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Producer/Merchant net long is not necessarily bullish

<div style="text-align: justify;">Gene Arensberg has a <a href="http://www.gotgoldreport.com/2013/12/rare-signal-producer-merchants-net-long-gold-futures.html">good post</a> up on the rare occurrence of COMEX Producer/Merchants category going net long. He sees it as a bullish sign but I would suggest another interpretation which could be more ambivalent.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Gene notes that the producer/merchant <i>"class of traders is dominated by actors who are hedging price risk of their own physical or financial exposure to precious metal, so they are usually more short than long futures"</i> and that it includes <i>"producers and miners, refiners, large jewelers, large bullion merchants"</i>. He also observes that for most of the time this group runs at around 160,000 contracts (circa 500 tonnes) short (see the chart below from Gene's site).</div><br /><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgWv8zaWOEAD9OwUmF9muEDjW_2Ap9HPlpwiNytRxDDr5Q-eGU0vQd4d2Xz0OqOSGvjKqYMmp3ZdSVtXGVk0_FoBXUzm9Xl4hoV_YdnoDOWpjhm8_i-qw-fAFqRTH2elhw8QV97GNvi1Kw9/s1600/gene1.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgWv8zaWOEAD9OwUmF9muEDjW_2Ap9HPlpwiNytRxDDr5Q-eGU0vQd4d2Xz0OqOSGvjKqYMmp3ZdSVtXGVk0_FoBXUzm9Xl4hoV_YdnoDOWpjhm8_i-qw-fAFqRTH2elhw8QV97GNvi1Kw9/s1600/gene1.png" /></a></div><br />Now the interesting this about this is that this group stays pretty much consistently short right through a huge bull run in gold, in pink. Don't you think that is unusual? As the losses mounted, wouldn't they have lightened up? How to account for this behaviour logically?<br /><br />The key is, as Gene says, that they are hedging their own physical. All of the types mentioned -  miners, refiners, jewellers and bullion dealers - have a lot of gold in the working inventories of their businesses. They own this metal (are long) and thus go short to hedge themselves. Their business is about buying gold and transforming it into another more valuable product and then selling it. They are not interested in making money on the gold price itself.<br /><br />Indeed, if they weren't hedged then as a group holding around 16 million ounces they would have lost around $11 billion dollars in the drop from $1900 to $1200. I'm pretty sure you'll agree that they are unlikely to be making so much profit making coins/jewellery or as coin dealers to wear that sort of loss.<br /><br />So that is why we see a stable short position for this group, with smaller ups and downs as their sales and inventory fluctuate in response to changes in demand. If demand surges, then their inventory gets run down and they would take short hedges off and the short position would reduce. As they restock inventory, the short position should increase.<br /><br />We now have a basis on which to explain the 2008/2009 and 2013 divergences from the long run average of 160,000 contracts short.<br /><br />My explanation for the reduction in shorts from 160,000 to 27,000 in late 2008 is that the financial crisis caused an <a href="http://goldchat.blogspot.com.au/2008/08/fud-fear-uncertainty-doubt.html" target="_blank">unprecedented</a> surge in retail demand for gold. The industry was not geared up for that sort of volume so inventories were run down, resulting in a <a href="http://www.sharelynx.com/gold/CoinPremiums.php" target="_blank">coin premiums surging</a>. As the industry geared up and put on extra shifts etc the producer/merchants were able to restock and hence we see their short position increase again.<br /><br />Continuing with this inventory based analysis, it suggests the interpretation for the 2013 reduction in short positions to 6,000 long is that the industry is running down its inventory. In 2008/09 the inventory run down was due to a demand surge, but was only temporary. In 2013 the run down has persisted. An explanation for that is that demand and business has dried up - if you aren't selling as much product then you don't need to hold, and can't justify holding, as much working inventory as you used to.<br /><br />Consider that during 2006/2007 the producer/merchant short position hovered between 50,000 and 100,000 contracts (see <a href="http://www.sharelynx.com/gold/cots/ddfcotgc.php" target="_blank">this chart</a>, which goes back a bit further than Gene's). The 160,000 average that Gene mentions is from 2009-2010-2011, which is the bull run in gold. An interpretation is that the extra demand during that bull run resulted in the industry needing to run higher inventories, so we see another 60,000+ shorts being added. With the $1900 bust, maybe the industry as a whole got stuck with higher than normal inventories so worked them down to their average of 75,000.<br /><br />What is interesting is that the rapid reduction from 75,000 short to 6,000 long started after the April 2013 price smash. That event certainly knocked sentiment from the market in the West. It resulted in cash for gold scrap business drying up (therefore less metal tied up in inventories by dealers and scrap merchants) and if you look at <a href="http://www.sharelynx.com/gold/USMintCoins.php" target="_blank">US Mint gold coin sales</a>, they drop right off from that point as well, so again coin dealers etc have reduced inventory needs.<br /><br />To further back up this analysis, consider that <a href="http://www.sharelynx.com/gold/USMintCoins.php" target="_blank">US Mint silver coin sales</a> have not reduced like gold and coincidentally the <a href="http://www.sharelynx.com/gold/cots/ddfcotsi.php" target="_blank">silver producer/merchant</a> short silver position shows no reduction like gold as the silver market is still strong.<br /><br />So I'd argue that the producer/merchant position is just reflecting the lack of Western interest in physical gold investment (as also demonstrated in gold ETF reductions) rather than them <em>"believe[ing] the path of least resistance is higher for gold."</em> Having said that, I wouldn't say it is necessarily bearish, as Gene is right in that it is a rare signal so could indicate a turning point. I just don't see it as a slam dunk bullish sign either, as this lack of interest in gold is likely to continue until people realise that, no, the economy isn't on the mend and the problems fixed. Until that mainstream narrative changes, we could see speculators testing the gold market to the downside.<br /><br />Note: I have linked to a number of Nick's Sharelynx charts in this post. Just sign up for the <a href="http://www.sharelynx.com/trial.php" target="_blank">free trial</a> to get access to them, they are invaluable to understanding what is going on in the market, as hopefully this post demonstrates.<br /><div align="justify"></div>

Gene Arensberg has a good post up on the rare occurrence of COMEX Producer/Merchants category going net long. He sees it as a bullish sign ...

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Gresham’s Law, Suicidal Strategies and Pure Speculation on China

<div style="text-align: justify;"><strong>Gresham’s Law for Interest Rates</strong></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Lars Schall has an <a href="http://www.larsschall.com/2013/12/03/gold-as-part-of-greshams-law-for-interest-rates/">interview</a> with Dr. Tom Fischer covering the ground in his <a href="http://www.statistik-mathematik.uni-wuerzburg.de/fileadmin/10040800/user_upload/Fischer/Faux_Gold_Arbitrage.pdf">Faux Gold Arbitrage</a> article. The Q&A format forces Tom to compress his ideas down into short paragraphs and the interview is worth a read IMO. One quote:</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><i>"Gold is not just another commodity. It historically has the role of a world currency that cannot be inflated into oblivion. It is a financial safe haven. However, for currencies like gold, the Dollar or the Euro, contango or backwardation follows from a difference in their interest rates. For instance, because of that interest rate differential, usually either the dollar is in contango towards the Euro and at the same time the Euro in backwardation to the Dollar, or vice versa. Now replace the word “Euro” by “gold” and you get the picture. So, gold is in backwardation when its interest rate, which is also called the “gold lease rate”, is higher than that of the Dollar. The question is now: why should the interest rate of gold be higher than that of the Dollar? In my opinion, the answer is obvious: gold is the much better currency, so, you should have to pay up to get a loan in it. I would call this a version of Gresham’s Law for interest rates."</i></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">From this interest rates perspective, futures markets for currencies like gold are effectively lending (for a backwardation or decarry trade) or borrowing (for a contango or carry trade) trades. See this <a href="http://goldchat.blogspot.com.au/2013/09/faux-gold-arbitrage.html">blog post</a> for more detail.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><strong>Suicidal Strategies</strong></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">James Turk has an <a href="http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2013/12/2_Metals_War_Rages_%26_Todays_Plunge_In_Gold_%26_Silver.html" target="_blank">interview</a> with KWN where he asserts that <em>"the attempt to shake out physical metal by driving the price lower is a suicidal strategy"</em> as it <em>"increases the demand for physical metal more than the weight of metal sold on to the market."</em></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Now I agree with his statement that the bullion banks may well be hedged so they don't have any exposure to gold prices and that their real risk is more likely physical liquidity maturity mismatches. James notes that <em>"we don’t know the size of the fraction of available metal backing delivery obligations"</em> but sees the episodes of backwardation and drawdowns on <em>"visible inventories of the ETFs and on the Comex"</em> as evidence of their liquidity risk.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">I would take exception to the quality of this evidence. Note the use of the word "visible". As I noted in this <a href="http://goldchat.blogspot.com.au/2009/08/gold-etf-league-table.html" target="_blank">blog post</a> years ago, the ETFs and COMEX are a minor part of the total investment stocks. We have <a href="http://in.reuters.com/article/2013/11/20/china-gold-imports-idINL4N0J410Y20131120" target="_blank">evidence</a> in terms of UK to Swiss to HK import/export figures that part of the visible inventory reduction is going to Asia, but we don't know where the massive amount of invisible inventory is going, if anywhere. If it is staying in London or other western warehouses, then we have to consider the possibility that there is sufficient physical liqudity for the bullion banks.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">In any case, even if the above analysis is incorrect and these attempts to shake out physical are not working, don't you think the bullion banks know this? I mean, bullion banks have <a href="http://goldchat.blogspot.com.au/2011/05/we-are-flies-in-bullion-bank-web.html" target="_blank">extensive webs</a> into all aspects of the gold market so would they not be the first to see the impacts of their strategies? In that case why would they persist with it when it threatens their existence? I can see some validity in the shake out theory regarding April's price smash, but given the Asian response, I can't see validity of the theory that the bullion banks are suicidally repeating this strategy. If they were that stupid they wouldn't have survived as long as they have.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><strong>Pure Speculation on China</strong></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Nice to see gold making the mainstream papers in Australia in a positive way with <a href="http://www.theaustralian.com.au/business/opinion/golden-lining-for-yuan-as-china-stocks-up-on-price-slump/story-fnciihm9-1226772537609">this quote</a> sent to me by a reader (you'll need a subscription to read the whole article):</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><i>"So here's the latest Pure Speculation gold theory: there will be no gold surplus in 2014 (as there never has been, unlike with most metals), China will keep taking advantage of the subdued price to buy both metal and the foreign mines that produce it, and one day, probably too late, Western investors will wake up to the fact that China controls so much of the world's gold and is using it to back the yuan as a reserve currency."</i></div>

Gresham’s Law for Interest Rates Lars Schall has an interview with Dr. Tom Fischer covering the ground in his Faux Gold Arbitrage article....

Central banker pop quiz on gold

<strong>Q1.</strong> If you say <a href="http://www.mineweb.com/mineweb/content/en//mineweb-gold-news?oid=218307&sn=Detail">that</a>  gold <i>"is an asset that people want to hold when they’re very fearful about potential financial market catastrophe or economic troubles"</i> or <a href="http://blogs.wsj.com/economics/2013/07/18/bernanke-nobody-really-understands-gold-prices/">that</a> gold is an <em>"asset that people hold as a sort of disaster insurance"</em> and someone points out that you hold around 70% of your reserves in gold, you should:<br /><br />A. say that you are not fearful at all <a href="http://www.federalreserve.gov/newsevents/testimony/yellen20131114a.htm">because</a> <em>"under the wise and skillful leadership of Chairman Bernanke, the Fed helped stabilize the financial system, arrest the steep fall in the economy, and restart growth."</em><br /><br />B. say "does 70% allocation to gold sound like I think everything is peachy pie, you moron?"<br /><br />C. just say <a href="http://www.gpo.gov/fdsys/pkg/CHRG-112hhrg67941/html/CHRG-112hhrg67941.htm">that</a> <em>"it is tradition, a long-term tradition"</em> to hold gold as <em>"a form of reserves"</em> and tell them to keep calm and carry on doing what you say and not what you do.<br /><br />D. Note the person's name and forward it to the NSA.<br /><br /><strong>Q2.</strong> If you say <a href="http://blogs.wsj.com/economics/2013/07/18/bernanke-nobody-really-understands-gold-prices/">that</a> <em>"nobody really understands gold prices and I don’t pretend to understand them either"</em> or <a href="http://www.mineweb.com/mineweb/content/en//mineweb-gold-news?oid=218307&sn=Detail">that</a> you <em>"don’t think anybody has a very good model of what makes gold prices go up or down"</em> and someone points out that it isn't very smart to invest 70% of your reserves in an asset you don't understand, you should:<br /><br />A. say that when you <a href="http://www.huffingtonpost.com/2009/09/07/priceless-how-the-federal_n_278805.html">have</a> <i>"a lock on the economics world"</i> and don't allow <i>"room for other views"</i>, you don't need to understand anything nor does it matter if you get it wrong.<br /><br />B. say "that was just to scare people off investing in gold, because do you really think we don't understand gold when we employ <a href="http://www.federalreserve.gov/econresdata/theeconomists.htm" target="_blank">over 300</a> Ph.D. economists and have written hundreds of papers on gold, you moron?"<br /><br />C. just say <a href="http://www.gpo.gov/fdsys/pkg/CHRG-112hhrg67941/html/CHRG-112hhrg67941.htm">that</a> <em>"it is tradition, a long-term tradition"</em> to hold gold as <em>"a form of reserves"</em> and tell them to keep calm and carry on doing what you say and not what you do.<br /><br />D. Note the person's name and forward it to the NSA.<br /><br />Answer key: anything exept B.<br /><br />

Q1. If you say that gold "is an asset that people want to hold when they’re very fearful about potential financial market catastroph...

So who are the The Liars and Cartel Apologists?

<div style="text-align: justify;">Craig Hemke (TF Metals Report) had a <a href="http://www.tfmetalsreport.com/blog/5234/sick-lies-and-liars">recent post</a> where he asked:</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><i>"Who is Jeffrey Christian and what is his business? How about his pals ErikT, Bron and Kitco? What are their motives? What about sites like Screwtape and "personalities" like Kid Dynamite? Who supports them and what drives their interest? ... Who is Kid Dynamite? Who really are Jeanne d'Arc, the crew at Screwtape and the bloggers of the Kitco boards? What are their names and what are their real jobs? What is Jeffrey Christian's background and who are CPM Group's clients? Who are his sources and from where does he get his information? What is CPM's business model and how do they profit? How about Kitco and The Perth Mint? Perhaps they can explain how pooled, unallocated accounts work. I'm not alleging fraud or malfeasance but I do think that folks need to know where there might be conflicts of interest in this fight."</i></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">I responded to Craig's questions in respect of the Perth Mint <a href="http://www.tfmetalsreport.com/comment/364692#comment-364692">here</a>, and a copy of the text is appended to this post for the lazy. The other people mentioned can answers for themselves if they care, but for what it is worth, below is what I know of who they are. As an overarching comment, none of them are related to each other/co-ordinate/work together or have "support" from shadowy forces as far as I know.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">I suppose I should also "confess" that I am in email contact with the people below from time to time. This may be confusing to some, but I don't have a problem corresponding with people even though I may disagree with some of the things they say/believe - and I don't agree with everything Erik, Kid, Warren or Jeff say. Everyone has different experiences and thus brings different facts to the table, so I am happy to engage with people I disagree with as I may learn stuff. In fact I seek out people who disagree with me as I think that is an important way to ensure one does not fall into group think and make sure you are getting to The Truth.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><strong>Erik Townsend</strong></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">I suppose Erik was mentioned because of <a href="http://www.financialsensearchive.com/editorials/townsend/2010/0419.html" target="_blank">the editorial</a> "Debunking the Post-CFTC Precious Metals Fearmongering Campaign" on Financial Sense and for the comments on this <a href="http://www.peakprosperity.com/blog/harvey-organ-get-physical-gold-silver/73933?page=28">Peak Prosperity article</a> (in which Jeff also comments).</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">There is nothing secretive about Erik from what I can tell from <a href="http://www.eriktownsend.com/About/about-erik-townsend.html">his website</a>, he <i>"is a retired software entrepreneur turned hedge fund manager. Erik has actively traded energy, grains, and precious metals futures markets since 2008."</i></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Erik <a href="http://www.financialsense.com/financial-sense-newshour/next-level/bron-suchecki-precious-metals-arbitrage" target="_blank">interviewed me</a> on arbitrage in June 2012 for Financial Sense. Since the Perth Mint doesn't trade futures, I see Erik as one source for information on gold futures from a traders point of view, which he provides on Financial Sense each week.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><strong>Kid Dynamite</strong></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Kid <a href="http://kiddynamitesworld.com/about/" target="_blank">was a</a> "<em>a trader at a major Wall Street investment bank</em>" for eight years and appears to have retired I guess. Traders aren't known for being shrinking violets, hence Kid's sometimes aggressive blogging style when "<em>trying to correct erroneous hype all over the internet</em>" which gets under the skin of most of his targets.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Kid is not a goldbug and just sees gold as a trade, and I value that non perma-bull non perma-bear agnostic approach when everyone seems to be in one camp or the other. His trading experience at a big bank is also useful to understand how trading desks work, which helps in working out what the bullion banks are/could be doing.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">I'm not sure how Kid got on to precious metals BS, but my take is noob investors getting mislead by BS into positions that aren't right for them is one of his hot button issues.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><strong>Warren James (<a href="http://screwtapefiles.blogspot.com.au/" target="_blank">Screwtape Files</a>)</strong></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Firstly, Screwtape is a group blog but that doesn't mean that they all agree with each other or endorse each other's blog posts. I don't know the other Screwtape bloggers much, but have met Warren in person a few times.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Once can best understand Screwtape Files by their work on <a href="http://screwtapefiles.blogspot.com.au/p/wynter-benton-myth.html" target="_blank">Wynter Benton</a>, which they say "<i>was a defining moment for this blog - at first we were believers of the message</i>" but they came to the conclusion that it was a fraud and "<i>could be considered one of the most successful silver pumpers of 2011</i>". The Screwtape Files bloggers were initially driven by a theory that a number of websites were part of a coordinated pump and dump scheme, which is similar to what Craig implies with his question of "who supports them"? Screwtape eventually came to the conclusion that the websites were just run by regular people.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Warren originally contacted me about the ETF bars lists as he had seen the claims the bars lists were fake and thought he could prove it via statistical analysis of a history of all the bar lists. I didn't think they were fake and I suppose I could have ignored him as I disagreed with him, but he was serious enough to come to Perth on his own dime to talk about it, so I thought I should meet him. We spent a few hours on it and I went through what signals/trails the data should show up if they were fake, what Warren called vectors for investigation.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">I kept and open mind on it and thought well if he can find evidence than that will be huge news, so was happy to give him as many vectors to look at. While Warren didn't find any evidence of fakery, his bullion bars database has provided some very interest insights into the way bullion bank run vaults and I his work on it is <a href="http://screwtapefiles.blogspot.com.au/p/bullion-bars-database.html">essential reading</a> for anyone trying to understand how bullion banks work.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Warren is a real person (see his photo in <a href="http://screwtapefiles.blogspot.com.au/2012/09/slv-database-3.html" target="_blank">this post</a>) and just an average guy working in IT and I'm four nines (ie 99.99%) sure he has nothing to do with The Cartel.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><b>Jeffrey Christian</b></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Craig has a lot of questions directed at Jeff, which I find puzzling as the answers are all available on his website, such as his <a href="http://www.cpmgroup.com/who-we-are/our-team/jeffrey-m-christian" target="_blank">background</a>, his clients (producers, consumers, investors, governments), his business model (consultants/advisors fee-based). The funny thing is that Jeff is far more closely aligned with Craig and other goldbugs than with bullion banks. Hard to believe? Consider these examples:</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><a href="http://www.cpmgroup.com/who-we-are/company-overview">Against conflicts of interest</a>: <em>"commodities research and advice is best delivered by independent experts who do not work for banks, brokers, mining companies, or any other entity that has interests that could conflict with the best interests of the clients"</em></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Alerting people to the fractional reserve bullion banking system (<a href="http://www.cpmgroup.com/our-market-views/general-articles-commentaries/hedging-and-derivatives/bullion-banking-explained">Feb 2000</a>): <em>"Banks treat their metal deposits in much the same way as they do deposits denominated in money, as the reserve asset against which they lend additional money to borrowers."</em></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Competes against bullion banks, highlights their conflicts of interest (<a href="http://www.cpmgroup.com/our-market-views/general-articles-commentaries/agricultural-commodities-hedging/cotton-price-risk-management">Oct 2002</a>): <em>"A producer should use an advisor such as CPM Group, which is not trading against the producer. Banks and dealers have a conflict of interest between their own trading positions and the hedges they advise their clients to take"</em> and (<a href="http://www.cpmgroup.com/our-market-views/general-articles-commentaries/hedging-and-derivatives/recent-lessons-learned-about-hedging">Jan 2000</a>) <em>"Hedgers should not rely on their trading counterparts for hedging strategies. These entities take the opposite side of the hedge transactions, have inherent conflicts of interest, and always keep their own best interests in mind, even if these are the short-term best interests and arguably not in the banks’ own long term best interests."</em></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Jeff also says in <a href="http://forums.silverstackers.com/message-596517.html#p596517">this discussion forum</a> that he has sued Goldman Sachs, <em>"testified on four continents and written extensively about the need to regulate OTC derivatives" </em>(see <a href="http://www.cpmgroup.com/sites/default/files/Two_Letters_Re_Derivatives_October_2002.pdf" target="_blank">here</a> and <a href="http://www.cpmgroup.com/sites/default/files/Derivative_Market_Regulation_Letter_May_2002.pdf" target="_blank">here</a>), <em>"denied re-entry into their home country as a form of harrassment, had their computers hacked into and files deleted, and their phone tapped"</em>.</div><div style="text-align: justify;"> </div><div style="text-align: justify;">I would bet that if I gave Craig the above quotes without mentioning it was Jeff, he would be very interested in interviewing the guy. Seems to me like there is common ground between the two. If Craig is after The Truth, then surely he can ignore/put differences aside to interview Jeff on bullion banks' conflict of interest and what regulations are needed, his suing of Goldman Sachs and harassment. I know there is zero chance of that, but at least I tried to build some bridges.</div><div style="text-align: justify;"> </div><div style="text-align: justify;"><b>Appendix: Response to Craig's questions in respect of the Perth Mint</b></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">You asked what the Perth Mint’s “agenda” is and to explain our Depository accounts. First up, the Perth Mint was created by the West Australian government to (key bits from section 10 of <a href="http://www.slp.wa.gov.au/pco/prod/FileStore.nsf/Documents/MRDocument:23299H/$FILE/Gold%20Corporation%20Act%201987%20-%20%5B04-f0-01%5D.html?OpenElement">Gold Corporation Act</a>):</div><div style="text-align: justify;"><br /></div><ul><li><div style="text-align: justify;">to recover, extract, process, smelt, sample, refine, assay and work gold and anything containing gold;</div></li><div style="text-align: justify;"></div><li><div style="text-align: justify;">to mint, make, issue, buy, sell, distribute and otherwise deal in coins</div></li><div style="text-align: justify;"></div><li><div style="text-align: justify;">to provide storage and safekeeping facilities to international standards for gold and other valuable objects;</div></li><div style="text-align: justify;"></div><li><div style="text-align: justify;">to maximise the value added to and export income derived from gold production through the development and marketing of things containing or relating to gold;</div></li><div style="text-align: justify;"></div><li><div style="text-align: justify;">to promote and develop markets for gold in Australia and elsewhere;</div></li><div style="text-align: justify;"></div></ul><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Those are our motives. We sell more gold and make more profit if the gold price is going up, that is our conflict of interest. We have been government owned for 114 years because gold mining employs a lot of voters, and thus our job is to do the above to keep the industry strong. We are also state government owned, not federal, so neither Australia’s federal government or central bank controls us or tells us what to do – we exist to benefit the state of Western Australia.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Unfortunately, the Perth Mint’s government ownership means we are public servants and thus cannot comment on policy matters or be critical of our own or other governments policies or actions – as public servants should not be using what are the public’s assets as a platform to advance their own political beliefs – and in the end holding gold as reserves and using it and other currency reserves to manage exchange rates and the economy is a policy decision, politics. This is why you don’t see us commenting on these matters or being involved in organisations like GATA. Indeed my personal blogging activities push this line somewhat and have on occasion caused angst internally.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">You may legitimately be cynical about this, but as the only truly commercially focused West Australian government entity, with not one bureaucratic government appointment in the organisation, be assured that we are aware we would sell a hell of a lot more coins and bars if we were privately owned and could do and say the things Eric Sprott does, for example. We keenly feel that restriction on our ability to market gold (as there is a modest bonus if we exceed budget), but know it is not our role to advocate policy and thus we focus on adding value to Western Australian gold production.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">As to the Depository, it is but one part of the Perth Mint and we make more money from our refining and coin/bar businesses, but it seems to attract attention. We offer three storage types:</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Allocated – this is the real deal. As I said in an earlier comment, you can come in and look at your bars and if you want to be sure we aren't just doing a switch, scratch or write on them with a texta so you can tell if you get to see your exact bars back again. Few allocated services will allow you to do that.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Pool Allocated – this is the same as GoldMoney, a pile of bars backing client accounts with a published <a href="http://www.perthmint.com.au/pool_allocated_bar_listing.aspx">bar list</a>.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Unallocated – this is our working inventory backing client accounts, 100% backed and not lent our, explained on our website <a href="http://www.perthmint.com.au/investment_invest_in_gold_storage_options.aspx">here</a>:</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><i>“Unlike other depositories, which are merely warehouses, The Perth Mint is a manufacturer of precious metal products and one of the world's largest refiners.  Accordingly, the Mint has a substantial requirement for physical metal to support these operations.<br /><br />To fund this work-in-progress inventory, the Mint traditionally borrowed metal from bullion banks, at cost.  At the same time, there were investors storing metal with bullion banks and others, at cost.<br /><br />The Mint realised that if it took deposits directly from investors, it could cut out the intermediary and create a win-win situation: the Mint wins by obtaining free funding for its inventory and investors win by getting free 100% backed storage.”</i></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">So our unallocated cuts out the bullion banks and denies them leasing revenue from us and storage fees from investors. Maybe you might now understand why I get confused when people think I’m part of “the cartel” especially since anyone bothering to read my blog, where I’ve covered <a href="http://goldchat.blogspot.com/2010/04/london-unallocated-fractional-fubar-or.html">fractional bullion banking</a>, <a href="http://goldchat.blogspot.com/2008/11/australian-gold-confiscation.html">confiscation</a> and <a href="http://goldchat.blogspot.com.au/2009/06/death-of-gold.html">manipulation</a> for years, will see I’m far from an apologist.</div>

Craig Hemke (TF Metals Report) had a recent post where he asked: "Who is Jeffrey Christian and what is his business? How about his pal...

Interview with Al Korelin on China

<div style="text-align: justify;">Forgot to mention that I did an interview with Al Korelin on the weekend chatting about China with Rick Rule. Goes for about 10 minutes and you can download it from <a href="http://www.kereport.com/2013/11/16/conventional-stock-markets-bubble/" target="_blank">here</a>, segment 4.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">While I'm posting, will mention <a href="http://preciousmetalslife.com/2013/11/11/star-trek-gold-next-generation">this post</a> from Miguel Perez-Santalla of Bullion Vault about Star Trek and gold - makes a good point about gold's enduring value:</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><i>"It just so happens that in this Star Trek episode which was aired November 11, 1989, the Ferengi, an aggressive profit centered alien culture show up at negotiations with a bag full of gold bricks. This episode to me expresses two things. First is that the writers for Star Trek believe that thousands of years into the future gold will have value. Secondly, that 24 years later after having aired the show gold still holds value."</i></div>

Forgot to mention that I did an interview with Al Korelin on the weekend chatting about China with Rick Rule. Goes for about 10 minutes and ...

More on bullion bank reserves, delta hedging and coat checking

<div style="text-align: justify;">Below is a response to FOFOA's seven part comment to me <a href="http://fofoa.blogspot.com/2013/10/gold-as-forex-currency.html?showComment=1383894602039#c441006473564506622" target="_blank">here</a> on his <a href="http://fofoa.blogspot.com.au/2013/10/gold-as-forex-currency.html" target="_blank">Gold as a FOREX currency post</a>.</div><div style="text-align: justify;"> </div><div style="text-align: justify;"><strong><em>FOFOA: “You can call <span style="font-family: inherit;">the</span> slack in the flow their "stock" if you want to, but if there's more flow coming in than going out, then the BBs will accumulate reserves. If there is more going out than coming in, then their reserves will decline.”</em></strong></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">This statement makes it sound like BBs are benevolent entities that manage the difference in flow for the market. If investors do not want to buy (sell) unallocated, then the BB will not accumulate (divest) reserves. There is also a separate borrow/lend market, and again, the impact on a BB’s reserves is driven by client action, not the BB.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">As you say, the unallocated account holders bear the burden of funding the BB’s reserves, from which it logically follows that BB accumulation/divestment of the “flow” is dependent on unallocated account holder willingness to hold unallocated (or futures etc).</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><strong><em>FOFOA: “unallocated credits are not necessarily lent into existence such that the offsetting asset is automatically a promissory note from a borrow, especially ever since the price of gold started rising in 2001 and it no longer made much sense to borrow in an appreciating unit.”</em></strong></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Interesting comment. Certainly the miner hedging has declined over that period, hence the drop in lease rates. I would note that this comment contradicts the goldbug theory that CBs and BBs lend paper gold into existence to supress the price of gold.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><strong><em>FOFOA: “So around 32 LBMA bullion banks which maintain ounce-denominated books (the very definition of a bullion bank) have their reserves stored in the vaults of the 6 bullion banks which are both LBMA-recognized custodians and also the clearing members of the LBMA. Talk about pooling reserves!”</em></strong></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">No, this does not follow at all. The non-clearing BBs only need to hold balances with clearing BBs sufficient to settle their net trading with other non-clearing BBs. No BB’s physical or paper (ie on-call liquid) reserves HAS to be held in London with a clearing BB.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">The point of the non-clearing BBs is that they have competitive advantages and specialisations with certain client bases in different geographical areas and so deal worldwide and hold physical gold outside of London (as do the clearing BBs). </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><a href="http://www.perthmint.com.au/education-locoswaps.aspx">Loco swaps</a>, for example, are a common transaction and can be settled without needing any clearing in London. For example, Soc Gen could have metal in a Swiss bonded warehouse but have a client in HK who wants to buy. They could call ANZ, whose strategic focus is the Asian region, and do a loco swap of COMEX gold for gold that ANZ holds in HK. <a href="http://silveraxis.com/todayinsilver/2009/07/30/exchange-of-futures-for-physical-efp-explained-part-one/">EFPs</a> perform a similar function on futures markets.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">So non-clearing BBs could hold all their reserves in physical outside of London and only need run some unallocated balances with clearing BBs.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><strong><em>FOFOA: “Are Goldman Sachs' gold reserves, which are deposited at JP Morgan, physically allocated to GS or unallocated bookkeeping credits? The answer is that they are obviously unallocated credits. … Why would the reserves of 30+ non-custodial bullion banks be held in allocated storage in the 6 clearing members' vaults? They wouldn't, of course.”</em></strong></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">I don’t see “obviously” and “wouldn’t, of course” as arguments. I don’t see you explaining why it is obvious. Non-clearing BBs could easily hold allocated with a BB if they have exceeded their credit exposure to that bank. While the limits these banks grant each other are large, and they have netting or set-off arrangements, there are still limits and those limits can be used up by other divisions of the bank. In such situations the bullion division of a bank may therefore have to resort to allocated, as I noted <a href="http://fofoa.blogspot.com/2012/11/regular-forum-archives-1998-2001.html?showComment=1354597106574#c5114072417817404539">here</a>.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><strong><em>FOFOA: “I'm sure you'll dismiss or at least dispute this notion as well, but just think about it. It makes perfect sense, even if it doesn't fit into your limited view of the gold market from your little corner that happens to be mostly physical.”</em></strong></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Very condescending: “limited view” and “little corner”. As they say, if you can dish it out: I’m sure you’ll dismiss the notion that it is not obvious that non-clearing BBs’ reserves are unallocated credits with clearing BBs, but if you think about it, it makes perfect sense, even if it doesn’t fit into your limited view of the gold market with no practical experience of working in the industry and sitting in your little blogging corner making theories up from behind a keyboard.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><strong><em>FOFOA: “They would be unallocated bank-to-bank credits much the same as domestic commercial bank reserves held at the Fed are unallocated dollar credits. … non-custodial bullion banks are essentially depositors or deposit holders at the 6 LBMA clearing banks just like commercial banks have a reserve account at the Fed.”</em></strong></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">So I assume that your proof that non-clearing BBs’ reserves are unallocated credits with clearing BBs is that this is how fiat money works. The problem with the analogy is that Fed reserves system works because the banks know that there can never be a shortage of reserves – the Fed can just digitally print them. That does not hold in bullion banking, as you can’t print physical gold. I would suggest that this one significant difference means that bullion banking dynamics and institutional structures will be different to those of fiat banking.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">My best guess is that bullion banking operates along free banking lines, which I have discussed with costata and Michael H on your blog <a href="http://goldchat.blogspot.com.au/2012/12/freebanking-and-bullion-banking.html">here</a>. I found it interesting that you never engaged in that discussion, or remember you ever considering the idea elsewhere. Maybe because free banking means the system self regulates the amount of paper gold and thus won’t blow up?</div><div style="text-align: justify;"> </div><div style="text-align: justify;"><strong><em>FOFOA: “the system as a whole could be much more thinly reserved since 84% of the banks' reserves are fractionally reserved on a different level, the LBMA interbank clearing tier, for which we have only very limited insight.”</em></strong></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">So we have a limited insight into the LBMA interbank clearing tier, but “obvious” insight that the non-clearing BB’s must all hold their reserves as unallocated? To the extent that a BB holds unallocated with other BB’s instead of physical as reserves, then yes it is tiered and the overall fractionalisation is higher. However we have no idea of how much physical reserves clearing or non-clearing BBs hold.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><strong><em>FOFOA: “I don't think I've ever seen you give your explanation for the astonishing volume. I have, in the post above, but I've never heard what you think explains an average of 170 trades per bank, per day, each averaging almost a tonne per trade.”</em></strong></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">I’m surprised you are surprised. Your post just said that paper gold traded in FOREX markets and had carry (and funny in a post about carry trades no mention of GOFO was made, which is the carry rate). What is the big deal, any online FX service lists XAU as a currency to trade, the fact that it has an ISO currency code, these two should tell you gold is part of the FX market. As to volume, I covered that in this <a href="http://goldchat.blogspot.com.au/2009/10/king-of-currencies.html">2009 post</a>:</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><em>“the very fact that gold is no one’s liability and cannot be printed means it attracts a disproportionate amount of trading and speculation. Why is it assumed that 12.7% is excessive and unreasonable? Could not the 12.7% figure be proof of the special monetary nature of gold, proof that it is the King of Currencies?”</em></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">That post and the 12.7% turnover figure was pre-survey, which reported daily turnover of 5,400t a day. Latest GFMS figures have CB stocks at 29,597t and investors holding 34,820t. 5,400t by 64,417 stock gives 8.4%. If you said that half of that stock was long-term holders and thus not traded and should be excluded, it gives a turnover of say 17%. When compared to similar figures for fiat money it is not “astonishing” at all and is a great indicator of gold’s <a href="http://goldchat.blogspot.com.au/2009/01/london-bullion-clearing.html">liquidity</a>.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">As to the number of trades per bank, well I do consider that astonishing - astonishingly low. Knowing how many trades we do with clearing BBs each day, there is no way that is actual number of trades given the number of counterparties the BB deal with at that top tier. There is some sort of aggregation going on in the LBMA survey to give such a low number. Just another reason I am no so quick to draw conclusions or extrapolations from that survey until I understand the methodology.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><strong><em>FOFOA: “such tremendous volume, especially if the BBs are, as Christian says, only leveraged 10:1?”</em></strong></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">I am not sure I understand the link between turnover and fractional reserve ratio (which is what the 10:1 is referring to). You can have a 100% reserve system and still have many multiples of turnover. Leverage, yes, will increase turnover, but leverage and fractional reserve ratio are different things.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><strong><em>FOFOA: “what could possibly be offsetting their net exposure given that the volume is ten times higher than the gold futures markets (and 100 times higher than GLD's daily volume)? Physical?”</em></strong></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Again, I don’t get the link between turnover and net exposure. Anyone could buy and sell back the same ounce multiple times during a day and be left with no net exposure at the end of the day. The BBs could intermediate (make markets) between FX desk traders all day and have no exposure.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">I would argue that the greater the leverage employed (and these FX platforms and contracts for difference market themselves on the leverage you can use) the less likely these speculators are to hold a position overnight. They add a lot of turnover and liquidity but at the end of the day do not add the sort of massive net positions you think they leave BBs with which require BBs to “delta hedge”.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><strong><em>FOFOA: “Do you even understand how the banks use these? Here's an email from FOREX Trader which I posted back in June of 2012 … The only answer I can think of is that they hedge it by going long correlated (but not identical) assets. What's correlated with paper gold? Silver, copper, euros, crude oil, interest rates, yield curve spreads, whatever.”</em></strong></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><em>“I can think of”</em> – sounds like he is guessing at what it is? If you read through FT Alphaville’s articles and associated links it is not clear that it is totally about using correlated assets. A lot of it is using derivatives of the underlying asset to synthesise the underlying asset’s performance.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">It is easy for your FX trader to say <em>“I made a quick delta-0.7 using some regression and eyeballing”</em> and another thing to actual implement it for the sort of volumes you are talking about and sustain that without slippage/loss.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Indeed, as this <a href="http://www.reuters.com/article/2011/09/21/us-banks-trading-idUSTRE78K4TK20110921">Reuters article</a> says: <em>“traders say that much of what happens at "Delta One" desks -- the focus of the UBS loss -- and in other parts of the business is driven by banks betting their capital to make a profit in what is known as proprietary, or "prop," trading.”</em> That is, Delta One desk are no more than speculative trading, gambling. No surprise that UBS’ and Soc Gen’s blew up.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><strong><em>FOFOA: “This is the age of complex derivatives, and to dismiss them being used in the "gold" market, especially given the incredible volume reported in the LBMA survey, simply because you don't see them being used in your little physical corner of the market, is simply silly.”</em></strong></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">There you go again with the condescension. The Perth Mint may not deal in this sort of risky stuff, but we have deep contacts into the BB market. I’ve asked a BB dealing desk managers about this delta hedging in another context and it was laughed at. He said he had enough trouble getting his middle office (risk) to approve an offset of gold in different locos, let alone something as unstable as complex mix of unrelated but partly correlated assets. You believe your source (by the way, has he/she ever worked on a bullion desk) and I’ll believe mine.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><strong><em>FOFOA: “this coat-check room view since January of 2011, but I didn't come up with it. … But it is obviously the correct view if you give it proper consideration.”</em></strong></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Who cares the source, you’ve endorsed it and appropriated it as part of your view of the market. And again with the “obvious”, I mean I think what I’m saying is obvious but that line of argument doesn’t seem to persuade you for some reason.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">As I said, I can see ETFs (any of them) being drawn upon via stock borrowing, but I dispute that a BB can park reserves in it.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><strong><em>FOFOA: “The coat-check room view only applies to GLD, and not to any other ETFs, gold or otherwise. It's not an ETF thing, it's only a GLD thing, because GLD is the LBMA's gold ETF. … because the LBMA is head and shoulders above all other gold selling organizations. And that's very simply why GLD is 10 times larger than other gold ETFs. Not because of marketing (PHYS arguably has better marketing), but because it's the LBMA's gold ETF, and the LBMA had that much gold to put into its ETF!”</em></strong></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">What do you mean by <em>“GLD is the LBMA’s gold ETF”</em>. The WGC is the one who sponsored (funded) GLD and created it. The reason it is the biggest is because it was the first and the WGC had been marketing to institutions well in advance of its launch (indeed, some US and UK money was funnelled into the Australian gold ETF because GLD was delayed). It is crazy to say PHYS has better marketing, you have no idea of the machine that the WGC deployed at the institutional level to sell GLD.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">And can we please not use “LBMA”. The LBMA does not have any gold, or run vaults or trade. Please be specific. Are you talking about all the BBs, or just the clearing BBs, or only a few of those?</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><strong><em>FOFOA: “If someone wants to capture a GLD discount-to-NAV arbitrage opportunity, it suffices to buy GLD and sell spot unallocated (XAUUSD). Then you wait until the selling pressure in GLD has abated, and you square your position. No redemption necessary. GLD is so large that, even if institutional investors dump it, someone else, including the bullion banks, will take it instead of allocated if it is cheap enough. But why redeem?”</em></strong></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">The BBs redeem because they have to pay 0.4% management fee on GLD when holding unallocated with a clearing BB cost them a lot less than that and if you have your own vault, the cost of storing the physical yourself is zero. In that case, why wouldn’t they redeem?</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><strong><em>FOFOA: “It's one way a bullion bank could turn a dead asset (surplus reserves) into a live one. …”</em></strong></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">You didn’t need to go to all that trouble with the T accounts, as steps 1-2 are what DP said and you have answered my question “so you're saying collectively the BBs went naked short 2000t of ETF gold” with a yes, but they delta hedge themselves, which is what I guessed in my response to DP. So the whole coatchecking IN thesis rests on delta hedging. Given I don’t think delta hedging is reasonable for that amount of gold and for the time period involved, we’ll just have to disagree.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Can you just clarify one thing – how much of GLD are you claiming came from excess reserves, that is, how much of it was delta hedged (at its peak)?</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><strong><em>FOFOA: “Before GLD, there was a storage cost associated with sitting on excess reserves, but the banks had no choice but to eat that cost.”</em></strong></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">As I said to DP, <em>“the marginal cost to a bullion bank to hold physical reserves is zero (vaulting is primarily a fixed cost business), there was/is no pressing need to create ETF's to save costs by parking metal in an ETF structure.”</em></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><strong><em>FOFOA: “now there was also an opportunity cost in addition to the storage cost of sitting on "excess" reserves.”</em></strong></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Not sure what you mean by opportunity cost. I’m guessing the fact that you can invest the excess cash from selling GLD shares less the lesser amount needed for that perfect delta hedge. Have you considered as well that under your theory the BBs didn’t need GLD to manage any excess reserves as they could have just delta hedged any client long positions rather than accumulating physical (and it is just as easy to borrow physical gold as it is to borrow GLD). GLD coatcheck in theory requires delta hedging, but once you believe in delta hedging you don’t need GLD coatcheck in theory.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><strong><em>FOFOA: “the LBMA could be using GLD shares in its internal clearing process, only redeeming them when the underlying physical is needed to restock the subterranean stream, that is, for physical allocation or delivery. No need to redeem simply for interbank clearing, just transfer the shares.”</em></strong></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">No, the LPMCL Clearing software, AURUM, and the associated SWIFT metal instructions do not allow for equity transfers, it is a metal (ounce) system only. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><strong><em>FOFOA: “I realize that you're trying to be Bron-the-Debunker, superhero destroyer of precious metals charlatans and defender of rational analysis, but with this GLD drain issue, I sometimes wonder if you really can't see how irrational your physical arbitrage view appears, or if you're just sticking to your guns.”</em></strong></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">It seems pretty irrational to me for you to stick to your guns about a complex coatcheck/GLD/delta hedging when there exists another Occam’s razor explanation: after 2008 gold developed a <a href="http://goldchat.blogspot.com.au/2013/07/gold-is-pure-epsilonnarrative-asset.html">narrative</a> among institutional investors that it was an uncertainty hedge, lots of money piled in, pushed gold price and ETF holdings up, the narrative changed now that everyone thinks the economy is getting better and the money (and gold) flew out. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><strong><em>FOFOA: “And yes, I did see your latest post asserting that PHYS redemptions might be due to an arbitrage opportunity rather than a general shift in preference toward physical.”</em></strong></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">I said <em>“It is a bit hard to say if it is arbitrage or just a holder(s) from long ago getting out”</em> the latter being a shift in preference toward physical. So it could be either.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><strong><em>FOFOA: “PHYS lost what, a little over one tonne in the last 5 months? GLD has lost an average of 46 tonnes per month for the last 10 months. That's well over a third of its holdings in less than a year.”</em></strong></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">What interests me, is if BBs are desperate for physical and failure the fractional reserve system is imminent as some claim, why are we not seeing much physical redemption from PHYS, especially when a BB is paid to do so?</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><strong><em>FOFOA: “I must admit, I don't envy you gold sellers right now.”</em></strong></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Thankfully the Perth Mint doesn’t “sell” gold, so I don’t envy them either. Insurance/protect wealth reasons for buying gold are boring and don’t attract clicks but are evergreen. Those who went for clicks and dramatic headlines and tried to sell gold on other reasons now face a credibility problem.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><strong><em>FOFOA: “in general, what is your argument for buying physical gold right now?”</em></strong></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Because even <em>“if you don't expect a financial, economic or currency crisis”</em>, you can’t be 100% sure at this time. Nor can you know if Freegold is right. If either happen then you have some protection. If neither happen, then any loss was just your insurance premium.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><strong><em>FOFOA: “We can resume the survey discrepancy debate if you want.”</em></strong></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">I’m just going to have to find the time to write it up in an appropriate way and send questions to the LBMA, that is the only way to resolve it.</div>

Below is a response to FOFOA's seven part comment to me here on his Gold as a FOREX currency post . FOFOA: “You can call the slack ...