10 August 2015

Gold Daily and Silver Weekly Charts - Bottom Scraping the Silly Season

Gold and silver popped a bit today, from what can only be described as a 'deeply oversold' condition.   And weakness in the dollar index certainly was a factor, although again it is good to keep in mind that the DX index is largely outdated, and just the inverse of the Euro which is undergoing its own set of secular and systemic problems.

Bottoms and tops tend to be marked by extremes.  There are extremes in sentiment of course, and extremes in the measures by which those who feed off the productive economy seek to hand off their 'investments' to others, and to wring the last dimes out of the public.

I think we might be approaching such a point in the bond and equity markets.  And we have certainly been seeing extremes in sentiment with regard with gold and silver in both directions here.

Of course we are well familiar with the 'pet rocks' crowd, who are falling all over themselves to say increasingly absurd and self-referential things largely about personal taste and bias that do not reference the current reality and even history.  The central banks of the world became net buyers of gold in 2006 or so, and this buying of physical bullion is continuing to grow in statistics that are easily discovered if one looks for them.  This is not to be disregarded, and yet it is.

But in fairness, such times also give rise to some hyperbole on the part of the beleaguered metals bulls, and some misconstruing of what is happening in some of the markets, in their enthusiasm.  There is a creeping inflation in sensational headlines for internet 'clicks' which translate to readership and dollars.  

A recent example was describing the actions of JPM in making a large amount of bullion available to cover demand recently as dramatically 'saving the exchange from default.'

As I have taken some pains to explain in the past, the Comex is unlikely to default, given its current structure and nature which I have described colloquially as The Bucket Shop.  

There is not enough physical action on the Comex in the metals, with the exception of silver which is largely due to the actions of CNT which is using it as a wholesale delivery mechanism, to warrant many serious concerns about a physical default.

But for those who may call out this sort of excessive language as a strawman for ridiculing all examination of the antics at The Bucket Shop is equally misfooted and silly.

Any analysis of supply and demand and delivery that does not consider price, the price setting mechanisms, and the major players dominating the game is probably naive, and possibly a bit disingenuous.  To talk about supply and demand without regard to price is misleading and meaningless.

For the Comex, to consider all the inventory held in their certified warehouses as deliverable at the current price is presumptuous.  This is like saying that all the people in the country are there to provide labor at any price without regard to the job or their willingness to do it.  Certainly you could say you will not run out of labour if you can conscript everyone at will, but that is hardly a market.

Once bullion has been certified acceptable into a Comex warehouse there is some incentive to keep it stored there if one is merely using it for speculative purposes, because you are merely holding a warehouse receipt for it, and taking it out of the system adds some friction and expense to the transaction if you intend to bring that bullion it back in again.

By the way, as Koos Jansen informs us, this is the rule at the Shanghai Gold Exchange.  If you take delivery of gold it is withdrawn out of that system.  And this rule does not seem to deter people from doing business there, as their deliveries dwarf the Comex.  The SGE is oriented towards actual buyers and sellers, and not so much to facilitate mere price speculation.

It is no accident that only '2% to 4% of the contracts at the Comex' actually take delivery of the metal.  That is what opens it up to large scale paper speculation if the regulators and exchange permit it.   And the chart of the ratio of contracts open to ounces deemed deliverable by the owners now at historic highs compared to the norm at the Comex itself!

Price matters.

If a person decides that the current price is an acceptable price for any number of motivations, they may rather easily place their eligible inventory at the Comex up for delivery to another by declaring it to be 'registered.'

Excessive attention to the technical details of how things are done in a certain place, while ignoring other equally important dimensions of the equation  may cause one to completely overlook all the other positions, motives, and conversations that may be occurring amongst the players, as we saw recently in the case of LIBOR and the London gold fixes.

Talking about even detailed supply and demand, without considering who is delivering what and at which price,, in the context of the current market dynamics of sizing and positioning is just talking without considering the underlying information that makes the market.  And I would like to think that most people familiar with markets and speculation would know this.

People tend to talk their books and their biases.  I get that.  And people may legitimately disagree about things, and still be friends, as long as they are acting in good faith and with a civil manner.  That is essential to sorting things out.

But when an argument starts off with an ad hominen characterization, as so many precious metal comments seem to be couched in this bottom scraping silly season, then one has to raise a hand and say that this is more distraction, a very weak argument, and not useful information.  And there is certainly enough of that in the 'pet rock' school of analysis.

Those who are standing for reform in the markets are a small minority these days indeed.  And for them to cut off others because they do not find their politics or their religious beliefs or race or any other of the myriad of things that make a person who they are in good conscience, are asking to fail alone in a contemptible and miserable struggle.

Reform must be a broad principle that unites diverse peoples.   Because the greed and pride that unites their opposition is certainly stronger and more broadly funded, and relying on the kind of weakness in character that finds at least some place in most people's hearts.

Based on the number of financial scandals in a remarkably broad range of major global markets, those who think that we are not enduring a time of excessive market manipulation and pervasive dishonesty must be living in a cave, or in a deep well of subjectivity.

Have a pleasant evening.