12 September 2012

Metals Bear Raid - Sprott Raises $392 Million For Gold for PHYS - Dalio Says 'Shift Assets Into Gold'

"Gold was not selected arbitrarily by governments to be the monetary standard. Gold had developed for many centuries on the free market as the best money; as the commodity providing the most stable and desirable monetary medium...I see a great future for gold and silver coins as the currency people may increasingly turn to when paper currencies begin to disintegrate."

Murray N. Rothbard
On the bright side, the Sprott Physical Gold Trust (PHYS) completed its secondary offering and the underwriters allotment, raising $392 million to buy additional gold bullion to be held in the trust.

The report does not indicate if they have secured title to the gold yet. Even after they have secured title, it often takes weeks and even months to achieve actual delivery to their vaults. The recent lag times in their Silver Trust expansion, and the types of bars they received, suggested a tight market for the real thing.

As you may recall, I think that it will be in the high quality bullion bar bulk market where the initial signs of failure to deliver will occur. The peripheral and coin markets will stay relatively healthy until the dawning comes, and then dry up overnight. The retail crowd are always the last to know. So lets keep an eye on this.

The metals were smacked hard today in what *looked like* a secondary reaction to the complications in Europe over their rescue funds. What initially looked like good news for the fans of Draghi was tarnished by a misunderstanding about the role and scope of the German Parliament.  There are also quite a few unanswered questions about how it could be implemented in specific countries.

Stocks recovered quickly but the metals remained a bit subdued.

The primary reason for the drop seems to be the traditional pre-FOMC metals smackdown. As you know the FOMC is in a two day meeting with their announcement coming tomorrow. Why does these attempts to dampen any enthusiasm for gold and silver seem happen around key central banking events?
"The modern mind dislikes gold because it blurts out unpleasant truths."

Joseph Schumpeter
The violence of the selling was concentrated and hard as you can see from the intraday silver chart below. It looks like the infamous "Dr. Evil" strategy in which a big player comes in to a thin market and runs the stops with a mass of concentrated sell orders in order to manipulate the price lower.  They make their money and then move along.  

It is illegal to do this, but in some cases and markets the regulators turn a blind eye to these shenanigans.  Professional courtesy, indirect policy action, perception manipulation, call it what you like.  It may be why futures volume on the CME is down 40%.

Bad behaviour drives out the good, in exchanges as well as companies and other organizations.  Corruption is a steep tax on expected profits, unless you are one of the profiteers, and a member of the audacious oligarchy.
"Ok guys, you're mad.  Now how are you going to stop me?" 
JPM must be quaking in their shoes over the rumoured exposé from the CFTC.  

I will say it again. This will end, eventually. And badly.

But in the meanwhile, investments with less counterparty risk that offer a stable store of value will command increasing interest among first the smart money, and then more widely by the public after it has appreciated even more significantly.
"Gold is primarily an alternative to fiat currency and a storehold of wealth. The main advantage that gold has over other currencies is that it can’t be printed. While we have just gone through a period in which the degree of monetary stimulation has ebbed, the ongoing deleveraging means that developed economic will remain highly reliably on continued stimulation for years.

By the end of the quarter, central banks were starting to shift back toward renewed stimulation. In addition, one of the primary disadvantages of gold relative to fiat currencies, that it doesn’t pay interest, is mitigated by low rates in the current environment. Real interest rates are likely to remain very low and below real growth rates as a means of combating deleveraging and improving debt sustainability (as described in our “beautiful deleveraging” work). As such, deleveragings strongly favor shifts from financial assets into gold and other tangible assets."

Ray Dalio, from his most recent hedge fund letter

As a side note, a virus of some sort has kept me struggling and a little shaky this week, and so I am especially grateful for the help and support I am getting from 'the invisible community of the mind and of the spirit.' They are helping me to stay abreast of the news. You know who you are, and you make a difference in so many ways, some of which you may not even realize, from passing along news items to helpful feedback and even highly welcome encouragement. Special thanks to 'Delray Beach.'

Sprott Physical Gold Trust Announces Completion of Its Follow-on Offering of Trust Units
Sep 12, 2012

TORONTO, Sept. 12, 2012 /CNW/ - Sprott Physical Gold Trust (the "Trust") (NYSE: PHYS / TSX: PHY.U), a trust created to invest and hold substantially all of its assets in physical gold bullion and managed by Sprott Asset Management LP, today announced that it has completed its follow-on offering of 26,450,000 transferable, redeemable units of the Trust (the "Units") at US$14.84 per Unit for gross proceeds of US$392,518,000 (the "Offering"). This includes the exercise in full by the underwriters of their over-allotment option.

The Trust will use the net proceeds of the Offering to acquire physical gold bullion in accordance with the Trust's objective and subject to the Trust's investment and operating restrictions described in the prospectus related to the Offering. The net proceeds of the Offering per Unit are greater than 100% of the most recently calculated net asset value per Unit of the Trust prior to, or upon determination of, pricing of the Offering, as required under the trust agreement governing the Trust...