Get a safe, hold cash, and wait for the buying opportunity.

[c1ue]

Re: Get a safe, hold cash, and wait for the buying opportunity.

Lukester,

I have not been impressed with Prof. Antal Fekete; other arguments I've seen him put forward were not either useful nor terribly coherent.

The gold hedge criticisms fall into the same category.

While I do agree with A.F.'s arguments that the gold hedges have been hurting maximum theoretical profitability in the gold mining companies - this is a problem only if the purpose of the hedging was to be for maximizing corporate profitability and failed to do so.

If instead the purpose was to offload certain forms of risk: i.e. capital cost of opening new mines or short term cash flow, then there is nothing wrong with having done so.

The hedges of course can also be used to offload risk for gold mining company management - in the form of options incentives or whatever. This would be a 'bad' reason for using them.

If the risk is that maximum profitability for the gold mining company is reduced, that itself is not necessarily relevant. Lots of people forgo maximum theoretical profitability for short term gain. Its like winning the lottery - take half the money now or all of it over 20 years.

Whatever you might say about Mish - his point about the mining companies not physically losing money even with 'bad' hedges is the key point.

If the mining company has a mine which will produce gold for $200, and sells hedges for $300, they will still make $100. If the price of gold is $700, that's unfortunate but the decision that was made was to 'lock in' the $100 profit and also get the cash up front from the hedge.

I don't see what is so necessarily nefarious about this.

It is no different than Steve Job's trading in his piles of options for stock; had he kept the options he would be billions richer, but as it is he still got a ton of money.

Perhaps I'm just stupid, but this seems another case of Prof. Fekete just not having a clue about the real world.

[c1ue]

Re: Get a safe, hold cash, and wait for the buying opportunity.

There have been questions asked concerning the concept of 'basis' listed by both Szabo and Fekete - specifically leasing rates for gold/silver.

In reality the two seem to talk about different issues but linked by the idea of lease rates having some special meaning.

To resummarize: there is a market for leased metal - basically a paired instant delivery of metal coupled with a future repayment plus interest.

Think of it as a 'short sale' of a given amount of metal from the buyer's viewpoint, or a trade of 'x' amount of today price metal for (amount + interest value equivalent) in deep in the money calls set in the future maturity date for the seller.

Prof. Fekete shrills on about a number of things - including how central banks lease gold to gold miners.

I can't speak to the precise train of thought at the CB's, but leasing a reserve seems a decent way to generate income with little risk - especially if the entity taking shipment is itself a producer.

Comparing gold to money, as gold has value as money, furthermore that a CB's gold reserve is intended as a monetary reserve (as opposed to jewelry or speculative investment), it seems perfectly reasonable that the loan of gold (and therefore a form of money) should have an interest rate attached.

While it is true that gold miner's one way hedges would ostensibly seem to prejudice the gold miners toward a lower gold price from a future standpoint, it is stupid to say this would apply to a gold miner as a business. If so, the gold miners need to make the full switchover to become hedge funds.

This applies similarly to CB gold stashes - the purpose of the stash is to act as a monetary backstop. The actual short term value should not matter so much - especially since currencies are no longer tied to amounts of gold.

The argument that gold miners' management may be hiding the extent of losses and/or increasing short term personal profitability is quite possibly true, but it is a mistake to assume a long term investment error is necessarily actual fraud. Both could be present, neither could be, or one of the two could be present, but the choices are not necessarily in collusion.

This comes then to Szabo's argument in its obtuse glory.

As far as I can make out, Szabo is saying that lease rates matter, and they matter because a negative lease rate implies a lease on silver yielding a higher rate of return than LIBOR - vs. the historical (slightly) lower rate.

Again I think too much thought has gone on - to the point where tail chasing has begun.

Logically I would assume a lease rate for silver being lower than LIBOR. While silver is sellable for cash - there are transaction fees involved as well as storage, delivery, etc. Silver is thus almost but not quite as good as cash.

A negative silver lease rate vs. LIBOR (i.e. a high actual interest charge for leasing silver vs. LIBOR) could be a sign that gold/silver is going to tank, but more likely it is a sign that even those forms of cash which have extra costs associated with them (i.e. gold/silver) are more valuable than (non-forthcoming) actual cash.

It is of course possible that the Illuminati or some other international financio/politico/religio conspiracy is pushing or foreseeing the price of silver/gold falling thus leasors of gold/silver wanting to be compensated for that risk, but I adhere to my financial version of Occam's: when there is a big problem in sight, that is probably what's causing strange behavior is other parts of the financial sphere. You just don't know how yet.:rolleyes:

[Guest]

Re: Get a safe, hold cash, and wait for the buying opportunity.

C1ue -

I have no idea if Fekete's ideas about the movements of 'basis' have any significance to influence large moves in the precious metals. The idea was intriguing in general to investors, because if it's real, it's signals are highly actionable. As to the rest of Fekete's theories, I wasn't really interested. So much for an inquiring mind - I was just chasing the possibility of a gain! :rolleyes:

So I dumped the topic onto these pages to get some input from people who can better assess it than I can.

I have a lot of trust in your approach C1ue, which looks for obvious clues on a question before chasing the more obscure probabilities. That seems to me an eminently common sense method.

I still don't 'get it' regarding "basis", and would be glad to read anyone else here inclined to put in their two cents on how a reversal in basis, whereby the leasing cost of silver or gold becoming higher than LIBOR can turn the whole 'good for delivery' pricing mechanism on it's ear.

I dimly grasp Fekete's point was, the entire paper gold and silver trade mechanism is hinged on bank's willingness to lease out the hard bullion. When you wipe out the financial (even just marginal) profit for doing so, you drive the paper leasing and paper gold derivative market into a "seizure" because the prime movers of the paper bullion trade, the banks actually lending of their real metal, suddenly are reduced to a trickle. This causes all paper bullion to suddenly seek delivery of hard bullion, and the price of bullion goes berserk. He is pointing out that inversion of 'basis' is a way to track that trigger.

This is the part I am getting a serious headache trying to grasp:

<< A negative silver lease rate vs. LIBOR (i.e. a high actual interest charge for leasing silver vs. LIBOR) could be a sign that gold/silver is going to tank, but more likely it is a sign that even those forms of cash which have extra costs associated with them (i.e. gold/silver) are more valuable than (non-forthcoming) actual cash. >>

How can negative lease rate vs. LIBOR mean two diametrically opposite things? To me it seems a PARADOX? Anyway, I'm real flat-footed on this stuff. I'm hoping someone can look at that metric, and ascertain whether there is something specifically actionable in it's movement.

Thanks again C1ue.



Somewhat long-winded explanation of Basis by Tom Szabo here : http://www.silveraxis.com/commentary...er_leasing.pdf

[Finster]

Re: Get a safe, hold cash, and wait for the buying opportunity.

Finster -

I have no clue where to post this, so I'm dumping it here. If anyone can make heads or tails of it profitably for us all then maybe they can re-post it over into a thread in Commodities where anyone else here who 'really gets this' can post their own understanding and synopsis for the rest of us...

I'm with C1ue, Lukester. There are two elements relevant to the price of gold that we have a pretty good handle on. Some discussion of UST in general and the yield curve in particular is germane here. It looks like we are getting a steepening trade. The first chart below represents the excess of the ten year yield over the one year yield.

The other one is the price of gold in relation to other commodities. The second chart below is a weekly chart of the ratio of gold to the DJ-AIG Spot Commodity index.

Both charts cover the period from Y2K to last weeks' close.

Putting these two together, do we see anything significant? The last time the yield curve steepened we saw a pretty healthy runup in the gold to commodities ratio. And this on top of a pretty healthy runup in commodities to begin with.

[bart]

Re: Get a safe, hold cash, and wait for the buying opportunity.

...
I think Bart in particular, and anyone else here with some futures background who monitor futures markets with sufficient experience may be able to skim through and if there is any merit to the arguments, 'deconstruct' some of the issues which Tom Szabo (and Antal Fekete) report on.
...

Tough set of questions, and probably not for the obvious reasons.

The bottom line is that there are dozens if not hundreds of ways to approach and successfully do futures trading... but I have as yet to run across a successful futures trader who only uses one or two items in their analyses.

So I'm less than thrilled with using basis only. It is somewhat workable but nowhere near totally reliable, not unlike my own gold and other predictive work.

Here's both and see for yourself:

My current prediction:





The red line below represents basis and there is some decent correlation with lows. Sorry for the difficult and busy chart - it's normally not public and I've taken no time to clean it up.






Lease rates are another useful tool and with some minor "signal processing" they can also help to increase one's winning percentage with gold trading.

[Guest]

Re: Get a safe, hold cash, and wait for the buying opportunity.

Super input.

Thank you very much Finster and Bart (and C1ue)!

[Sapiens]

Re: Get a safe, hold cash, and wait for the buying opportunity.

Sapiens -


I still haven't figured out your "Japan demographic conundrum"! :cool:

I hope you didn't give up, it is important.

[Guest]

Re: Get a safe, hold cash, and wait for the buying opportunity.

Sapiens - I still have no foggiest idea what this was about. Was it something in their food maybe? Like a SOYLENT GREEN type of horrorshow story - planned infertility due to the Japanese love for seafood and some steroids surreptitiously introduced into the marine food chain, or summat hallucinatory like that? Sounds macabre.

I know you are a proponent of the seriousness of the "population bomb" and I am right on the same page about that. Also a few OECD countries have the opposite crisis, like Japan and Italy (or Russia) with forecasts of critically declining population. But I can't figure out what the heck you were referring to. Call me "stumped".

I hope you didn't give up, it is important.

[Rajiv]

Re: Get a safe, hold cash, and wait for the buying opportunity.

Lukester,

Here is a news article that should answer your question

Gender issues key to low birth rate

In the second of a series on Japan's population crisis, the BBC's Philippa Fogarty looks at the reasons behind the country's low birth rate.

In Japan, people flagged up three separate issues as obstacles to child-rearing - money worries, the problems of working and having a family, and a lack of support for mothers.

"Everyone has the impression that raising a child is very expensive," one Tokyo student said. But many young couples do not have much money.

Pay is often linked to age, while a disproportionate number of young people and women are employed on poorly-paid temporary contracts. Child allowances are low, while housing and education costs are high.
.
.
.
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Look at all that this implies for life in Japan -- I can quite understand Sapiens concerns. Life will be nothing like humanity has ever known.

This is a very different situation compared to the great depression, when the fertility rates in the US were higher ~3 dropped to 2.2 during the depression years, and went back up to 4 in the late 50's and early 60's

from: Fertility and Mortality in the United States

What this tells me is that in hard times people will delay having children - and in good times, they will increase the number of children.

[tastymannatees]

Re: Get a safe, hold cash, and wait for the buying opportunity.

http://www.thesmokinggun.com/archive...2081minn1.html

"hope I die before I get old" (Talkin' 'bout my generation)

After reading this with "nice girls" torturing patients I do not want to be taken care of by generation X'ers with a resentment that the babyboomers destroyed the economy.

With the demographic shift, a big chunk of resources will be allocated to taking care of the busted broke boomers....

[Guest]

Re: Get a safe, hold cash, and wait for the buying opportunity.

Rajiv - I think Sapiens had been referring to something to do with diet, or the food chain. Actually your point is not lost on me. Having grown up in Italy I saw that as the Italian state's encroachments ever further into taxing their citizenry into the ground took hold from the 1970's on forward, Italian youth became ever more reluctant to take on the burden of raising children. In effect the Italian state has created a web of taxation so stifling that simply getting ahead without any kids becomes supremely challenging. Before this, in the booming 1950's and 1960's of course the Italians had a booming population growth as well. There seems a clear linkage between a hostile economic environment and the birth rate in developing or mature economies. However in very poor economies it's the opposite, with parents routinely electing to have more children, A) because of the "attrition rate" wherein a high number of the kids don't make it to adulthood, and B) because the ones that do survive can then act as the parents "social security net" in their old age providing partial support. Somewhere along the line as societies evolve into industrialised, a fiscally intrusive state puts a heavy damper on the birth rate though - I think that's absolutely true.