23 February 2016

NAV Premiums of Certain Precious Metal Trusts and Funds - Capture and Crash

The gold/silver ratio is about 80 which is historically very high.

I believe that this is attributable to the price leadership of gold because of a flight to safety from economic uncertainty and policy errors such as negative interest rates.

Further, I believe that there is a looming short squeeze in the physical gold market which, if unaddressed by reforms and market pricing, will cause a dislocation in the global bullion markets.

I am obviously less certain about the second reason, but the data lend themselves to this interpretation. And I believe further that failing to address this mispriced risk is a failure of the regulators and the exchanges to rein in the excesses of the 'synthetic gold' derivative trade.

This is not an incidental lapse, but at the heart of their responsibilities in oversight, and further symptomatic of the financial crises which we have been suffering since at least 1999. Indeed, an environment of Too Big To Fail banking entities and captured and complacent regulators is a pernicious influence on the health of the economy and a barrier to a sustainable recovery.

When this trade cracks open, risking collateral damage in the banking system, there will be those who will say that 'no one could have foreseen this coming.' This is nonsense. It is hard to see only because those whose responsibility it is to protect the public against such abuses is standing idly by while it happens, allowing the insiders and perpetrators to hide their actions and its consequences from the rest of the market for the sake of outsized, short term personal profits.