Is there a gold backwardation or not?

[Potemkin]

Sources:
http://goldchat.blogspot.ro/2013/07/shortodile-golddee-thats-not.html
http://goldchat.blogspot.ro/2013/07/shortodile-golddee-thats-not.html

I guess not...

:judge:

 

[Unbeatable]

The Author of the report you linked to works for the Perth Mint and he suggests that this might be more of a leasing market problem than a physical supply and demand problem he says...

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.

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. 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.

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!?

Hmm... When he sees bullion banks desperately bidding on Perth Mint's refining output he'll let us know?

The Perth mint reported the highest demand levels in five years and that the mint was working through weekends to satisfy demand.

http://www.gold.org/ (Q2 Market update)

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'

Well I think the author has failed to disclose something... That he is blind!

 

[Unbeatable]

As for the graph you linked to, just read the comments from the people who responded...

Backwardation of any sort should not normally occur in the gold market because of the available large above-ground supplies. The fact that gold backwardation is in fact occuring is highly significant. The now twelve days of negative GOFO rates suggest extreme tightness in the physical market in London. I find it somewhat strange that you are trying to downplay this..

Why do you think that this state has not been in this situation since 2008? And only a few times in the past decade.

The gold chart shows a long term uptrend in gold.However, in the short term the prices are lower. This is true backwardation. It defies the trend, and therefore indicates fear of near term gold supply failure.Another backwardation indicator is that the gold lease rate is higher than the Libor rate.

POTEMKIN:

'Potemkin Village':

any construction (literal or figurative) built solely to deceive others into thinking that some situation is better than it really is

'battleship Potemkin':

One of the most influential propaganda films of all time

http://en.wikipedia.org/wiki/Battleship_Potemkin

http://en.wikipedia.org/wiki/Potemkin_village

 

[Potemkin]

The Author of the report you linked to works for the Perth Mint and he suggests that this might be more of a leasing market problem than a physical supply and demand problem he says...

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!?

Hmm... When he sees bullion banks desperately bidding on Perth Mint's refining output he'll let us know? http://www.gold.org/ (Q2 Market update)

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'

Well I think the author has failed to disclose something... That he is blind!

I'm glad you read it and you observed he works for Perth Mint. Seems so...
Why is he "blind"?

I think he makes some interesting points there...

 

[Potemkin]

As for the graph you linked to, just read the comments from the people who responded...

POTEMKIN:

'Potemkin Village':

'battleship Potemkin':

http://en.wikipedia.org/wiki/Battleship_Potemkin

http://en.wikipedia.org/wiki/Potemkin_village

As you can see from my avatar, I took the nickname from "Battleship Potemkin", there was a famous old Russian movie about it...

 

[Unbeatable]

I'm glad you read it and you observed he works for Perth Mint. Seems so...
Why is he "blind"?

I think he is blind because he says in his most recent blog, (http://goldchat.blogspot.co.uk/) that when these three factors happen

1. High Premiums
2. Unprecedented demand for mint output
3. Gold buying/ownership restrictions

Then you'll know it is more likely real backwardation and not just a gold leasing problem.

These points -

1. India & China are paying a $30+ premium an ounce over spot, a 600%+ increase over what they paid in previous years!?
2. The Perth mint reported the highest demand levels in five years
3. The Reserve Bank of India banned import of gold by domestic consumers through bank credit. Pakistan temporarily bans gold imports'

Are my points, not his, to show that those three things he is waiting for to happen are already happening.

Yes I see your Avatar is Battleship Potemkin,

But because of some dubious posts you've made, like finding the only guy who is blind to the crazy physical demand at the moment and making posts like this in the China thread -

China has been "gold crazy" for a very long time...

They are also nuts about US bonds and US dollars overall. How crazy!

It makes me wonder if you chose that name because you are deliberately trying to troll/downplay/'potemkin village' the PM situation at the moment.

 

[Jay]

I think he is blind because he says in his most recent blog, (http://goldchat.blogspot.co.uk/) that when these three factors happen

1. High Premiums
2. Unprecedented demand for mint output
3. Gold buying/ownership restrictions

Then you'll know it is more likely real backwardation and not just a gold leasing problem.

These points -

1. India & China are paying a $30+ premium an ounce over spot, a 600%+ increase over what they paid in previous years!?
2. The Perth mint reported the highest demand levels in five years
3. The Reserve Bank of India banned import of gold by domestic consumers through bank credit. Pakistan temporarily bans gold imports'

Are my points, not his, to show that those three things he is waiting for to happen are already happening.

Yes I see your Avatar is Battleship Potemkin,

But because of some dubious posts you've made, like finding the only guy who is blind to the crazy physical demand at the moment and making posts like this in the China thread -



It makes me wonder if you chose that name because you are deliberately trying to troll/downplay/'potemkin village' the PM situation at the moment.

Unbeatable, couldn't you post some graphs or something?
http://www.pmbug.com/forum/f2/china-goes-gold-crazy-2322/index2.html

/sarc.

 

[Potemkin]

I think he is blind because he says in his most recent blog, (http://goldchat.blogspot.co.uk/) that when these three factors happen

1. High Premiums
2. Unprecedented demand for mint output
3. Gold buying/ownership restrictions

Then you'll know it is more likely real backwardation and not just a gold leasing problem.

These points -

1. India & China are paying a $30+ premium an ounce over spot, a 600%+ increase over what they paid in previous years!?
2. The Perth mint reported the highest demand levels in five years
3. The Reserve Bank of India banned import of gold by domestic consumers through bank credit. Pakistan temporarily bans gold imports'

Are my points, not his, to show that those three things he is waiting for to happen are already happening.

Yes I see your Avatar is Battleship Potemkin,

But because of some dubious posts you've made, like finding the only guy who is blind to the crazy physical demand at the moment and making posts like this in the China thread -



It makes me wonder if you chose that name because you are deliberately trying to troll/downplay/'potemkin village' the PM situation at the moment.

:flail: you are being paranoid!

Look: I don't know much about precious metals, I admit. I'm no expert, but I don't think my posts are "dubious".

 

[Potemkin]

And yes, China has been buying gold "like crazy" for years... Nothing special about that.

I never thought the word "Potemkin" has a bad significance in your mind. I should have picked some other battleship's name... I just could not find a better name.

 

[bronsuchecki]

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!?

The premium in India and China is not for 400oz bars, but for smaller forms and particularly in India there are import duties and other taxes that go into the premium. The demand in India and China is high, but it is not translating into premiums for the raw wholesale form (400oz bars).

Hmm... When he sees bullion banks desperately bidding on Perth Mint's refining output he'll let us know?

My statement was about bullion banks and 400oz bars. Your quote is referring to demand for coins, two different markets. You are missing the whole point of my comment, which is that retail level demand, premiums do not reflect a shortage of gold at the wholesale level and a run on the fractional reserve bullion banking system.

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'

You are misquoting again. The restrictions I was talking about was restrictions by GoldMoney and Bullion Vault, not any restriction in any market. I picked GM and BV because they buy 400oz bars for their pooled storage products. If there was a shortage/run on the wholesale gold banking system then GM and BV would have problems sourcing 400oz bars. They are not.

 

[Potemkin]

You found this thread quite fast. How come?

 

[pmbug]

Welcome to the forum Mr. Bronsucheki. I'm familiar with your posts over at Silver Stackers. Cheers.

 

[bronsuchecki]

You found this thread quite fast. How come?

Google blogger tells you what sites people visiting your come from, I saw it because people clicked on the links to my blog from this topic.

 

[bronsuchecki]

Welcome to the forum Mr. Bronsucheki. I'm familiar with your posts over at Silver Stackers. Cheers.

Thanks. Sstackers is the only forum I have time to check personally, too hard to keep up with all the others I have been on (see here http://www.perthmint.com.au/research_about.aspx). Feel free to leave a comment on my blog letting me know if someone is laying in to me and you want to get a debate going.

 

[Unbeatable]

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. 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.

My original quote clearly shows that you are talking about the 400oz bar wholesale market, looking for bullion banks bidding on mint output and looking for restrictions placed on the Gold Money and BullionVault purchases etc.

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. 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.)

 

[Unbeatable]

But if you want me to address your specific quotes...

When I see... bullion banks desperately bidding on the Perth Mint's refining output... I will let you know

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?
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.
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...


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

http://www.pmbug.com/forum/f2/bank-england-may-have-sold-1300-tons-since-jan-2596/

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

while yesterday HSBC released eligible inventory, today Scotia was forced to hand over registered gold straight into JPM's eligible pile: this is perhaps the first time we have seen this happen laterally between two vaults, without an intermediate warrant detachment step. Furthermore, with HSBC moving 43.4K oz from Registered to Eligible, we would expect either another major Comex withdrawal in the next few days from HSBC, or this is merely HSBC making room for further gold "requests" by JPM.

http://www.zerohedge.com/news/2013-...atta-jpmorgan-we-urgently-need-some-your-gold

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.

As for your other quote

Just watch Bullion Vault and Gold Money... for reports of difficultlies in getting 400oz bars and restrictions on how much gold can be bought,

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.

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.

 

[pmbug]

Bronsucheki, are you able to confirm or deny this claim (at least as it pertains to the Perth Mint) from Bill Haynes?

...
Most physical gold sold in Asia carries premiums, especially in India, and bullion banks are moving to fill that void in order to capture those lucrative premiums.

They are doing so by procuring physical gold in the U.S., not only from the COMEX warehouses and ETF liquidations, but directly from refiners. The gold is then converted into forms which Asians are comfortable with -- mainly kilo bars, and then the gold is shipped to Asia.

Several weeks ago I exchanged emails with a rep for a major precious metals refiner about the huge ETF liquidations and speculated that the liquidated gold was in fact going to Asia. After all, the gold coming out of the ETFs and the COMEX warehouses has to go somewhere.

The rep said that my speculation fit well with what his refinery was seeing. He said, “I think you are absolutely right given the level of large institutional demand we see for our kilo bars and 400 ounce bars that are going to New York and London.” New York and London are the off-loading sites for gold being shipped to Asia.

In another email, he said, “The bullion banks were buying as much metal from our company as they could get their hands on, just to ship to Hong Kong and Singapore.” So this is just further evidence that ETF and COMEX gold is going to Asia.
...

http://kingworldnews.com/kingworldn...re_Buying_All_The_Physical_Gold_They_Can.html

 

[pmbug]

Interestingly, Tekoa Da Silva published a very similar piece this morning:

I had the chance to reconnect with a source in the bullion management business, whose operations deal on a direct basis with the shipping desks at the GLD. While remaining unnamed at this time, it was a powerful conversation, and he was quite liberal in sharing thought.

Speaking to what his group is hearing from the main GLD custodian, he noted that, “GLD is collapsing in [terms of] the number of share issuance, and [is] being redeemed…we are hearing from my end…that the GLD main custodian has been collapsing it and redeeming it, and that gold is just being shipped via their shipping desk directly to Asia.”

He further added that, “It is quite clearly a major establishment using their shipping desk to ship gold bullion, and potentially having it re-smelted down in Singapore, Hong Kong, etc. It (the gold) is moving.”
...

http://bullmarketthinking.com/gld-i...-that-gold-is-being-shipped-directly-to-asia/

 

[Potemkin]

This thread started quite a controversy...

 

[bronsuchecki]

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.

Nope, it is not a sudden event, it will build up over time and signals will be given, see http://www.goldchat.blogspot.com/2010/07/degrees-of-distrust.html‎ (that does need some refinement but the basic idea is there). Bullion banks, just like any bank, will do everything they can to drag out and avoid a run, they aren't just going to throw their hands up at the first sign of trouble. Those "do everything" will be gradual at first and will be visible to us in the wholesale market who know what to look for.

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.)

There is separation between retail and wholesale. Most of the retail problems/premiums are driven by production capacity shortages rather than shortages of raw gold or silver. For example, during the 2008 financial crisis the blogosphere was going crazy about shortages of silvers, particularly, yet the Perth Mint was shipping in 20 tonnes of silver each week from London for about 20 weeks on end. Go and have a look at my blog around that time.

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.

 

[bronsuchecki]

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?

Nope, got that wrong. US Mint, yes needs to get metal from the market but the two other big ones - Canadian Mint and Perth Mint - are refineries so they source their own metal and in fact have excess left over after coining needs. Perth Mint refines around 6 tonnes a week and we use 10%, maybe up to 20% if lucky, for coin production. The rest we turn mostly into kilo bars and then sell it to the highest bullion bank bidder - it is that premium on kilo bars that tells us how desperate they are, in addition to where it is going and what form, gives a lot of info.

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.

We work with a range of bullion banks and have no exclusive supply arrangements. While we have customer privacy requirements, that does not stop us from making general statements about what we are seeing. And there is no such thing as market sensitive information in bullion - it isn't an equity.

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...

Actually, it would be more logical for us to hype up shortages so that we could increase coin and kilo bar premiums and make more profit. I've rarely seen any market comment coming out of the major refiners talking about how crap demand is. Shortage hype is used by coin dealers to 1. get people to buy now 2. pay excessive premiums. Perth Mint has a bit more integrity and we stick to the facts. Why do you think Perth Mint and I get so much crap on the gold blogosphere - because we are wrecking their sales patter.

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

You are on the right track here, a run is about liquidity, so the first action of a bullion bank experiencing a run will be to lease/borrow gold (not buy), which should show up in increasing lease rates (which has the effect of decreasing GOFO) - although lease rates are still quite low compared to stress periods in the past but trending up.

The 1300t story is another beat up, see here http://www.screwtapefiles.blogspot.com.au/2013/07/bank-of-england-vault-floor-layout.html the BoE said that the figure that Alasdair relies on for his whole thesis cannot be relied upon.

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

Those sort of inter-bank transfers are standard part of market clearing http://lpmcl.com/

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.

Signs of increased demand and just signs of demand, not a bank run and does not cause a bank run as the bullion banks just act as a broker between buyer and seller and let price manage it. It is only unallocated holders taking delivery that creates a run and possibility of default. That shows up in lease rates and the futures/forward market first.

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.

First sign will be premium increases, that is the key signal. And it won't be explicit purchase restrictions, more like delays due to "transport issues" etc.

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.

See my earlier comment on India. The Indian restrictions aren't doing anything to stop demand, it is just being smuggled. The Indian Govt actions are just about making their CAD figure look better to financial markets.

 

[bronsuchecki]

Bronsucheki, are you able to confirm or deny this claim (at least as it pertains to the Perth Mint) from Bill Haynes?

No can't confirm it directly as we aren't being given any 100oz (ex Comex) or 400oz (ex London ETFs) bars by bullion banks to melt and recast into kilo bars. However, we are seeing good demand for our refining output into kilo bars for shipment into China, Dubai and Thailand, so the Bill and Tekoa reports fit in with that.

 

[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

 

[bronsuchecki]

No problem, don't mind being challenged. This time is different to 2008 and certainly more stress, I'm just not sure there is a run on yet, but it is finely balanced I think. We are seeing very high premiums on kilo bars, premiums we haven't seen for a very long time.

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.

 

[Unbeatable]

Hi bronsuchecki, just some questions about your response,

Nope, got that wrong. US Mint, yes needs to get metal from the market but the two other big ones - Canadian Mint and Perth Mint - are refineries so they source their own metal and in fact have excess left over after coining needs. Perth Mint refines around 6 tonnes a week and we use 10%, maybe up to 20% if lucky, for coin production. The rest we turn mostly into kilo bars and then sell it to the highest bullion bank bidder - it is that premium on kilo bars that tells us how desperate they are, in addition to where it is going and what form, gives a lot of info.

I wasn't referring just to coin production, I realise that is a very small part of the total and also meant to include all london good delivery refineries in my statement, not just the mints. & though you say I got in wrong and that you have more than enough supply. In an earlier post you said -

during the 2008 financial crisis... the Perth Mint was shipping in 20 tonnes of silver each week from London for about 20 weeks on end.

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?

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?

You also say I'm being misleading, saying that they're paying $30 premiums in India because you say

In India there are import duties and other taxes that go into the premium.

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?

 

[bronsuchecki]

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?

Perth Mint is primarily a gold refiner and we get silver as a by-product of that gold refining. Normally the silver was enough for our coining needs but in 2008 the demand was so high we had to source silver externally. Since then we have picked up some more silver refining so have enough silver now, even with higher demand.

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?

1kg = $40,000, not exactly "retail" by most definitions! Bullion banks deal in any size - they cover all markets. 100oz gold bars are primarily a US market size. 400oz bars are usually used for investment, bulk long term storage, they are not really convenient for use in industry/jewellery/mint as you need a big caster to melt 400oz, plus 400oz is 99.5%. So, particularly in Asia, the smaller 1kg in 99.99% purity is preferred by jewellers. Plus when I talk about kilo bars wholesale, that is selling in half or one tonne lots, eg $20m to $40m deal size.

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?

Yes correct, the $30 would not include that import tax, but I believe there are some other duties/fees and often bullion banks selling into distributors in India include shipment and finance deals in the price, so I'm not sure the $30 is the full premium. However there is still a large premium in that market reflecting the restrictions and driving the smuggling, so I probably pushed my point too hard there. The premium is also highly volatile as the Indians are very price sensitive.

 

[bushi]

as for the original question re: is there/is there not a backwardation - it seems there is, but not terribly significant one - if you compare that, to backwardation in oil, for example:

image comes from Mike "Mish" Shedlock's blog post:
http://globaleconomicanalysis.blogspot.com/2013/07/gold-backwardation-conspiracy-nonsense.html

 

[pmbug]

Another anecdote for the fire...

Bloomberg News television today lets Mihir Dange, co-founder of commodity trading firm Grafite Capital, remark that his company bought physical gold eight weeks ago but still hasn't gotten delivery yet. Dange says "there's a huge run on physical now." ...

http://gata.org/node/12908

 

[Unbeatable]

Hi Bronsuchecki, my next question is -

When I said that if a wholesale supply problem/bullion bank run was in progress that I would look for 'signs that Bullion Banks are running short of supply and/or are being forced to help one another out'. I then highlighted a story that showed some unusual transfers regarding HSBC & Scotia moving gold into JPM's nearly emptied stockpile.

Your reply was...

Those sort of inter-bank transfers are standard part of market clearing http://lpmcl.com/

Even though I felt this part of my quote highlighted that is wasn't very standard.

this is perhaps the first time we have seen this happen laterally between two vaults, without an intermediate warrant detachment step.

Since my original post, the unusual transfers have only continued, with this story from ZH yesterday.

The Color-Coded Comex Crunch: Behind The JPMorgan Golden "Musical Chairs" Scramble

http://www.zerohedge.com/news/2013-08-12/color-coded-comex-crunch-behind-jpmorgan-golden-scramble

It covers a range of transfers which all ultimately have ended up with JPM receiving the majority of the gold & where

the only net exit of gold from the Comex took place at JPM. Everything else was, well, a "musical chairs" scramble to actually obtain the gold.

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.

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.

My question to you is, having seen how these unusual transfers have continued since my original post do you still think -

Those sort of inter-bank transfers are standard part of market clearing http://lpmcl.com/

Or would you say that now it does look like something more is afoot?

 

[Unbeatable]

Bronsuchecki, when I brought up the fact that the RBI restrictions may have been influenced by the bullion banks to decrease demand for physical gold from the biggest/2nd biggest consumer, your response was -

The Indian restrictions aren't doing anything to stop demand, it is just being smuggled. The Indian Govt actions are just about making their CAD figure look better to financial markets.

While I COMPLETELY agree that Indians will just smuggle in gold to make up most of the difference I believe one specific action bought the bullion banks some much needed breathing space and that was the banning of buying gold on consignment on the 13th of May.

Any business in any field used to operating on consignment obviously won't have the cash flow to be able to pay for new orders in cash so this will cause demand to plummet. Unfortunately the black market operates mostly in cash too so it wouldn't be able to make up most of the difference.

As a result what we saw was India 'officially' importing a massive 142 tons in April, a massive 162 tons in May and then a capitulation to a paltry 31 tons in June. Personally, I don't think Mr. Naidoo had the cash flow to buy all of the smuggled gold for cash that he would usually pay for on 60 or 90 day consignment, so I think overall Indian demand pressure on physical gold did decrease at the end of May and through June even though there was of course a considerable increase in smuggling.

'Possibly' partly as a result, you'll notice through May and most of June, withdrawals from the Comex dropped to an avg. of 330k ounces a month vs. 750k a month they were hemorrhaging in January to April. (Comex withdrawals picked up at the end of June again) and the one month GOFO rate which had been trending towards negative and hit it lowest point YTD on the 14th May then also managed to hold off going permanently negative for another 55 days, all the way until July 8th.

03-May-13 0.17000
07-May-13 0.16000
08-May-13 0.15600
09-May-13 0.09333
10-May-13 0.08400
13-May-13 0.03833
14-May-13 0.00333


While I'm sure you'll disagree & perhaps rightly that the decrease in Indian demand had an impact on Comex withdrawals &/or the GOFO rate.

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)?

 

[bronsuchecki]

this is perhaps the first time we have seen this happen laterally between two vaults

Has ZH been following these comex reports for the past ten years? I doubt it. I am sure if I had the time and went through all the reports I would be able to find this happening many times. One also needs to consider that if a BB is doing other movements/transfers as well as to another BB's vault, that is not going to be visible as the aggregate number would combine both. So one cannot say this is unusual.

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.

The transfer from registered to eligible is why one needs to add both stocks together and compare that to open interest, which is what I did in this post. The current coverage ratio for gold is 17.7% and silver 24.5%. Looks like plenty of metal for redemptions.

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.

How long do you think banks runs last for? I note no commentator is really putting a date out there, except Jim Sinclair "because of the continued fall in gold inventory that within in 90 days or sooner the Comex must change its delivery mechanism". Personally I think by mid-Oct Comex will still be going on as per normal and the BBs will still be around.

My question to you is, having seen how these unusual transfers have continued since my original post do you still think

As noted above about ZH, I question whether there is any proof these are "unusual transfers".

 

[bronsuchecki]

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)?

Yes, as India had a relatively open gold import system the sudden rule changes crimped legitimate imports but the smuggling network was not in place to take up the slack so that would have had the net impact of restricting demand. We have recently seen a pick up in demand from other countries which tells us smuggling has started back up.

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."

 

[pmbug]

...
The transfer from registered to eligible is why one needs to add both stocks together and compare that to open interest, which is what I did in this post. The current coverage ratio for gold is 17.7% and silver 24.5%. Looks like plenty of metal for redemptions.
...

Have you by any chance been tracking / charting this metric (since at least the time of that post)? It would be interesting to see the trend and historical action in that context.

Even so, it seems to me that that metric doesn't tell the whole story. It might be the best indicator of whether the COMEX is in imminent danger of default, but if both denominator and numerator of the ratio are shrinking (and I'm not sure if they are, as I don't watch the COMEX open interest closely), you would miss the story on the waning vault inventories. Has open interest been falling in the wake of MF Global and Knight / PFG Best? I seem to recall reading commentary to that effect in the weeks following those events.

 

[Aubuy]

Yes, as India had a relatively open gold import system the sudden rule changes crimped legitimate imports but the smuggling network was not in place to take up the slack so that would have had the net impact of restricting demand. We have recently seen a pick up in demand from other countries which tells us smuggling has started back up.

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."

By 2025 India will be the most populated country in the world even surpassing China. Gold will be the least of their worries. They are going to be running out of everything:

http://en.wikipedia.org/wiki/Demographics_of_India

 

[Unbeatable]

Thanks again for your well thought out replies bronsuchecki, it nice to get the other side of the common arguments from someone who works in the industry.

You've said that there is no real proof that the transfers I've highlighted are particularly unusual because you doubt the ZH guys have properly scrutinized all the past Comex transfers, which is fair enough. You also make a good point that the current coverage ratio for gold is 17.7%, which I can see from the post you linked to is not historically low.

But my final attempt on this front is to ask you. Do you not at least think this is 'very unusual'?

I obviously haven't scrutinized the Comex history but a bullion bank losing 80% of their combined stockpile over a period of 7 months, I would imagine is unprecedented & would certainly fall under 'very unusual', no?

 

[Unbeatable]

Also I see India has just announced

The finance ministry lifted the import tax on gold to 10% from 8%. The tax on silver was also raised to 10%, from 6%. India is the world's biggest gold consumer and a leading market for silver.

http://online.wsj.com/article/SB10001424127887324769704579010164286710906.html

Now you say

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 Indian Govt actions are just about making their CAD figure look better to financial markets.

But the entire annual silver supply (mine+scrap) is only worth +-$20 billion at current prices and even if India took a much greater than usual share of that it would only have a negligible impact on their CAD, so why do so much to discourage silver imports too?

 

[Unbeatable]

Regarding your metric of comparing open interest to total Comex stocks (As well as 2-4% deliveries) as a key indicator for Comex stress and risk of default. Isn't this much less relevant now, as it fails to take into account the presence of the new physical delivery behemoth of the Shanghai Gold Exchange ?

Rather than your indicator, isn't it possible to tell whether the Comex is not only under stress but actually in a form of 'technical default' just by looking at the premiums on the SGE?

Maybe I haven't thought this through but I think -

'When the Shanghai premium makes standing for delivery on the Comex, less the expenses of transporting, insuring & refining that delivery to the SGE profitable for a third party, then the Comex could be said to be in 'technical default.''

Why?

1. Currently the average ratio of SGE monthly physical deliveries to total comex stockpiles is about 85%! (The SGE has delivered an average of +-180 tons of gold a month this year and the total of the enitre Comex stockpile is only +-220 tons)

Which means that once the abitrage highlighted in bold becomes reasonably profitable for a third party, the free market should take advantage of it, & it would take less than two months for the Comex stockpile to be drained.

Currently the SGE premiums are $30+ an ounce over the Comex price.
This means that there is a +-$1 million, pre-expense profit per ton of gold for conducting that abitrage.

Though it may be difficult to put a number on it, my question to you, as someone who may have some knowledge of transport, insurance and refining costs is -

Would you estimate that it costs more than a million dollars to transport, insure and refine a ton of gold from London for SGE delivery and if so, at what kind of Shanghai premium do you think that the abitrage would be profitable/look attractive to a third party? (I personally have no idea)

But If the SGE premium already makes it profitable to arbitrage between the two exchanges, then IMO, it means that the Comex is preventing the free market from doing its' job and therefore never mind 'stress' or 'risk of default', then 'technical default' could already be said to have mathematically occurred & it is only being disguised by 'capital controls' designed to limit/prevent physical withdrawals from the Comex.

(One of the only counter arguments I can see, is that perhaps the premium is related to limited refining capacity & that there is plenty of raw gold available if you can find someone with the spare capacity to refine it. & while this may have been the case in March when SGE made a massive 297 tons of deliveries. In July, SGE deliveries were a relatively low 72 tons & yet... the high, $30+ premiums have remained? I'm also lead to believe most refiners incl. the Perth Mint are not pulling the 7 day & night full capacity weeks you were earlier in the year either, so it would appear to be a supply and not refining capacity problem.
http://www.goldminerpulse.com/v/shanghaiGoldExchangePhysicalDelivery.php )

 

[Jay]

snip:

That JPMorgan has been scrambling day after day in the past week to meet gold delivery requests directed to its vault located deep under 1 CMP is no secret, at least not to our frequent readers. This peaked on Monday when, courtesy of a color-coded Comex scheme, we showed how panicked the lateral moves between various Comex gold vaults had become to preserve the illusion of physical availability.

good comments (but I'm "easy"):

http://www.zerohedge.com/news/2013-08-14/why-gold-spiking

 

[rblong2us]

eeerr

from a general news article on ZH -

Gold demand fell 12% to a 4-year low of 856.3 tons in Q2, according to the World Gold Council. According to the report, central bank gold acquisitions fell 57%to 71.1 tons in Q2 and gold ETFs post outflow of 402.2 tons in Q2. Paulson & Co. cut its stake in SPDR Gold Trust in Q2, whilst there were also reports that Soros dumped his SPDR stake.... China July refined copper output at 534,600 tons.

 

[pmbug]

"gold ETFs post outflow of 402.2 tons"

Does this mean that investors pulled the dollar equivalent of 402.2 tons out of the paper markets? That, IMO, doesn't really speak to demand for physical gold.

Similarly, Paulson's stake in SPDR has nothing to do with physical demand.

Also, I wonder if the World Gold Council's report of central bank acquisitions includes China. IIRC, China doesn't publish or release that info to the WGC.