Gettin’ High on Bubbles

By Keith Weiner

Back in the drug-soaked, if not halcyon, days known at the sexual and drug revolution—the 1960’s—many people were on a quest for the “perfect trip”, and the “perfect hit of acid” (the drug lysergic acid diethylamide, LSD). We will no doubt generate some hate mail for saying this, but we don’t believe that anyone ever attained that goal. The perfect drug-induced high does not exist. Even if it seems fun while it lasts, the problem is that the consequences spill over into the real world.

Today, drunk on falling interest rates, people look for the perfect speculation. Good speculations generally begin with a story. For example dollar-collapse. And then an asset gets bid up to infinity and beyond (to quote Buzz Lightyear, who is not so close a friend as our buddy Aragorn). It happened in silver in 2010-2011. It happened more recently in bitcoin.

Most speculators don’t care about the economic causes and effects of bubbles. They just want to buy an asset as the bubble begins inflating, and sell just before it pops. But bitcoin and many gold proponents are different. They promise that their favorite asset will cure many social ills, fix many intractable problems, and increase liberty. Oh yeah and get-rich-quick.

Continue reading Gettin’ High on Bubbles

GLD Inventory Levels and the Inventory/Price Ratio Have a Tale to Tell

By Otto Rock

If you go over to the dedicated site of the SPDR Gold shares ETF, better known to the world as GLD, there’s plenty of information to cut and slice. Here are two charts derived from just a couple of the datasets available.

This shows bullion holdings in metric tonnes since Jan 1st 2016. It takes in the pre-Trump world, the system shock of the US election, and all moments since then. Notice how, with some normal fluctuations, bullion held at GLD has been pretty stable recently.

However, if you divide bullion by gold price there’s a distinct decandence (taking into account the cut down Y-axes of course):

Chew those over and come to a conclusion or two. That there’s a lack of interest in owning gold among the Wall St jocks at the moment. And that there’s plenty of room for gold to run hard when that sentiment changes.

Open Letter to Warren Buffett

By Dickson Buchanan Jr.

Dear Mr. Buffet,

Let me start by saying that I am a great admirer of yours. What you and Charlie Munger have accomplished at Berkshire Hathaway is truly extraordinary.

Today though, I want to talk to you about a very specific four letter word – gold.

You’ve not been shy with your opinion about gold over the years. Your 2011 letter to shareholders seems to offer the best summary of your thoughts. Towards the end of this letter, pages 17-19, you place investments into three major categories;

  1. Currency denominated investments (USD money market funds, bonds, bank deposits etc.)
  2. Unproductive assets, purchased out of fear or a “herd” mentality
  3. Productive assets such as businesses, farms, or real estate – your favorite

You put gold into the second category. You said:
Continue reading Open Letter to Warren Buffett

Milking the Savers

By Keith Weiner

Do you want to lend your hard-earned money to the US government? In exchange for the high, high interest rate of 2.8%? It’s a most generous deal, even though the Federal Reserve is committed to dollar devaluation at the rate of 2% per annum. So you are getting 0.8% per year, assuming that the Fed hits its goal. In exchange for lending to a profligate and counterfeit borrower—the government has neither the means nor intent to repay.

No, you don’t? This sounds like a bad deal? Well, tough.

It sucks, but if you need to hold a cash balance, your other choices suck more. Instead of lending to the government, you could deposit the cash in a bank. There’s only one problem. The bank will lend to the government. After taking out the costs of compliance, this rate is 2% according to the St Louis Fed.

This is actually up from 0.13% over the last three years, in our current bout of risinginterestrate-itis. Enjoy this high rate while you can.

In any case, the bank adds risk. On top of all of the risks you incur by lending to the government, you take the risk of bank insolvency too. The government does provide deposit insurance—but this is the same government whose risk you are trying to avoid by not buying its bonds.

Finally, you could hold paper cash, $20 bills. Ignoring the risk of theft, there is still a problem with this. You are lending to the Fed. The Fed issues dollars, which are its liability, to fund its purchase of Treasury bonds. The dollar is backed by government bonds.

To have a dollar is not to own a thing. It is a credit relationship. Someone else owes you. If you own the dollar bill, the Fed owes you.

Continue reading Milking the Savers

METALOR of Switzerland, Caught Trading in Illegally Produced Gold

By Otto Rock

This is a great report out of Peru’s investigative reporting team “Ojo Publico” (public eye) that follows the paper trail and shows how Switzerland’s METALOR, one of the biggest precious metals refineries in the world, is willingly dealing in illegally produced gold from the Peru’s infamous Amazon basin region Madre de Dio.

It’s in Spanish but this is 2018 and that shouldn’t put you off, Google Translate exists. Go read it right here.

More on the METALOR illegal gold story

Further to the news broken by Ojo Publico yesterday about the way Swiss precious metals refining giant METALOR has been accepting illegally produced gold from the Madre de Dios region of Amazon basin Peru, we have interesting information to pass on.

Canada’s Scotia Mocatta does plenty of business with Peru produced gold and several businesses sell gold to the company, including METALOR. We hear from reliable sources that since last week  Scotia Mocatta has been withholding payments to all Peru domiciled suppliers of gold until further notice. Scotia Mocatta is demanding extra compliance work be done to guarantee the legal status of the gold it buys and is conducting its own DD on bonafides of the supply companies. In other words:

1) Word has been out in the bullion world on this Ojo Publico story for a few days, probably coming from the Peru customs and tax people.

2) Scotia Mocatta is now being very careful that it doesn’t leave itself open to problems and quite right too. Canada has strict laws about knowingly trading in illegally mined products.Most importantly, if you’re METALOR this story is not going to go away.

3) They are deep in the doo-doo and if Scotia Mocatta is doing this, you can bet that a lot of other financial houses are doing the same.

Again, congrats due to Ojo Publico for its great reporting and bringing METALOR to account.

The Skyrocket Phase

By Keith Weiner

Let’s tie two topics we have treated, one in exhaustive depth and the other in an ongoing series. They are bitcoin and capital consumption. By now, everyone knows that the price of bitcoin crashed. Barrels of electrons are being spilled discussing and debating why, and if/when the price will go back to what it ought to be ($1,000,000 we are told).

As an aside, in what other market is there a sense of entitlement of what the price ought to be, and a sense of anger at the only conceivable cause for why the price is not what it ought?

Bitcoin, Postmodern Money

Anyways, during the incredible run up in price, we wrote a series of articles, entitled Bitcoin, Postmodern Money. We were not focused on the price of the thing, other than to discuss the problems of unstable price, and even rising price. We did not say the price will come down, or when. We said a rising price makes it unusable as money.

In an online forum, some folks insisted that bitcoin is a store of value (in contrast to the dollar). We said that even if you don’t think it will crash, a skyrocket is not a store. Here is the graph through Friday.

Continue reading The Skyrocket Phase

Gold and Real Yields

By Callum Thomas

This week it’s gold and real yields. A really important thing happened with interest rates in November last year which should be front of mind for investors thinking about gold.  It is a reasonably well established understanding that gold prices trade inversely to real yields, and I’ll explain why shortly.  What happened in November last year was that a key measure of real yields moved from negative to positive. And that’s not positive for gold!

The chart in question comes from a recent report we wrote on the outlook for gold prices (and silver). Basically what you see is the 5-year real yield (US 5-Year Treasury Yield minus US 5-Year Inflation Swap… a pure market based measure of real yields), shown inverted against the gold price (because real yields tend to move inversely with gold prices).  A large bearish divergence has opened up on this chart, and if you took it literally gold prices could be headed below $1000.

Continue reading Gold and Real Yields

Phone Call from a Bank Manipulator, Special Report 1 April

By Keith Weiner

This topic is so timely and so important, that we publish this special report in lieu of our normal weekly Supply and Demand Report.

After our recent article debunking manipulation, we got a phone call from a man whom we will call Jim Bailey (all names have been changed to protect the innocent and the guilty). Jim worked on the London gold desk at a major financial institution. He told us that a lot of what we said was spot on. However, he said in no uncertain terms that manipulation does occur. Here is Jim’s story, as related to us by phone on Friday.

It was seven years ago, today. Lord Horace Abernathy came into our office. I knew of Abernathy, of course, he was my boss’ boss’ boss. A power broker, his value to the bank was not so much in his managerial skills, but his connections in government. His seat in the House of Lords was invaluable.

He did not ask after the traders’ health, or make any other small talk. He is a Lord and traders are mere peasants. He just said, “Chancellor Osborne needs you to make silver go down.”

There was a long silence, as nearly a score of traders gaped at each other.

“Gold too, of course.”
Continue reading Phone Call from a Bank Manipulator, Special Report 1 April

Backwardation, the Bank of England and Falling Prices

By Keith Weiner

In commodity markets backwardation is an indicator of physical shortages. Shortages result in buyers bidding up the cash price of the commodity above the future prices. This creates a profitable trade (called decarry) for those holding the physical commodity – they can sell it now and buy a futures contract at a lower price, locking in a profit.

Backwardation should therefore be associated with rising prices. However, in a recent Macro Voice podcast, guest Jeffrey Snider noted the anomalous situation in the gold market between 2013 and 2016 where negative gold forward rates (GOFO) indicated backwardation while the gold price was falling. Jeffery’s chart below shows periods where the LBMA GOFO rate was below zero, along with the Bank of England’s custody holdings (gold held on behalf of central banks and bullion banks).

Jeffery sees this unusual situation being related to the Eurodollar market:

Continue reading Backwardation, the Bank of England and Falling Prices

How Do Changes in Real Interest Rates Affect Gold?

By Charlie Bilello

We often hear that Gold prices are driven by real interest rates. Rising real interest rates are said to be bad for Gold because it increases the opportunity cost of holding the yellow metal. This makes sense intuitively as Gold pays no interest or dividend, and will therefore be less attractive as compared to risk-free bonds when real interest rates are higher.

But Gold is a complex animal, influenced by a multitude of factors, only one of which is real interest rates. How much do changes in real interest rates alone impact the the price of Gold? And is it only the change in real interest rates that’s important or the absolute level as well? Let’s take a look…

Since 1975 (when Gold futures began trading), there has been an inverse relationship between Gold and real interest rates. Gold has generated positive returns during periods of falling real interest rates and negative returns during periods of rising real interest rates.  This is true whether we look at monthly changes (+13.9%/-3.9% during falling/rising periods) in real interest rates or year-over-year changes (+11.0%/-0.3% during falling/rising periods).

Continue reading How Do Changes in Real Interest Rates Affect Gold?

Buying Gold Wouldn’t Be The Worst Idea Right Now, Goldman Reckons

By Heisenberg

Regular readers know we’re not big fans of gold outside of the hedging benefits it can provide in a portfolio.

The fact is, it’s just a piece of metal. It has no intrinsic value and ironically, it will be even more inherently worthless in an armageddon scenario than it is now.

As we’re fond of putting it, the only thing gold will be good for if we all find ourselves living out Cormac McCarthy’s The Road is as a weapon to bludgeon the cannibals with when you run out of bullets. You can’t burn gold for fuel and you can’t eat gold, so I’m not sure why anyone thinks they need a personal safe full of it to guard against the nuclear apocalypse.

With that out of the way, obviously it can serve a purpose in the portfolio context and given the very real possibility that there’s an acute, indiscriminate risk-off episode in everyone’s future that might not be tied to the Fed (i.e. a risk-off episode that doesn’t result from some hawkish lean somewhere and thus isn’t accompanied by rising real rates), it’s probably worth considering whether allocating more to carefully polished yellow doorstops would be a prudent move.

We’re not going to spend a ton of time on this because frankly we don’t find it very interesting (if you want to own some pretty paperweights, well then by all means stock up, we don’t give a shit), but it’s worth noting that Goldman is out with something new. We’ll just hit the high points. They start by noting the decoupling with real rates:


Continue reading Buying Gold Wouldn’t Be The Worst Idea Right Now, Goldman Reckons

Slaves to Government Debt Paper

By Keith Weiner

Picture, if you will, a group of slaves owned by a cruel man. Most of them are content, but one says to the others, “I will defy the Master.” While his statement would superficially appear to yearn towards freedom, it does not. It betrays that this slave, just like the others, thinks of the man who beats them as their “Master” (note the capital M). This slave does not seek freedom, but merely a small gesture of disloyalty. Of course, he will not get his liberty (but maybe a beating).

Today we do not have slavery, but we are shackled nevertheless. Savers are forced to use the government’s debt paper as if it were money. Most are content, but one says “gold will go up.” He does not expect a beating (but maybe a price suppression).

The slave cannot escape from his bondage, until he stops thinking of the brute as “Master” with a capital M. Freedom does not come from a little show of resentment. So long as malcontent slaves are content to limit themselves to petty disobedience, the Master is content that his rule is absolute. Freedom first takes an act of thinking. One must see the brute for what he is.

Today’s investor cannot escape from the bondage of the Federal Reserve, until he stops thinking of the dollar as “Money” with a capital M. So long as malcontent investors are content to limit themselves to betting on the dollar-price of gold, the Federal Reserve is content that its rule is absolute. Freedom takes an act of thinking. One must see the dollar for what it is.

Continue reading Slaves to Government Debt Paper