11 September 2013

NAV Premiums Of Certain Precious Metal Trusts and Funds - Physical Gold Demand Provokes Another Bullion Redemption - A Murder of Black Swans

The woods decay, the woods decay and fall,
The vapours weep their burthen to the ground,
Man comes and tills the field and lies beneath,
And after many a summer dies the swan.

Alfred Lord Tennyson, Tithonus

N’en déplaise à ces fous nommés sages de Grèce,
En ce monde il n’est point de parfaite sagesse;
Tous les hommes sont fous, et malgré tous leurs soîns
Ne diffèrent entre eux que du plus ou du moins.

Nicolas Boileau-Despréaux, from the frontspiece of Mackay's Madness of Crowds

The short term demand for gold bullion provoked another exchange of units for bullion from the Sprott Physical Gold Trust.

The fund saw 1,500,000 units exchanged for 12,460 ounces of gold bullion at the rate of .008 ounces per unit.   That is about a $17,000,000 transaction.

I believe that this redemption feature is one of the reasons why the Sprott funds tend to hold their premiums a little better than others, although in the longer term that makes little difference. I use it to measure the overall tenor of the market, and also to help pick certain entry and exit points.

Since there is no real financial advantage in the exchange, one would tend to attribute this to the huge short term demand for physical gold bullion that makes the forward rates negative and drives other behaviours not ordinarily seen.  All things considered where else is one going to obtain a large amount of high quality physical gold at these prices?

Grant Williams says in a recent interview that he has heard of requests for GLD bullion redemptions in excess of the $14,000,000 minimum that have been recently denied.   If this is in fact the case, it is a sign of tremendous short term pressure in the bullion market that could be a sign of the failure to reach a genuine market clearing price.   I find it hard to believe that GLD could refuse such a transaction given the terms and condition of their fund. 

Normally I would discount such speculative things, but given the astonishing fact that the Fed literally denied the legitimate request of the Bundesbank for the repatriation of their national gold is a clear sign that something seems to have gone terribly wrong.   And the other inventory measures I regularly show are out at the tails of probability and sustainability.

This type of protracted market distortion can create some very difficult conditions that may place the integrity of the markets at risk.   It reminds one of the late stage MF Global situation, but on a significantly larger scale.  These jokers are so leveraged that they seem to be robbing Peter to pay Paul, and everything is flowing until the music stops, and then ba-boom.  Who could have seen that coming?

Thus a single trigger event can set off a cascade of nearly catastrophic events in a system that has been allowed to become overly fragile.  And that fragility is very often directly tied to interconnected rehypothecation of assets, a mispricing of risk, and excessive leverage.  That is the story of the most recent financial crisis, and why there will likely be more.  They ignore the lessons of history in their arrogance and their greed.  Being a sociopath or narcissist means never having to feel that you're sorry, much less say it.

I don't see any other way to explain this, what I see happening.  And the consequences could be quite dramatic.  

This could make for a scandal of memorable proportion, even for this time of financial scandals.  Is there any market that is not being rigged and manipulated by the financiers and their friends?   Their hypocrisy seems to know no bounds.