precious metal products: making a wood table. Looking at your plans, you go down to the hardware store and buy some wood and nails, say it costs $100 all up. It is not likely that you will get the exact lengths you need, so some sawing is involved. Whack a few nails in and you have your table. If I asked you what the table cost, you look at me strangely and say $100 and wonder why I was so stupid. Your answer, however, has made one assumption: that your "by-products" of the table making process are worthless. What are these by-products? They are the wood offcuts and sawdust and your assumption is most likely correct. Now consider that you are making the same table out of gold. Lets assume the same $100 purchasing cost for the raw gold (it would have to be a really small table) and same process - you have to cut up the gold planks. When I asked what the cost was, would you still say $100? Of course not, you aren't going to sweep up the golddust and throw it and the gold offcuts in the bin like you would with the wood. You would melt them down and sell them to a refinery and the money you would get back would reduce the initial cost of $100. It is like the hardware store giving you a refund for the wood offcuts and sawdust. This is what makes precious metal manufacture different from normal manufacture and is a function of the high value of precious metals and the fact that you can melt the by-products and reuse them without any or much loss of "utility". My first exposure to this was when I looked at a stocktake count summary and saw a line called "sweeps". It was literally the amount of gold after refining from the sweepings from the factory floor. That plus the fact that the counts were done down to 1/1000th of an ounce that was my first indication that this minting business was just a little bit different. The existence of by-products introduces our first complication in precious metal control - estimations. To help illustrate the issue, let us first complicate our gold table process. As your local hardware store doesn't sell gold planks, you have to buy standard size gold bars from your local refinery. You therefore have to melt them and pour them into a mould for the legs of your table. To melt and pour gold, you have to heat it to above its melting point. The reason for this is that gold cools very quickly and if it is just at its melting point it will go solid before you can finishing pouring it. However, this creates a problem because when something is above its melting point (but not yet at its boiling point), some of the liquid is evaporating. Now you might think how much gold would really evaporate and I don't know the technical answer to that. But what I do know is that it must be enough because above any gold furnace I've seen there is a hood that sucks in the fumes, taking it to a "scrubber" that collects the gold particles. However much gold is evaporated, it must be worth enough to go to all that trouble. Consider also that the crucibles in which the gold bars are melted also, over time, absorb amounts of gold. Estimations So how do you do a precious metals stocktake? First step is working out your "theoretical" or book inventory. Say you received 100oz of raw gold and recorded shipments of 90oz of coins. 100 minus 90 equals 10oz. Second step seems simple enough, go around and count all the physical gold and it should add up to 10oz. Easy. OK, lets say there are 5 x 1oz finished coins on the shelves and 3 ounces of "offcuts". But what about the gold in the sweeps, embedded in the crucibles, in the scrubbers? This is where one has to estimate the gold that is onsite, but not measurable - for example you don't want to crush up and refine your perfectly good crucibles just because it happens to be a stocktake date. Introducing estimations, however, introduces room for human error. This is minimised by keeping historical records of the usual gold recovery from spent crucibles, scrubbers etc, so that there is a reasonable basis or justification for the estimated "onsite but not measurable" gold. Lets say this is worked out to be 1 ounce. We are still missing 1 ounce. At this point consider that not all "recovery" controls are 100% effective. Scrubbers still let some gold evaporated gold out, for example. I've only described a few of the many recovery type controls in a precious metal factory, there are many more and over high volumes of manufacture bits of gold can be lost. The use of the word "loss" is often interpreted as "theft" but it is more accurately described as a "production" loss. It is a sort of known unknown. But this is not really fair, because production managers, again from historical stocktakes, know that there is a certain ratio of production losses to volume manufactured, which enables them to calculate and expected production loss. Lets say in our example that the production loss ratio is 1% (our production manager would get fired if that was an actual loss). The estimate loss is therefore 0.950oz (1% of 95 coins made). This leaves us with a stocktake result of 5+3+1+0.95 = 9.950oz against theoretical or book inventory of 10oz. What happened to the 0.050oz? In a precious metals stocktake this is the key question. First thing that is looked at is the accuracy of the count of measurable/countable physical gold. Second the production manager reviews the by-product estimations. If these two look OK, then third is to consider the effectiveness of the recovery controls. For example, maybe there was a hole in the ducting to the scrubbers and thus more gold was lost to evaporation. If controls are OK then it only leaves two possibilities: 1. Your production loss ratio is not correct. Maybe for every 95 coins made you lose 1oz? 2. Maybe your production loss ratio is correct. Therefore, someone in the factory has managed to secrete 0.001oz out every week over the past year. The problem is that it is not easy to answer the question, because the stocktake result relies on estimations. This is why mints have one other "recovery" control - physical metal detection of staff as they leave the factory! The above discussion is simplified, of course. There are many more processes involved in a refinery or mint and many more opportunities for production losses, necessitating many more controls. This is where accurate historical records and experienced staff come in to keep account of precious metal. There is one thing we have missed. In our example, we only have 9oz in physical metal. Whether the 1oz is 0.95oz of production losses and 0.05oz of theft, or 1oz of production loss, doesn't change the fact that we have lost 1oz. If the 10oz book inventory was funded/acquired from clients holding unallocated with us, then we only have 9oz of physical against 10oz of liabilities. This is why this article was titled Metal Accounting I. In Metal Accounting II, we will discuss how the 1oz loss is dealt with and introduce yet more opportunities for gold to get lost.</div>

This article discusses the issues associated with keeping track of precious metals. I call it metal accounting because the point is to ensur...

Silver Smoking Guns

<div align="justify">This <a href="http://silveraxis.com/todayinsilver/2009/06/15/smoking-guns-and-banks-that-smoke/">recent post</a> (well delayed for those not subscribing to Tom Szabo's <a href="http://www.metalaugmentor.com/">Metal Augmentor</a>) is the sort of quality analysis that I wish many of the so-called silver experts would do. Worth reading. For those pressed for time, some excerpts: What if, instead, we studied the Bank Participation Report under the assumption that it is NOT a smoking gun? Can we then find some use in it? I humbly offer one hypothesis. Let’s go out on a limb and suppose that the increase in the COMEX silver short futures positions by the U.S. banks did not directly cause the price of silver to fall. This is actually pretty easy to do since the short futures positions were put on before the price of silver actually fell. If the short futures position of the U.S. banks didn’t cause the price of silver to fall, which is obviously true, perhaps the same market conditions that did cause the price of silver to fall also resulted in the banks establishing the large short futures position. How would that work? To answer the question, we obviously need to look at the market conditions that prevailed during the relevant time frame. And because we have hypothetically eliminated the “smoking gun thesis”, we must now substitute bona fide market forces for the price manipulation that is alleged to have caused the price of silver to decline precipitously. ... if the banks are still holding their COMEX short positions as hedges against loan collateral in the form of physical silver and gold, that could represent a dangerous overhang to the market. It is especially troubling that the loans have not been paid back in almost a year. Another squeeze in liquidity could cause more defaults that would force the banks to sell the silver and gold collateral. One possible early manifestation of this would be a sudden jump in the contango especially as measured by the LBMA silver forward rates. ... I’ll just note that while we’ve had quite a climb in the silver forward rates since the mild backwardation in the shorter maturities earlier this year, we haven’t reached the critical point. In my estimation, the critical point would be reached if the normalized forward rate (after removing the effect of interest) climbs above the historical average. This is something to watch closely while the bank participation in COMEX silver futures remains so large and so short, and I intend to do just that. </div>

This recent post (well delayed for those not subscribing to Tom Szabo's Metal Augmentor ) is the sort of quality analysis that I wish m...

Australian yield curve and mortgage rates

<div align="justify">Below is a short commentary on mortgage rates I received from Jackarine Ludwig of <a href="http://www.aggregatedawareness.com/">Aggregated Awareness</a>: <a href="http://news.goldseek.com/GoldSeek/1244646000.php">The Mystery Behind the Parabolic Yield Curve</a> is a nice report by Gary Dorsch, an American chartist I follow. Rarely does Australia get a mention in his reports. It is good that he's done so now. His charts a good, because they tie in with political & economic events. Although I don't see the rise in the Australian yield curve as a mystery. And whether Wayne Swan wishes to call it the fault of the 'bond vigilantes' in the US Debt markets or not is irrevelent. Fact is, China is the biggest foreign holder of bonds, both from the US and elsewhere, including Australia. It is obvious that they are the 'bond vigilantes' which Swan refers to. Regardless, it makes perfect sense from a fundamental supply/demand equation, that more supply would reduce prices, so I don't know what Swan is complaining about? Under his, Ken Henry's & Kevin Rudd's command, the Treasury is going into record setting hock mode for the foreseeable future. By 2012, this government has projected a total deficit of A$300 billion. You read that right, that's billion with a B. What did he reckon was going to happen? Bond Prices to rise & yields fall when he was getting involved in issuing more bonds? HaHaHaHa...What a fool. It is obvious to anyone with a brain, that more Australian bond supply would reduce bond prices & subsequently increase yields. Nothing conspiratorial there Mr. Swan. If you wish to follow the short & long end bond yields of Australia, US & UK, may I suggest <a href="http://money.ninemsn.com.au/news-and-analysis/bond-prices.aspx">this site</a>. It is updated daily. Now if you didn't think bond yields are important, then you have obviously never borrowed any money or paid any taxes. If you have borrowed money or paid taxes, then I can say that the yields on 3 year Aussie Treasury bonds, sets the mortgage rate for 3 year adjustable rate mortgages, and the 10 year Aussie Treasury bond sets the rate for longer term mortgages, the 7 year, 10 year or 15 year fixed rate mortgages. And these yields are the interest paid by your tax dollars toward those creditors who have purchased these bonds, both domestic & foreign. For mortgages, the normal rule of thumb is that banks add 2.5% to the price of these bonds to come up with the mortgage rates. Although lately, because of the rising bond yield, and the fact that it's politically unpalatable to raise home loan rates at the moment, the banks have been copping the bond rate increases and not passing it onto retail borrowers. Therefore, in the past month, banks have not been adding 2.5% to bond yields to calculate their mortgages, but more like 1.7% for the 15 & 10 year fixed mortgages. But I read a story yesterday that said that CBA were looking at raising rates again, but having just gone to <a href="http://www.commbank.com.au/personal/apply-online/download-printed-forms/home-loan-update-002842.pdf">their site</a> we can see that they haven't raise them yet. I received this commentary on Friday and now a number of Aussie banks have moved their rates up in between RBA moves, which is unusual. Maybe the first indication to the average Joe that the Government is not some all powerful economic lever puller who can make it all OK?</div>

Below is a short commentary on mortgage rates I received from Jackarine Ludwig of Aggregated Awareness : The Mystery Behind the Parabolic Yi...

What if?

AUD Gold Scatter Graph

Just one of the many fun charts you can produce from the Perth Mint's historical data .