PM Bug forum comments on backwardation
Those who are not bored to death with the backwardation/gold bank run narrative may find my comments on this PM Bug forum thread of interest, which was in response to this post of mine. I've cut and past some of them below for the lazy readers, but to get the correct context of Mr/Ms Unbeatable's probing questions you need to read the thread. I'm working on some posts on GOFO/backwardation to further expand on my comments in this post.
Originally Posted by Unbeatable:
| Hmm.... When he sees 400oz bars attracting a 'special premium' he will let us know?The two biggest gold consumers India & China are paying a $30+ premium an ounce over spot, a 600%+ increase over what they paid in previous years!? |
Originally Posted by Unbeatable:
| Hmm... When he sees bullion banks desperately bidding on Perth Mint's refining output he'll let us know? |
Originally Posted by Unbeatable:
| Hmm.. When he sees restrictions on how much gold can be bough he will let us know? 'the Reserve Bank of India banned import of gold by domestic consumers through bank credit' ' Gold coin and bar sales stopped in India' 'Pakistan temporarily bans gold imports' |
Originally Posted by Unbeatable:
| But to be blunt (And as I think you know full well yourself), the idea that you'll see the overt stress indicators that you suggest coming from the bullion banks actions themselves is quite frankly absurd because the day they show provable supply side issues is the day they default. |
Originally Posted by Unbeatable:
| Which is why I showed how each of the indicators are already clearly manifesting themselves in the gold market. (& though you repeatedly try to pretend that there is this massive separation between stresses in demand in the retail and wholesale market, they are in fact completely interlinked.) |
The indicators you mention are just indicators of strong end user demand, not a run on the bullion banks nor any stress at that end. India premiums reflect the restrictions the Govt has put on, something they have been ratching up for a long time well before this talk of a run/stress and driven by a CAD problem. It hasn't affect demand much at all - instead of the shipments of gold we sell going to India they have suddenly started going (demand coming from) dubai and thailand, funny that.
Originally Posted by Unbeatable:
| 1. In times of demand stress the bullion banks are the ones supplying many mints with additional refining input never mind bidding on the output? |
Originally Posted by Unbeatable:
| 2. I'd imagine the bullion banks have preferential contracts in place and ones that prohibit you, a Perth Mint employee from disclosing market sensitive information, so I take your 'I will let you know' with a pinch of salt. |
Originally Posted by Unbeatable:
| 3. If the bullion banks were having issues, instead of people like Perth Mint employees letting the public know about it, I'd expect them to go out and try to convince people of the opposite - 'Don't worry there are not wholesale supply issues' & shi*, look, here you are... |
Originally Posted by Unbeatable:
| So rather if I was looking for supply problems in the 400oz wholesale market, I'd look for signs of additional central bank leasing, particularly the Bank of England who are a key source of supply in times of stress. & shi* look a story just in the last two weeks that the BOE may have leased up to 1300 tons in the 400oz wholesale market in the first half of the year |
The 1300t story is another beat up, see here http://www.screwtapefiles.blogspot.c...or-layout.html the BoE said that the figure that Alasdair relies on for his whole thesis cannot be relied upon.
Originally Posted by Unbeatable:
| Or I'd look for signs that Bullion Banks are running short of supply and/or are being forced to help one another out. & shi* look at how much of JPM's inventory has been removed this year and also this story from just yesterday |
Originally Posted by Unbeatable:
| But as these don't constitute hard evidence, & people like Potemkin would say 'Rumours, words, stories...' I chose to bring up provable supply side shortages &/or unprecedented demand in the gold market which is of course what creates the wholesale market problems you are witnessing above. |
Originally Posted by Unbeatable:
| Really!? How many hours do you think it will take from the time they announce purchasing restrictions to Gold Money to the time they default? I think you know that this is the very last thing they will do, if they don't actually just default first. |
Originally Posted by Unbeatable:
| If there are demand stresses for gold, I think it's (painfully) obvious that they would rather do their best to try cut demand from the biggest gold consumer, India. (EDIT: Which is obviously why I brought up the restrictions in India and outright temporary import ban in Pakistan as being very indicative of shortages in the wholesale market.) As this would ideally (For the bullion banks) have the effect of decreasing demand for their good delivery bars in that market and also freeing up mint output sourced from the mines & scrap, so that it could then be used to refine new 400oz delivery bars for the bullion banks as opposed to coins and smaller bars for retail. |
Originally Posted by PMBug:
| Bronsucheki, are you able to confirm or deny this claim (at least as it pertains to the Perth Mint) from Bill Haynes? |
Originally Posted by Unbeatable:
| Hi Bronsucheki, thanks for taking the time to give such a detailed response and for doing it in a pretty reasonable tone despite how confrontational mine was. Also especially considering that you work & have considerable knowledge in that area vs. me who doesn't. |
In addition, we did hear that 99.99% purity 400oz bars were attracting a premium in London (but the normal 99.5% purity wasn't). Mostly likely explanation for that was that 99.99% purity 400oz bars could just be melted and recast into kilo bars (which are generally preferred to be 99.99% purity in Asia/India) without needing refining. Screwtapefiles blog did some good analysis on the number of 99.99% vs 99.50% purity and what was being withdrawn from GLD, but nothing conclusive yet.
So certainly this is all very unusual and you're right to be cautious.
Originally Posted by Unbeatable:
| So I'm surprised during the period of unprecedented demand this year that you didn't have to source any additional supply from the LBMA in London again? |
Originally Posted by Unbeatable:
| You also say the majority of your non coin production is being made into Kilo bars for the highest bullion bank bidder. But I was under the impression that the bullion banks dealt in the larger 100 & 400oz bars & that the 1 kilo bars would be more for the retail investment market? |
Originally Posted by Unbeatable:
| But the import taxes/duties in India are 8% that would be $104 an ounce, far higher than the $30 premium the media is using. Doesn't this mean that the $30 premium is the premium they're paying prior to import duties/taxes being applied? |
Originally Posted by Unbeatable:
| this is perhaps the first time we have seen this happen laterally between two vaults |
Originally Posted by Unbeatable:
| Today I see another negligible 4k ounces went from Scotia to JPM and JPM converted a massive 70k ounces from there 360k registered total and moved it onto their 100k eligible total. |
Originally Posted by Unbeatable:
| Personally I think at the very least a Bullion Bank run is in progress at JPM and I think even though the writing is on the wall, the others are just trying to help JPM make it to some pre-determined end date. |
Originally Posted by Unbeatable:
| My question to you is, having seen how these unusual transfers have continued since my original post do you still think |
Originally Posted by Unbeatable:
| My question to you is would you agree that the banning of buying gold on consignment did have the effect of considerably decreasing India's overall physical gold demand for 1-2 months (incl. smuggling)? |
I disagree with Eric Sprott that western central bankers "called up" India and asked/told them to do these import restrictions to help them out. I agree more with Jim Rogers on this "Indian politicians who suddenly blamed their problems on gold. The three largest imports to India are crude oil, gold and cooking oil. Since they can’t do anything about crude and vegetable oil, the politicians said India’s problems were because of gold, which, in my view, is totally outrageous. But like all politicians across the world, the Indians too needed a scapegoat."
Norcini: Gold is not in backwardation
In my last post I was not saying that what we see now on COMEX and with GOFO is not important – remember the mugger in Crocodile Dundee still had a knife – just that his switchblade is small compared to Dundee’s much larger “full” backwardation knife.
There is a lot of confusion about the definition of backwardation. Here is a quote from the Dummies series of books:
"When a market is experiencing backwardation, the contracts for future months are decreasing in value relative to the current and most recent months. The spot price is thus greater than the front month, which is greater than future delivery months."
Note their use of plural – "contracts" and "futures months" - as these other links also do, from the first page of a google search on "definition backwardation":
Wikipedia - "The resulting futures or forward curve would typically be downward sloping (i.e. "inverted"), since contracts for further dates would typically trade at even lower prices."
McClellan Oscillator - "Backwardation means that forward contracts are priced lower than nearer term contracts, or spot"
Investopedia - "Backwardation is the same as inverted when futures prices are lower than spot prices."
This is what I understand by backwardation when one uses that word in a general sense about a futures market. Having said that, I think it is valid to talk of a specific month being “in backwardation” even if that is not exactly a precise use of the term. What I have a problem with is describing what we are currently seeing in gold as a general backwardation and playing this up as a sign of the failure of the fractional reserve bullion banking system. It is not.
Last word on this I'll give to Dan Norcini:
"gold is not in backwardation and has not been at any time whatsoever on the Comex during the entire time this backwardation talk commenced and picked up some gullible followers"
The post is worth reading in full because he explains the need to look at current bid/ask rather than last price for the further out contracts due to lack of liquidity and the difference between backwardation and the basis (or strong basis as he calls it when spot is above futures). He also makes the following statement:
"When we do however see a STRONG BASIS PLUS a BACKWARDATION STRUCTURE ON THE FUTURES BOARD, then we have the real deal."
I covered similar ground this in 2010 post, saying that that occasional "backwardation" in the shorter months is just the start, or first sign, of a breakdown in the system. Calling what we see now in gold as backwardation proper overstates the phase we are in.
I think the other issue with backwardation is that it is a concept that comes from commodity markets. In this post I question whether such a commodity type interpretation of backwardation is appropriate for gold. Aren't we told that gold is a monetary asset with high stocks to flow, unlike commodities? If so, should we apply a commodity futures market interpretation to gold? As I say in that post "Then you see that gold hasn't went into backwardation, but that USD has went into contango."
If gold is mostly monetary with only a little commodity-like nature, it is therefore best analysed as a currency and in that respect, no one talks of currencies going into backwardation or contango, they just have different interest rates and that differential might drive a carry trade if the difference is big enough. FT Alphaville has done a whole series on this more "financialised" view of gold.
Regarding negative GOFO (which reflects the interest rate differential between USD and XAU), my current view is that it is reflecting the shift by speculators to the short side - more shorting results in more demand to lease gold, which drives up the lease rate (thus GOFO goes down). I have read that liquidation by specs out of long positions has also restricted supply of gold to lease (as the gold has been sold to those unable or unwilling to lease their gold out) and seen comments that increased physical demand has resulted in more metal being tied up in the value chain, so that results in more demand for leasing (or inventory to hedge).
So I think there is a case to say that negative GOFO as more driven by tightness in the gold leasing market. Note that shortage in the borrowing and lending market does not have to coincide with a shortage in the buying and selling market. Holders of gold may be willing to sell it (so price is low), but at the same time those continuing holding it (or the new people buying it) may not willing to lend it (so lease rate is high).
This is why it is logical for Dan Norcini to say that the structure of the futures market is not exhibiting "a true supply shortage" while at the same time we have negative GOFO and some futures contracts below spot.
So this development in leasing is probably what has driven GOFO negative, which, as Keith Weiner notes in this post, is then synced/transmitted to the futures markets by arbitrage (and has a very compelling combined chart of GOFO and the basis to prove his point). Therefore I think we are currently seeing is more a liquidity squeeze on the bullion banks, rather than a full blown distrust in them by holders of unallocated or shortages of physical (a price squeeze).
A real gold bank run will manifest itself in the wholesale markets for 400oz bars. When I see them attracting a premium and/or being difficult to source, or bullion banks desperately bidding on the Perth Mint's refining output, then we "have the real deal" as Dan says. I will let you know.
Alternatively, just watch Bullion Vault and Gold Money - which are backed by 400oz bars and which deal in that market every day - for reports of difficultlies in getting 400oz bars and restrictions on how much gold can be bought, and/or if they start to add on a "special" premium to their spot price.
Don't be complacent however. What I'm talking about above is the end of the line and things can unravel quickly - a liquidity squeeze can turn into a price squeeze - so keep your gold close or stored with non-banks, like the Perth Mint, who don't engage in fractional reserve and maturity transformation activities.
Don't be complacent however. What I'm talking about above is the end of the line and things can unravel quickly - a liquidity squeeze can turn into a price squeeze - so keep your gold close or stored with non-banks, like the Perth Mint, who don't engage in fractional reserve and maturity transformation activities.
Shortodile Golddee: That's not backwardation
Shortodile Golddee is threatened by a goldbug with backwardation
Sue Shortton: Shortodile Golddee, give him your short positions.
Shortodile Golddee: What for?
Sue Shortton: He's got backwardation.
Shortodile Golddee: [chuckling] That's not backwardation. [draws a oil chart] That's backwardation.
(apologies to the screenwriters and thanks to Nick for the charts)
Sue Shortton: Shortodile Golddee, give him your short positions.
Shortodile Golddee: What for?
Sue Shortton: He's got backwardation.
Shortodile Golddee: [chuckling] That's not backwardation. [draws a oil chart] That's backwardation.
(apologies to the screenwriters and thanks to Nick for the charts)
Gold is a pure Epsilon/Narrative asset
I came across this gem of a blog from a reader sending me Mauldin Economics' latest.
I think I could argue the case that gold is almost all Epsilon and little Alpha or Beta, because it is a Monetary asset, because of its massive stocks to flow ratio. As I said here "It is actually supply - the withholding of supply - that matters most." What those holders think matters, and that "think" is what the blogger calls a Narrative.
What we see going on in the goldbug internet is an attempt to construct a Narrative around gold. However, as the blogger says, it is not necessary for the Narrative to be true, "it is only important for a Narrative to sound truthful." Truth is not relevant because the point of the Narrative is to serve the interests of the powerful/those who are communicating it. How true - truth doesn't matter as long as it generates clicks and sells newsletters and coins.
It seems my, at times, crusade for truth in the blogosphere is in vain because what matters is "the more Common Knowledge in play at any given time, the more that market behaviors will be driven by the rules and logic of the Common Knowledge Game than by fundamentals or traditional factors."
Certainly I would have to concede that the current goldbug Narrative (a group of various memes) is all pervading in the gold blogosphere and I'm not really making a dent. There is a catch however. What the goldbugs don't realise is that their Narrative is not the Narrative that the rest of the world is using. Indeed in this post the blogger says that gold doesn't have a Narrative:
"In some periods of history gold is money. In other periods of history gold is not. But gold is always something, and that something is defined by the Common Knowledge of the day. To be an efficient gold investor in any period, I believe it’s crucial to identify and measure the relevant Narrative that is driving the Common Knowledge regarding gold. Only then can one construct an informational surface that predicts how the equilibrium price of gold will respond to new information ... There is no stand-alone Narrative regarding gold today, as there was in 1895. Today gold is understood from a Common Knowledge perspective only as a shadow or reflection of a powerful stand-alone Narrative regarding central banks, particularly the Fed … what I will call the Narrative of Central Banker Omnipotence. Like all effective Narratives it’s simple: central bank policy WILL determine market outcomes."
The result is that those who operate under the blogosphere Narrative will make the wrong decisions:
"You may privately believe that J.P. Morgan is still right, that gold has meaning as a store of value. But if you participate in the market on the basis of that belief, then you will buy and sell gold in an incredibly inefficient manner. You would be a smart gold investor in 1895, but a poor gold investor today."
This is a challenging statement for goldbugs - it doesn't matter if you think gold is a store of value, or if it should be one, what matters is what most people think gold is. I first came across this idea when reading The Social Construction of Reality (see this blog post of mine for background on this idea). When making investment decision what matters is what is, not what ought to be. I think most blogosphere Narratives are about the Ought, not the Is. That's fine, just don't buy and sell on that basis.
I think I could argue the case that gold is almost all Epsilon and little Alpha or Beta, because it is a Monetary asset, because of its massive stocks to flow ratio. As I said here "It is actually supply - the withholding of supply - that matters most." What those holders think matters, and that "think" is what the blogger calls a Narrative.
What we see going on in the goldbug internet is an attempt to construct a Narrative around gold. However, as the blogger says, it is not necessary for the Narrative to be true, "it is only important for a Narrative to sound truthful." Truth is not relevant because the point of the Narrative is to serve the interests of the powerful/those who are communicating it. How true - truth doesn't matter as long as it generates clicks and sells newsletters and coins.
It seems my, at times, crusade for truth in the blogosphere is in vain because what matters is "the more Common Knowledge in play at any given time, the more that market behaviors will be driven by the rules and logic of the Common Knowledge Game than by fundamentals or traditional factors."
Certainly I would have to concede that the current goldbug Narrative (a group of various memes) is all pervading in the gold blogosphere and I'm not really making a dent. There is a catch however. What the goldbugs don't realise is that their Narrative is not the Narrative that the rest of the world is using. Indeed in this post the blogger says that gold doesn't have a Narrative:
"In some periods of history gold is money. In other periods of history gold is not. But gold is always something, and that something is defined by the Common Knowledge of the day. To be an efficient gold investor in any period, I believe it’s crucial to identify and measure the relevant Narrative that is driving the Common Knowledge regarding gold. Only then can one construct an informational surface that predicts how the equilibrium price of gold will respond to new information ... There is no stand-alone Narrative regarding gold today, as there was in 1895. Today gold is understood from a Common Knowledge perspective only as a shadow or reflection of a powerful stand-alone Narrative regarding central banks, particularly the Fed … what I will call the Narrative of Central Banker Omnipotence. Like all effective Narratives it’s simple: central bank policy WILL determine market outcomes."
The result is that those who operate under the blogosphere Narrative will make the wrong decisions:
"You may privately believe that J.P. Morgan is still right, that gold has meaning as a store of value. But if you participate in the market on the basis of that belief, then you will buy and sell gold in an incredibly inefficient manner. You would be a smart gold investor in 1895, but a poor gold investor today."
This is a challenging statement for goldbugs - it doesn't matter if you think gold is a store of value, or if it should be one, what matters is what most people think gold is. I first came across this idea when reading The Social Construction of Reality (see this blog post of mine for background on this idea). When making investment decision what matters is what is, not what ought to be. I think most blogosphere Narratives are about the Ought, not the Is. That's fine, just don't buy and sell on that basis.
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