The dollar, precious metals, and the 'other' invisible hand

[bart]

Re: The dollar, precious metals, and the 'other' invisible hand

Kitco's Nadler and Mishmash make very comely bed-fellows! [ pair of hacks, maybe that's the similarity. ] All tucked in and comfy under the blankys, are we? Just go perusing through a collection of Nadler's articles and see if you can spot where his "umbilical chord" is attached. ;)

I see that your tinfoil hat is still firmly in place too... ;)


On a personal note, I actually warned Mish the very last time we spoke about these type of issues and getting over confident. *sigh*

[*T*]

Re: The dollar, precious metals, and the 'other' invisible hand

As an aside, I'm no longer publishing any of my ECB gold manipulation work - I'm tired of dealing with the hate mail, threats and other effects and factors. I've gotten more of it on my ECB work than anything else I've ever published, but at least a factor of 10.

A shame. You might have taken it as an indication that it was commensurately worthwhile.

[Guest]

Re: The dollar, precious metals, and the 'other' invisible hand

DUE DILIGENCE FOR ANYONE OWNING GOLD AS A LONG TERM INVESTMENT.
DUE DILIGENCE ALSO FOR ALL "DEBUNKERS" OF GOLD PRICE MANIPULATION.

Jim Sinclair has long subscribed to Mr. Veneroso's own thesis of manipulation on more than a mere whim.

Veneroso's point is that the conditions leading to a large short position on gold did not spring from "active collusion" (aka cloak and dagger conspiracy), but rather, have sprung up quite naturally as a consequence of gold leasing, which over the past fifteen years has progressed well on the way to creating a "trap" for central banks with now quite large amounts of "leased gold". His point here is to pull together six separately gleaned segments of deductive general data which in aggregate points to a fair likelihood that the real volume of CB leased gold is a good deal greater than the commonly accepted volumes, and that's regarding multiple central banks. He aggregates the volumes of leased gold suggested by broad deduction here - then fully halves his own estimates, for extreme conservative projection - and charts what that would suggest as a progression forward. The conclusions are startling.

His point is that if the volumes leased have been much larger than commonly accepted, their dampener effect on the price progression thus far has also been much larger than many would conclude, and their course to eventual depletion of this CB gold disbursement presents a very different picture when all these stealthy additional leased volumes are included. Hence to be "pro or contra conspiracy theories" within Veneroso's illustration of the large issue, is a misconception. You only have to look at the mechansm of leasing, with concomitant structural growth of a chronic short position on gold in the form of secondary and tertiary counterparties of that leasing, growing on this 15 year trend like a large and permanent crust of "barnacles". This is the real story. So it is not a story sprung from "conspiracy", but nonetheless those who debunk conspiracy here and replace it with hedge funds are focusing on a lesser story. The larger story suggested here is structural, grown very large, causes notable price distortion, and has grown straight out of central bank leasing over the past 15 years.

The thing to keep in mind here is that Veneroso is talking about "stealthy leasing", NOT Central Bank Gold sales, which garner all the hoopla and publicity. We know the CB's make a lot of noise about selling gold and then quietly decline to do so. His point has been about the leasing going on in the background all along - which has a large cumulative and spring loaded effect at the end of it's trajectory. Depletion, and a cessation of that ploy.

Veneroso's work on this and GATA's therefore, have performed a tremendous service to the general public to alert us of a very large anomaly playing out in the markets. And BTW, this is the "truth" which Bart works on uncovering and upholds as well. It takes real integrity to undertake positions which are so vulnerable to "debunkers". The "debunkers" have it easy here. Those suggesting the picture is more complex have it a lot harder.

_____________________________________________

Facts, Evidence and Logical Inference, by Frank. A.J. Veneroso

Submitted by Administrator on Thu, 2007-07-19 14:38. Section: Essays

A Presentation On Gold Supply/Demand, Gold Derivatives and Gold Loans
By Frank A. J. Veneroso

INTRODUCTION Currently head of Veneroso Associates, formerly partner of the hedge fund Omega Advisors where he was responsible for global investment policy formulation. Through his own firm, Mr. Veneroso has been an investment and economic adviser in investment strategy to institutions and governments around the world in the areas of money and banking, financial instability and crisis, privatization, and development and globalization of securities markets. His clients have included the World Bank, the International Finance Corporation, The Organization of American States.

He has advised the Governments of Bahrain, Brazil, Chile, Ecuador, Korea, Mexico, Peru, Portugal, Thailand, Venezuela and the United Arab Emirates.

Frank is a graduate from Harvard and has authored many articles on the subjects of international finance.

FOLLOWING ARE ONLY EXTRACTS. FULL ARTICLE HERE:

http://www.gata.org/node/5275

QUOTE [ F. VENEROSO ]

Well, James Turk gave you interesting detective work that shows the possible hand of Government intervening in the gold market---sexy stuff. I am going to talk about the dry stuff---which is statistics on gold supply and demand. I sort of apologize for this but I guess it is an important part of the whole case. I am going to try and focus just on facts and evidence and simple logical inferences from them---rather than allegations, footprints, paper trails and the like. You might want to know why I have come all the way down here to participate in this conference. I find it extremely annoying that there is a hell of a lot of obvious evidence out there that something is happening in the gold market---that there are very large supplies coming into the market---larger than the consensus would claim---and no one is willing to discuss it.

I have had interviews with the press. After the interviews, its has always turned out that the articles were killed. I have requested debates with Goldfields Mineral Services and they have refused to show up. I have asked the World Gold Council to fund pertinent research studies and they have not responded. I never get a response that counters the evidence that I can bring forward. I simply get extreme silence. Only GATA has looked at this evidence and taken it to the public, and so, as a result, I feel it is incumbent on me to present it once again in their forum because I think that it represents evidence of very large undisclosed official supplies in the market that is systematically ignored. If there are any producers here who have influence on organizations like the Gold Council---if you find this persuasive---you should go to them and say, "Hey, listen, this guy has real evidence. He may not be right but it poses serious questions. It should be addressed. Why isn't it being addressed?"
_____________________________________________

It is a simple, simple idea. Central banks have bars of gold in a vault. It's their own vault, it's the Bank of England's vault, it's the New York Fed's vault. It costs them money for insurance - it costs them money for storage--- and gold doesn't pay any interest. They earn interest on their bills of sovereigns, like US Treasury Bills. They would like to have a return as well on their barren gold, so they take the bars out of the vault and they lend them to a bullion bank. Now the bullion bank owes the central bank gold---physical gold---and pays interest on this loan of perhaps 1%. What do these bullion bankers do with this gold? Does it sit in their vault and cost them storage and insurance? No, they are not going to pay 1% for a gold loan from a central bank and then have a negative spread of 2% because of additional insurance and storage costs on their physical gold.

They are intermediaries---they are in the business of making money on financial intermediation. So they take the physical gold and they sell it spot and get cash for it. They put that cash on deposit or purchase a Treasury Bill. Now they have a financial asset---not a real asset---on the asset side of their balance sheet that pays them interest---6% against that 1% interest cost on the gold loan to the central bank. What happened to that physical gold? Well, that physical gold was Central Bank bars and it went to a refinery and that refinery refined it, upgraded it, and poured it into different kinds of bars like kilo bars that go to jewelry factories who then make jewelry out of it. That jewelry gets sold to individuals. That's where those physical bars have wound up---adorning the people of the world.

Now, this bullion banker is net short gold when he conducts this operation. Remember he borrowed gold and now he has a dollar financial asset. He is making a 5% return on the spread, but he now has a gold price risk. As a banker he is not normally in the business of putting on speculative positions like this. He is an intermediary, so what does he do? For the most part what he does is he hedges his gold price risk. He goes long the forward market to offset his physical short. Now if he goes long in the forward market someone else must go short, because every such contract in the forward market has two sides---a long and a short. In doing this he allows private market participants to go short the forward market. Who are those private participants who go short the forward market? They are producers hedging future production, they are jewelers who are hedging their inventory, and they are speculators who want to go short the gold market because they believe the price will go down and they earn a forward premium or 'contango' which happens to be, in this case, roughly equal (though not quite) to the difference between the rate of interest on the dollar asset held by the bullion bank and the rate of interest paid on the gold loans by the bullion bank.

So, basically, in doing this operation the bullion banker has a hedged position on the gold price and he takes a small margin---like a half of one percent---from this intermediation. In doing so, he allows private market participants to go short gold. That's why we elide the two phrases---going short in the gold market and gold borrowing. The ultimate borrowers in the gold lending operation are these shorts in the gold futures and forward markets. Now that we understand what this mechanism is all about, I am going to talk about the commodity case for gold.
_____________________________________________

Since then we have done some more analysis and we have found four more bodies of evidence that point to the same conclusion: consensus (Gold Fields) estimates of global gold demand and supply are significantly understated.



The first of these four is data on the gold derivatives of commercial banks reported to the BIS in conjunction with BIS capital adequacy requirements. In the US there is a monthly report by the US Controller of the Currency on the balance sheet of the US banking system which includes US commercial bank derivatives. I had seen the gold derivatives data included in this report over the years, but I did not know what to make of it. I thought it described a lot of derivatives that were duplicative. I didn't think it was significant.

But then something strange happened in 1999---there was a big shift in the locus of these derivatives. About that time there was also an explosion in the gold price, after the Washington Accord. People then began to focus on this derivative data. Reg Howe did a lot of research on these derivatives and he found similar derivative data on the German banks and on the Swiss banks. We took this data and we tried to interpret it. Now the World Gold Council, Jessica Cross, Antony Neuburger and the bullion banks--- they've all said this is meaningless data---it's transaction data---it's data not about stocks or positions but about transaction flows and you can't draw any conclusions from it about the amount of gold lending outstanding. In fact, Reg Howe has shown that, in the BIS' own accounts of what they are compiling and reporting, they make it very clear that this is in fact position data, not transaction data.

Now we believe we have figured out what this data means. Let us go back to the process of bullion banking. The central bank deposits its gold with the bullion banker. The bullion banker sells the physical gold into the spot market, and then goes long forward to hedge his physical short. That forward is a derivative. If all that was done by a bullion banker was to go long forward against the gold deposited with him by the central banks, there would be a one to one correlation between his gold deposits and his gold derivatives. But in fact that is not what happens. What happens is that sometimes he hedges with options rather than forwards. In the latter case the hedge is the delta on those options. I won't go into the details---basically these options will have a nominal or face value that is several times the value of the gold deposit operation being hedged. Now if we mixed together some option hedges and some forward hedges, a bullion bank's gold derivatives would be a small whole number multiple of the deposits (or at least those deposits that were hedged).

I want to say that what James Turk was talking about earlier today---that some bullion bankers will borrow gold, sell it spot, and take positions in currencies like the dollar without a hedge---these operations, these gold carry trades, carry no associated derivative. Gold derivatives are only spawned if bankers choose to hedge their physical gold shorts. But based on the way I described the operation you will see that it is likely that the derivatives would be perhaps two or three times a bullion banker's deposits, assuming that they hedge most of the physical gold shorts generated out of their gold deposits. Now it is likely that there is some double counting in this data due to duplicative positions that would make this ratio somewhat higher. On the other hand, some bullion bankers presumably have unhedged physical shorts and, in this case, there would be deposits without an associated derivative that would tend to make this ratio somewhat lower.

Now we have a survey of our own of gold deposit taking from central banks, not deposit taking from other bullion banks, but just from central banks. The survey encompasses only a partial sub-set of the gold dealers. Of importance is that some of those gold dealers are also among the ones who report their gold derivatives. We took a ratio of what we thought were their deposits and what were their derivatives disclosed to the BIS, and that ratio came out almost exactly to what you would think given my description of bullion banking operations.

It turned out that, for this small sub-set (and it was small and it could be unrepresentative), the face value of gold derivatives was maybe three times our estimates of gold deposits. That meant that, from the derivative data that had fallen into the public domain, we could infer a number on total gold loans from official lenders outstanding based on our analysis of the data on the gold derivatives. Once again, our sample is partial--- it is not total---but we believe it's pretty representative. We estimated from BIS data that the total amount of the gross gold derivatives of the bullion bankers, all 37 of them, has been somewhat more than 40,000 tonnes. That would suggest something like 10 to 16 thousand tonnes of gold have departed from the official sector as a result of official gold lending. This is an inference from a small sample, but it's an interesting corroborative piece of evidence.



Okay, now, let us look to yet another piece of evidence for more support for our gold loan estimates. In the Gold Book Annual we analyze the gold market like you would analyze any commodity market using microeconomics. What is analysis of commodity markets all about? It is all about elasticities with respect to price of the market's supply and demand variables---variables like jewelry demand, or mine supply, or scrap supply. It is also about changes in these variables over time. What is important about such changes over time with commodities is that, for a constant real gold price, for most commodities, demand grows less rapidly than global income. In economics we say that the income elasticity of that commodity is less than unity. In commodity jargon we say that this commodity has a declining intensity of use. Now, almost all commodities have an income elasticity of less than unity; in other words, they almost all have a declining intensity of use over the long run, at least in modern economies. BUT NOT GOLD. Excluding the monetary use of gold and focusing only on jewelry, on electronics, and the like, if you look at 200 years of data until 1997 what you find is that gold has an income elasticity in excess of unity. That is, demand rises more rapidly than global income over periods in which the gold price is constant in real terms.

Now, in commodity analysis you also have to look at the supply side over time. What we find out also about commodities is that, because of technological change and exploring new lands, for a constant given real gold price, mine supply increases. In the jargon we say that, because of technological change and the exploitation of new lands, the supply schedule for the commodity shifts outward at a certain rate. Now for most commodities, it shifts outward fairly rapidly. A combination of an income elasticity that is less than unity and a rapidly outwardly shifting supply curve implies that most commodities have, on trend, a declining real price. For copper, silver and the like, what has happened to their real inflation adjusted price over 100 years? It has fallen in real terms by 70%. But gold has not---gold has kept a constant real price.

This is an amazing thing because half of demand 100 years ago was monetary demand and today there is no monetary demand. In fact, monetary demand is negative because the central banks are dishoarding their monetary stock. So, if we just looked at the commodity dynamics of gold we would see that the gold price would tend to rise in real terms. Why is that? It is because demand tends to rise more rapidly at a constant real price than global income and mine supply tends to rise less rapidly. And, in order to make supply equal demand every year, the gold price has to rise in real terms to ration down price elastic demand and encourage more supply and thereby clear the market. Two hundred years of data from Eugene Sherman suggests this and 25 years of Gold Fields Mineral Services data, which is somewhat better data, suggest the same between 1971 and 1996. Now here is what is interesting. If you look at the Gold Fields data since 1996, what you find out is that, despite a big decline in the real gold price (remember gold demand is elastic with respect to the gold price), and despite perhaps 3% per annum increases in global income, demand has only increased by 10%.

Now if you apply the income elasticities that we have estimated from 200 years of data and the income and price elasticities that we have estimated from 25 years of data to the last four years---1996 to 2000---demand should have risen by something like 40% - 45% over those four years. Income went up, and the real gold price went down by a lot. The World Gold Council's demand series shows that demand went up by 20%---not 45 %---but the Gold Fields data contends that demand only went up by 10%. To assume it went up by only 10% implies that gold's income elasticity and gold's price elasticity have totally changed relative to history. We don't think that's plausible. We think at a minimum that the Gold Council's data is more reasonable; it allows for a certain amount of reduction in demand versus historical trends, perhaps because gold has gone somewhat out of fashion. But the "official" Gold Fields data is almost unbelievable. Now remember, the Gold Council's data shows an increase in demand much less than history would suggest; yet, it implies much higher levels of demand and much higher levels of supply.



Let us present yet another piece of corroborating evidence. These under reported official gold flows we are talking about are coming out of the depositories of the central banks. Now, in keeping with their unwillingness to be transparent, the central banks don't like to tell us what physical gold is in these depositories. However, we have data on what is in two of these depositories---the BIS and New York Fed. The physical gold in these two vaults at the beginning of the 1990's accounted for about one third of the officially held gold. Now, if you take a look at that 1/3 window on the total, what you find out is that we have lost almost four thousand tonnes of gold. The amount that has left those depositories that comprise only a third of all the gold in official depositories is almost equal to all the gold (5000 tonnes plus) that has supposedly left the official sector vaults in this decade through both selling and lending. If we prorate this drawdown from one third of the official depositories---that is, if we assume basically that there was the same kind of drawdown out of the other depositories (the country vaults, the Bank of England depository, etc.)---we come up with a draw down or liquidation that is consistent with OUR numbers on total gold lending and gold sales and not the official statistics. I should add, however, that this inference supports our more conservative estimates of outstanding gold loans (10,000 tonnes) and not our more aggressive estimates.



Now, in addition to the above three corroborative bodies of evidence we did a little bit of field research---we have had other people make inquiries with bullion bankers. (We went to other parties to make the inquires, since we feared that, as analysts, these dealers would be less forthcoming with us.) Some of these bankers had left bullion banking, some had been fired and felt disaffected and inclined to speak, some are still employed. In any case, they were willing to talk. We have gotten, albeit crude, estimates of gold borrowings from the official sector from about 1/3 to 1/4 of all the bullion banks. We went to bullion dealers and we asked, "Are these guys major bullion bankers, medium bullion bankers, or small scale bullion bankers?" We classified them accordingly and from that we have extrapolated a total amount of gold lending from our sample. That exercise has pointed to exactly the same conclusion as all of our other evidence and inference---i.e. something like 10,000 to 15,000 tonnes of borrowed gold.

So I have now given you 6 completely independent pieces of evidence that a hell of a lot more gold has left those official vaults than the consensus would contend. This implies that the flow, the draw down rate, the liquidation rate from official gold stocks is substantially higher than what the consensus contends.

Now let us put these two suppositions together. Remember our pie chart--- a big chunk of the official gold reserves reported to the IMF has already gone. Remember our supply/demand balances---this outflow on an annual basis is substantially larger. Now, let us project forward. First of all, as the years pass, global income will rise. At a constant real gold price we could then expect demand would rise somewhat. At the same time the current very low gold price is close to the total cost of production and we are having less exploration. We have more or less exhausted the pipeline of projects that we created through higher exploration expenditures years ago. Also, cash flow strapped miners are high grading the eyes out of their mines. Mines deplete in any case by about 7% a year. Mines are depleting more rapidly now because miners are high grading. In essence, we are not coming up with new projects to replace what is being depleted, and depletion is occurring at a rapid rate. Overall we can expect mine output will fall over time. Therefore, we can assume some growth in future demand, we can assume some decline in supply, so that the deficit in the gold market---that rate of flow of gold out of the central bank vaults---should increase in order for the gold price to remain at its current level in real terms.

Now, we will make two sets of assumptions. First let us take the current rate of drawdown and project it forward. Second, let us also assume some growth in that rate of drawdown. Let us then take our estimates of what is left in them thar' vaults and figure out how long this process can go on.





First, we take our conservative numbers--- our lower rather than our higher estimates of gold lending. Here we project how long this process can go on if we assume no growth in demand and no decline in supply and conclude it will take a decade to empty the vaults. In this alternative projection we have assumed some growth in demand and some decline in supply. It will take about 7 years to empty the vaults.





If we use our more aggressive numbers, we have less in those vaults and it is flowing out at a faster rate; consequently, it takes less than seven years to empty the vaults.

So whatever is happening in the gold market--- whatever is keeping the gold price down---if our numbers are correct, it can't go on that much longer, because we know not every central bank will lend or sell all it's gold. In fact, if our analysis is correct, the official sector knows what is coming. If the official sector is rational, it knows what will happen to the gold price when this large flow that is depressing the price abates and ultimately ends---the price will go up by a lot. Therefore, some rational central banks will not sell and lend down to the last ounce. Instead they will start to buy. So regardless of what has been happening in the gold market, if our data is correct, then, within a couple of years, whatever the official sector is doing, it will terminate and the gold price will rise.

What are the implications of all this dry statistical analysis for the claims of GATA? To our mind, it is very simple. There is much evidence that the consensus data on supply and demand is wrong and that the supply coming from the central banks is higher than the consensus estimates. In our opinion, the fact that the central banks do not acknowledge this but simply keep affirming the consensus data---despite abundant evidence to the contrary---represents considerable support for the allegations of GATA that there may be something deliberate and intentionally clandestine about the large flows of official gold that have been depressing the gold price.

____________________________

MY COMMENT:

What does 10-15 years laxly regulated "metals leasing" into the markets produce? Dysfunctional price signals: What the following evidences is not conventional "conspiracy", but rather much more significant - entrenched "dysfunction" due to long term laxly regulated metals "leasing" run amok.

Assume all this vast pile of "silver" longs sold in August represents hedge fund liquidation, all streaming through two money center banks. This is the MISH thesis. These two Banks were and are only conduits for hedge long liquidation. Anyone concluding this invalidates "collusions" misses the larger point. The quite obvious larger point is that all this silver they "sold" for the hedgies is 90%+++ "paper silver". In monthly sales volume, this quite remarkable dump represented 40++ times the monthly recent average real silver investment consumption worldwide, all disgorged into the silver market in a 30 day period, and this event provided little if any discernible physical silver stock liquidity to that silver bullion market, which has instead locked up with supply problems.

This is where Mish becomes a little disingenuous, and begins to mangle his positions. He's refuting "manipulation" by claiming it's "self evident" here that it's instead "free market action" at work. Nice, black and white lesson for the chalkboard. Like a morality play, which shows up muddle headed conspiracists for the doddering fools they must be. He intentionally or unintentionally, omits mentioning, that there is a large and quite evidently dysfunctional mismatch of deliverable bullion available to the market vs. volume of contracts being liquidated. Of course this is common knowledge. What is striking is his omission of this "large grey area" within his agenda driven argument. His conclusion and Nadler's then leads them to broadly hint (so the morality play about muddle headed conspiracists can have a nice crisp conclusion), that the "free market" is at work here, while in fact it is a very distorted example of markets in action which is visible here, due to this oversize pile of liquidated silver contracts not producing much of any corresponding silver bullion liquidity.

This is the real "conspiracy" point - the product these hedge funds have disgorged is the direct SYMPTOM OF GOLD and SILVER LEASING having become DYSFUNCTIONAL. The "manipulation" is not in the sale of these silver futures, or banks actively bludgeoning the silver price down although there may be a component of that - the much broader and more systemic (real) manipulation is inherent in the very existence of this many silver futures unbacked by readily liquidatable silver to correspond to all those contracts to begin with.

That is the much broader and more interesting point of Veneroso's article above. "Manipulation" = uncontrolled, runaway and unregulated metals "leasing". It is a market phenomenon, but it speaks of an even larger market distortion at work. It is a spontaneous commercial phenomenon, which eventually grows enough to become dysfunctional and highly distorting, with a trapped set of parties at one end of the market distortion. Those trapped parties are by definition the original lessee's of silver and gold.

Lessee's do not have good chances of getting that leased silver (or gold) back because of the very large disparity between liquidating futures contracts and the greatly reduced or non existent volume of corresponding real silver to that volume of contracts, as we have just witnessed. It is a thoroughly accepted fact that paper silver trading represents close to 100 times the volume of deliverable silver in the markets. This is it's manifest market dysfunction in full display. Massive disgorging of contracts = zero noticeable increment of real silver coming to to market. He who has let the original commodity go is now permanently dangling on the string.

This Augusts's gargantuan market-distorted paper bullion selloff tells the tale. Mish's great "conspiracy debunk" wishes to illustrate like a beautifully coherent allegory celebrating "market realism", that these bullion markets were obeying "natural market laws" while they in fact were obeying market distortion laws (metals mis-pricing already, both up AND down, due to runaway and stealthy metals "leasing" and resultant uncontrolled proliferation of paper metal volumes a hundred times larger than available metal). So in true agenda-driven fashion, Mish coyly omits mention of the larger, deeper and more interesting systemic point entirely, in hot pursuit of a cookie cutter story that more clearly matches the thesis he had adopted beforehand and was merely seeking to validate. The curiosity driven agnostic process of discovery is nowhere to be found in his method.

____________________________

J. Hommel, commenting on August silver sales and debacle.

"A short position of 33,805 contracts is a big number. It represents 169,025,000 ounces of silver. That is a net short position by two U.S. banks of 5,257 tonnes on silver worth about $2.7 billion at $16.00 the ounce."

$2.7 billion worth of "silver sold" has important implications, as even more 7th Grade Math will show.

The CPM Group has estimated that out of the 550 million ounces of silver produce by the mines, only about 60 million ounces are purchased by investors annually; the rest, and more (from recycling and government selling) goes to industry, jewelry, and photography.

The 60 million ounces purchased by investors, at an average of $13/oz., as 7th Grade Math shows, is $780 million dollars, or less than $1 billion.

Interesting. Let's use more 7th Grade Math to compare those two numbers. $2.7 billion divided by $.78 billion = 3.46.

See, two U.S. banks sold 3.46 times as much silver in a month, as investors worldwide, bought in an entire year.

Doing more math, we can divide annnual investor demand by 12 months, to see what investors buy in a typical month.

$.78 billion / 12 = $.065 billion, or $65 million.

Doing more math, we can compare what the two big banks sold in a month, to what investors buy in a month.

$2.7 billion / $.065 billion = 41.53

Wow. In one month, the banks sold 41.53 times as much silver promises as investors buy silver. No wonder the price went down.

... ... ...

If two banks sold that much silver, then where is it? Who has it? Why isn't it for sale?

Oh, that's right, they didn't sell silver. They sold paper promises to deliver silver, to gamblers who never take any chips off the table. See, that's what even a 7th Grader can know if they do the basic math.

[Jay]

Re: The dollar, precious metals, and the 'other' invisible hand

I think there is manipulation but really I don't care because I'm holding for the long term and manipulation is a short term tool, isn't it? The long term economic forces will eventually rule. Please correct me if this isn't necessarily true. How long can the manipulators hold on? Bought silver on the dip and will buy more if it falls farther.

[Guest]

Re: The dollar, precious metals, and the 'other' invisible hand

Jay - Manipulation seems far more likely to be a gift, not a curse, with the 5-10 year time horizon in mind. The secular shift of wealth to Asia is obviously in progress and is obviously tectonic, and given the evident state of the US, does not proceed without secular scale monetary disruptions. If that reasoning is sound, then we just ride the resulting monetary disruption. It's a very large trend with room to run, and the emergence of unsustainable leasing as argued by Veneroso is programmed to shut itself down by it's very nature. Unsustainable.

[Jay]

Re: The dollar, precious metals, and the 'other' invisible hand

Jay - Manipulation seems far more likely to be a gift, not a curse, with the 5-10 year time horizon in mind. The secular shift of wealth to Asia is obviously in progress and is obviously tectonic, and given the evident state of the US, does not proceed without secular scale monetary disruptions. If that reasoning is sound, then we just ride the resulting monetary disruption. It's a very large trend with room to run, and the emergence of unsustainable leasing as argued by Veneroso is programmed to shut itself down by it's very nature. Unsustainable.

Then, may I ask, why were you so freaked by the recent drop in PM prices?

[Guest]

Re: The dollar, precious metals, and the 'other' invisible hand

Jay -

Metalman seemed confused about that too, expecting that everyone here has to only post viewpoints with which they agree. I figure it's interesting to post viewpoints that are expressly contrary to one's own views regularly to challenge one's own viewpoint and throw around any ideas that seem to have robust arguments, but that seems to sow confusion as people think, "why don't you just post whatever you actually believe in"?

As far as Veneroso and this manipulation question however I do believe that the entire pricing of the PM's is under distortion. The weird anomalous effects we are noting between plunging prices and availability at the retail level, despite all the glib disclaimers that it's nothing but retail bottlenecks, hints broadly at market price dysfunction. The "market price" is screwed up, the systematic, accumulated leasing and it's corrolaries are a big deal, and we need to think very carefully before dismissing people like Jim Sinclair on this.

Jim Sinclair "knows gold". That is what he does. It's his entire business. He and Frank Veneroso have been around this block a lot of times. Old dogs. Wise dogs.

[Jim Nickerson]

Re: The dollar, precious metals, and the 'other' invisible hand

Jay, that Lukester is hard to pin down sometimes. I thought his answer to your question above was an excellent example of evasiness.

It seems to me that when gold was going up, up, up, there was never any commentary about manipulation of anything being the cause. It was all inflation, inflation, inflation, ad infinitum.

Now gold has gone down some and it's manipulation. Why not disinflation or deflation?

I think the most pertinent post concerning this issue was by Finster on 8/23/08 copied into here for those who may have missed it.

You probably have a better handle on that than I do! It is noteworthy, though, that the recent advance in the conventional forex-based dollar index has been "confirmed" by the FDI. In other words, it is real, not merely an artifact of other currencies declining.

http://users.zoominternet.net/~fwuth...alForecast.htm

Then bart asked if the graph above was not showing disinflation?

To which Finster responded:

The hard stuff, El Bartos. De-freaking-flation!

Remember that unlike most 'flation guages, the FDI is sensitive to short-term movements. Technically disinflation would show as a shallower slope of decline, an outright rise is always deflation. Only if a rise were to persist at a high rate and/or for a substantial period of time (e.g. as in 2000-2002) would conventional measures begin to register deflation.

Keep in mind the FDI only registers what has already happened (even if it is more timely than conventional price inflation guages). Whether and to what extent the trend may continue might be better guided by your monetary indicators ...

Emphasis JN

Now Finster has been around here a fairly long time and my assessment of him is he is not given to bullshit or a lot of misadventure when it comes to speculating (plus he may never actually use cuss-words), so when he writes the FDI is showing "De-freaking-flation," personally I think it would be wise to screw all this bickering crap of manipulation of the price of gold and pay attention to the FDI. Caveat: it may be that only Finster and I pay any on-going attention to the FDI, and I am not positive about him, but I am about myself.

[Guest]

Re: The dollar, precious metals, and the 'other' invisible hand

Jim -

Your world is too polarised and simplistic. The two events are by no means mutually exclusive. Actually I also think Finster is spot on - and I don't say this to pre-empt you in some rhetorical game.

Finster is right - we may well be heading into a deflationary interlude and the USD is showing extraordinary strength "within the paradox that it should not be". And that brings me to my point in your regard. You are looking for "consistency of viewpoint", where you score consistency in terms of how few points in contradiction to one another a poster may endorse. I embrace contradictions. I see people like you (and Metalman expressed the same "concerns"), who prefer to think along straight lines such as "get off the fence and tell me which way it's gonna be, so I can plunk down my appropriate investments, already!".

To post some long comments on someone like Veneroso, who points out dysfunction in the leasing of precious metals and then on other posts to posit a deflationary interlude when the USD actually has a good shot at breaking out - these things are NOT contradictory - what they are Jim, is COMPLEX. That means the currents can interact, cross each other in mid-stream, and leave you flummoxed as to the "clear actionable conclusion. Where I differ from you in how I view these pages, is that I don't see them as a place whose primary function is to "deliver clear actionable calls for investment". That is a straightjacketed, blinkered way to use this vehicle. It is like driving a Lamborghini to the corner grocery store to buy a gallon of milk. These pages are a place where all the ideas with some validity are to be examined.

The hallmark of an agnostic examiner is that he does not have an "investment agenda" guiding the "theories" that he puts forward. He will put forward ideas that can be entirely contradictory, and both could be true.

Too tough to grasp for U??

Jay, that Lukester is hard to pin down sometimes ... excellent example of evasiness.... Now Finster has been around here a fairly long time ... so when he writes the FDI is showing "De-freaking-flation," ... I think it would be wise to screw all this bickering crap of manipulation ... and pay attention to the FDI.

[jk]

Re: The dollar, precious metals, and the 'other' invisible hand

one complication here, jim, is that finster has never been willing to discuss the composition of the fdi. it may even be that the lower gold price is an fdi input, which would make your argument circular.

[Guest]

Re: The dollar, precious metals, and the 'other' invisible hand

Jim -

FWIW, Finster's post here sounded spot on to me. I think your question to him on the dollar trend and his reply actually answered something i've been dwelling on as well. Sounds about right! But the stuff Veneroso's writing about has been developing for a decade or more. It's not simply going to vanish. It will keep percolating in the background.

Now have a cold beer and relax mate.

It has been stunningly sharp, Jim. Best guess on why would simply be that the trend had just overshot way too far and once it broke, was like a crack in a dam.

The FDI itself does not tell us how much further the deflationary trend will continue. Nevertheless, based on both fundamental conditions and Elliott Wave considerations, some speculation is possible. I expect a small "B Wave" retracement just about any time now, followed by another deflationary wave of substantial magnitude. The latter, due to the magnitude of the debt (short position in dollars) extant, along with the already-extended nature of monetary policy tools. This will last perhaps some months. Then I expect another round of severe inflation.

The B wave retracement should manifest itself in financial markets as a rally in commodity prices, stock prices, or both. Then they will fall. As a lagging indicator, I expect the CPI to moderate substantially over the next year. As the concern of policymakers turns again towards deflation and economic weakness, however, I expect a renewed full-court press, probably accompanied by further "innovative tools" from the Fed.

Notably, I expect as the US Treasury begins to absorb credit losses from such failing institutions as Feddie (Fannie and Freddie), the credit quality of US Treasury paper itself will deteriorate. Since the default mode of such soveregn debt is usually inflation, that would likely be accompanied by stepped-up monetization of Treasury debt, leading to either a renewed decline in the dollar, sharply rising interest rates, or both.

[Jim Nickerson]

Re: The dollar, precious metals, and the 'other' invisible hand

one complication here, jim, is that finster has never been willing to discuss the composition of the fdi. it may even be that the lower gold price is an fdi input, which would make your argument circular.

Luke, I always love it when you explain to me how I am thinking. Almost no one else has that presumed capability.

jk, what you wrote may be true, and I recognize the lack of knowledge all of us have about what constitutes the FDI. Nevertheless, for the moment I personally am sticking with what the FDI is indicating, but even more importantly what I have tried to do with my own positions in PM's has been to pay attention to what their price actions have been doing, which in that attempt has resulted in my lessening my exposures.

[FRED]

Re: The dollar, precious metals, and the 'other' invisible hand

Jay, that Lukester is hard to pin down sometimes. I thought his answer to your question above was an excellent example of evasiness.

It seems to me that when gold was going up, up, up, there was never any commentary about manipulation of anything being the cause. It was all inflation, inflation, inflation, ad infinitum.

Now gold has gone down some and it's manipulation. Why not disinflation or deflation?

I think the most pertinent post concerning this issue was by Finster on 8/23/08 copied into here for those who may have missed it.



Then bart asked if the graph above was not showing disinflation?

To which Finster responded:

Emphasis JN

Now Finster has been around here a fairly long time and my assessment of him is he is not given to bullshit or a lot of misadventure when it comes to speculating (plus he may never actually use cuss-words), so when he writes the FDI is showing "De-freaking-flation," personally I think it would be wise to screw all this bickering crap of manipulation of the price of gold and pay attention to the FDI. Caveat: it may be that only Finster and I pay any on-going attention to the FDI, and I am not positive about him, but I am about myself.

EJ writes in:

Great holiday discussion. First, a couple of definitions:

Deflation: Negative rate of inflation (e.g., -2%)

Dis-inflation: Declining rate of inflation (e.g., from 3.5% to 2.1%)

Dis-inflation in iTulip parlance is "Ka" of the "Ka-Poom" inflation/disinflation cycle.

Perhaps Finster's FDI is indicating that the US has entered a "Ka" disinflation period, and he interprets the FDI to indicate that disinflation may continue until actual deflation occurs. I don't believe is claiming that the US is currently experiencing a negative inflation rate.

On his site Finster says: "The FDI therefore is designed to be a broad measure of the value of the US dollar somewhat analogous to a reciprocal of the CPI in that it tends to capture long term changes in the value of the dollar against real things, but takes into account the full scope of global commerce. It is analogous to the US Dollar index in that it provides a series explicit in the value of the dollar, but measures it against real goods, services, capital, and labor, rather than currencies which themselves fluctuate and decline in value."

When attempting to correlate the money supply and currency values with inflation it is critical to take output into account. Many charts we see that measure CPI against M3, for example, show correlation but then jump to the erroneous conclusion of short term causation. They are ignoring the "jockey on the horse," that is, the actions of central banks to maintain that correlation. This leads to a lot of circular reasoning.

The main point of confusion I see in many discussions of the money supply and inflation is there are not two but four important variables that relate inflation to the money supply:

1. Supply of money
2. Demand for money
3. Supply of goods
4. Demand for goods

There are two ways that inflation occurs:

1. The supply of money increases relative to the supply of goods
2. The supply of money increases relative to the demand for money

When both occur at the same time, rapid inflation results. At times when only one occurs, more gradual inflation results. In the event that money supply is increasing relative to goods but is falling relative to demand, the inflationary and deflationary impacts can cancel each other out, at least for a period of time. However, longer term the first factor effects the second, and the second the first. A monetary policy response to falling output and a rising demand for money is to increase in the supply of money. If they do not, disinflation occurs.
The Fed cannot cause output to rise or fall directly, but can by affecting changes in short term interest rates cause the money supply to rise or fall in relation to expected of future demand for money, of which expected future output is a variable.

Recessions are periods of declining output. Recessions are associated with disinflation but do not necessarily cause disinflation. The Fed has since the early 1980s used the opportunity of declining output as a tool to manage inflation by failing to meet the increased demand for money that is caused by recession and the attendant decline in output. What appears to be causation – recession causes disinflation – is in fact the result of the policy of a central bank to use recession to cause disinflation. So far the Fed has responded to the current recession by meeting the increased demand for money, so that the US has experienced a decline in real output but not nominal output; as this week's Barron's points out, adjusted for inflation, the US is in recession but grew, nominally, by over 3% in Q2.

With respect to the currency exchange rate, there are times when the exchange rate value of a currency is highly correlated to inflation and periods when it is not.

By raising interest rates to protect the yen during the first year of debt deflation (asset price deflation) in 1990, by intentionally failing to meet the rising demand for money two years later the Bank of Japan lost control of inflation, with inflation falling below zero in 1993.

Subsequently, the Japanese economy has experienced periods of inflation, disinflation, and outright deflation that at times was correlated to the exchange rate value of the yen and at at other times to other factors. The Fed determined long before the US debt deflation started to not make this error; instead of raising interest rates the Fed kept rates low and has allowed the dollar to decline, both to blunt the deflationary impact of debt deflation and boost exports. The Fed hopes that by only partially meeting the demand for money caused by falling demand and output, that inflation caused by rising input costs, especially energy, will abate without an Japan 1990s style increase rates increases. In any case, as the US is a debtor not a creditor, such increases are not feasible. So the strategy had better work. They are also hoping that recession outside the US will increase demand for dollars, slowing the week dollar as a source of inflation; the FDI may be indicating this part of the program is working.

The moral of the story: A one size fits all measure of future inflation such as the FDI is desirable but ultimately impractical because different factors determine inflation over time and the actions of central banks cannot be forecast this way.

The major challenge facing me in making future forecasts is that political uncertainty is the most relevant variable in determining the outcome of the US debt deflation.

Major inflations experienced by indebted countries typically start off the way inflation has for the US, with the central bank making "live to fight another day" decisions, such as by allowing inflation to rise above stated target levels on the belief that inflation can be painlessly manged down later as recession creates a new opportunity to not meet the inevitable rise in the demand for money.

The wild card is this: will the conditions of debt deflation ever allow the Fed to not meet the demand for money as recession intensifies, and what impact will that have on the dollar and, in turn, on inflation? If the current Fed strategy doesn't work, then the US is faced with the secondary stage of a major inflation, when the purchasing power of tax revenues declines and the government is forced to print to meet obligations if it cannot borrow to meet those obligations. The US is vulnerable to secondary effect because so much of the operation of the Federal government is funded by foreign borrowing and of local governments by revenues from taxes based on rising asset prices.

[Jim Nickerson]

Re: The dollar, precious metals, and the 'other' invisible hand

If what I read is correct, ole Richard Russell probably lost a few more good brain cells recently, but somehow he seems to have enough to keep putting forth his assessments. Here is one put up by Prieur du Plessis this weekend.

Richard Russell (Dow Theory Letters): We’re heading for de-leveraging and deflation
“Brilliant Bloomberg columnist Caroline Baum probably knows the bond market better than anyone else I know. Caroline starts her current column as follows. ‘Inflation expectations are so weighted down that investors are buying 10-year Treasuries yielding 3.8% with inflation running at 5.6%. Federal Reserve policy makers couldn’t ask for a stronger mooring in the face of disappointing inflation news. A pair of reports on consumer and producer prices for July showing year-over-year increases of 5.6% and 9.8%, respectively, the fastest pace in 17 and 27 years, failed to rattle the US Treasury market.’

“What’s going on? ‘One school holds that bonds are mispriced. Buyers are either complacent or smoking something stronger than tobacco. Even if they are in full command of their faculties, they are choosing liquidity over yield.’

“Russell Comment – Bond people tend to be very sophisticated. I think they are thinking in terms of the great international de-leveraging that may be coming up. Or why would the 10-year T-notes be selling at a lousy 3.8% yield which is actually below the rate of inflation? Obviously, the bond crowd sees deflation ahead. And nobody else does. Maybe the stock market is just getting wind of it now!

“Remember, years ago I said that the big problem coming up would be INCOME. Everybody’s going to need income, and income will be hard to come by. I’m still of that same opinion. My dear subscribers – hunker down – there’s a hard rain a’comin’. We’re heading into de-leveraging and deflation, and nobody’s positioned for it.”

Source: Richard Russell, Dow Theory Letters, August 25, 2008.

[bart]

Re: The dollar, precious metals, and the 'other' invisible hand

A shame. You might have taken it as an indication that it was commensurately worthwhile.

Thanks for the good thoughts. Maybe I'll bring it back someday but it has affected my health and attitudes, and also affects other ongoing research and education efforts. It wasn't an easy decision.

I think there is manipulation but really I don't care because I'm holding for the long term and manipulation is a short term tool, isn't it? The long term economic forces will eventually rule. Please correct me if this isn't necessarily true. How long can the manipulators hold on? Bought silver on the dip and will buy more if it falls farther.

Spot on in my opinion if one is a boy & hold investor. The only value to knowing about the intervantion specifics is to answer why some drops occur and to tip one off that it can be (but isn't always) a buying opportunity.



By the way Lukester, good pick up on the Veneroso data. :cool:

The bottom line is that there is way more than one factor that effects PM prices or for that matter any price. Money supply/inflation, sentiment & expectations & fear/greed, manipulation, TA, and supply & demand are a few key ones.

Could we see real deflation - of course. But I remain in the camp that believes if it happens (far from an assured scenario), that it will only be for a very short time period.

EJ writes in:

When attempting to correlate the money supply and currency values with inflation it is critical to take output into account. Many charts we see that measure CPI against M3, for example, show correlation but then jump to the erroneous conclusion of short term causation. They are ignoring the "jockey on the horse," that is, the actions of central banks to maintain that correlation. This leads to a lot of circular reasoning.

I've also seen more than a few folk mistake my chart showing 10 year moving averages on M2, M3 & CPI as meaning that the short term gyrations are directly translatable into more or less inflation on shorter terms. It just plain ain't so.

The main points of that chart are both to show *long* term trends and to also show that inflation as measured by a corrected CPI have an unmistakable relationship to money supply. There are many factors that have effects on future inflation and that chart only provides a very broad framework, much like the FDI does.

I do have some unpublished charts and work that do take output into account in various ways, but they're not ready for prime time.