17 April 2013

Gold Daily and Silver Weekly Charts - And Most Importantly Why?

Stocks were weak today, and volatility was up as the market was on edge.

There was bad news and a guiding down from the tech sector today.

The miners got hammered again, hit by the double blow of a sell in stocks and weakness in the metals after the recent 'flash crash.'

There is intraday commentary here that I suggest that you read.

In it I lay out the general reasons why such an historic decline would occur drawing on all the data I can find.

I do not believe that this was just a liquidation by some pension funds. I do not believe for a minute that the fundamentals have changed, not with competitive devaluations in the currencies going on.

So now we look for other possibilities. Those could be grouped loosely into systemic and incidental.

Systemic can be some general liquidation event which is not likely given the performance of other asset classes like stocks. I have had an eye on the carry trades like yen, but I am not seeing that yet. Obviously selling begets selling as margin calls occur, but that did not start this.

So, are the central banks pounding the metals and select commodities to lessen a shock when a major player makes an announcement? Eyes on Europe, which could be restructuring the membership of the Eurozone, or adopting some monetary policy in the manner of Japan for example.

For the non-systemic we look for particular incidents. Did some major entity go to either the Comex or the LBMA and demand delivery of their bullion? We know that both of those institutions are highly leveraged without knowing the exact number. We also know that supply is tight. 

A major request for delivery could set up a cascade of defaults, and involve the derivatives markets, where JPM holds rather large positions in gold and silver. This data is released quarterly by the OCC, of recent notoriety for overlooking irregularities by its banking clients in the foreclosures scandal.

A fellow from the GLD gold trust was on financial television around the close of trade, and in addition to the annoyingly snarky questions put forward by the spokesmodels about gold, he did in fact plainly state that GLD holds its bullion with HSBC in London, in LBMA ready bars. 

And he went on to say that the policy of GLD is not to smooth their inventory using hedging, but to maintain their inventory roughly 1 to 1 of allocated gold with respect to tracking the gold price.  So, it seems very likely that GLD was selling a lot of bullion in London and it is LBMA ready.  And it is their policy to just move the bullion within the vault from one owner to another.  So if the LBMA needed some bullion quickly, they would tend to get it from GLD or a bullion bank, and not from the Comex where the bars are of a different size and specification. 

As an aside, several people have said, "Oh Jesse are you so naïve to think GLD has any gold?"  And the answer is, yes I do.  For GLD not to have ANY gold would be insane.  Even a blatant Ponzi scheme has to keep cash on hand to cover redemptions.  The first time they default is the last. 

I just don't know exactly how much GLD has, and whether it is 1 to 1 or not.  I don't think there are any auditor reports that I can go to and look at their allocated inventory bar for bar, and say, "This is exactly how much they have."   But I am sure they do have some amount.   I find it hard to imagine how they maintain their ratios in such volatility without resorting to hedges and leasing.  But they say that they do. 

I am trying to eliminate the least likely things, and highlight those that remain more probable. This way I can have some rough models with which to evaluate new data as it becomes available, and adjust the probabilities accordingly.  If you want to do in possibilities without constraint or likelihood, then have fund making a long list that gains you nothing.

As an aside, this is one of the ways I used to find and diagnose difficult trouble in major communications systems where there was a problem, but the cause was not readily identifiable, and all the usual suspects had failed so it bubbled up to the fifth tier support guy. 

Slowly, carefully, sorting and categorizing the data. Assuming little, testing everything, all the while looking for the major systemic pivot points that would provide the ability to eliminate some possibilties. The major problem in this case of course is that the data is often hidden, and willfully.

I think it is more and more obvious to me that we are still just children playing on a beach, on the shores of a vast ocean of the unknown and the unknowable.

That was Newton who said that, and I am leaning on him.  Newton was so intelligent that he was smart enough to realize who he was, and what he did not know.  And that is the beginning of wisdom, to see so far that you can look back and see yourself as you are, and your place in things, as if from a great distance.
“I do not know what I may appear to the world, but to myself I seem to have been only like a boy playing on the sea-shore, and diverting myself in now and then finding a smoother pebble or a prettier shell than ordinary, whilst the great ocean of truth lay all undiscovered before me...If I have seen further it is by standing on the shoulders of giants.

Gravity explains the motions of the planets, but it cannot explain who sets the planets in motion."

Isaac Newton

This from one of the greatest minds in modern history.

Have a pleasant evening.