Announcement

Collapse
No announcement yet.

Debunking the Precious Metals Fear Mongering Campaign - Erik Townsend

Collapse
X
 
  • Filter
  • Time
  • Show
Clear All
new posts

  • #16
    Re: Debunking the Precious Metals Fear Mongering Campaign - Erik Townsend

    Originally posted by $#* View Post
    Here we disagree. The existence of PM derivatives does is not diluting the value of physical PM. When you have a unique price discovery process for paper and physical (delivery) PM, and the paper PM has a larger share in trading, what that means is only that the price of physical PM can be easily manipulated by derivatives players. Add to that the compounding effect of leverage used in trading paper PM and the result is that it's very easy to have an artificial (manipulated) process of price discovery for physical PM.
    Not easily. Only short-term within certain limits. Paper trading increases volatility and distorts short-term price dynamics. This shell game only exists because there are enough patsies ready to lose their money. Long term this game changes nothing. PMs keep moving from mines and CBs to jewelery and physical PM investors.

    It is possible that being arrogant SOBs, some paper pushers will be caught with their pants down and some shorts will not be covered. But then the gov't and CBs will bail them out either by giving them physical metal or suspending PM trade altogether. Either way, most people will not pay attention.
    медведь

    Comment


    • #17
      Re: Debunking the Precious Metals Fear Mongering Campaign - Erik Townsend

      Originally posted by jtabeb View Post
      Thanks for the really great article. There are much larger issues that I think you DON'T really cover here (but you do hint at them), but by and large this does an excellent job of explaining to retail investors what the should have already know before they invested their first dollar in any "gold" product.

      I think far too many poor retail investors don't or didn't understand what you have described above when they purchased their "gold". If they did, I think there would be far less demand for synthetic "gold" products and maybe more demand for the "other stuff".
      Camtender gets into one of the bigger points posted just above yours but I'd like to add my comments because I find the whole subject exasperating. I don't pretend to know much about this futures/derivative stuff but from reading this article I want to see if I understand how this works?

      First, isn't the spot price for gold set on the futures market? So if 101 investors are buying gold futures but only 1 is paying full price with the expectation of taking delivery, then you have a 100-1 ratio of gold futures buyers to physical buyers. So, out of 101 contracts to sell or cash settle gold, only 1 contract gets delivered. What was sold to the other 100 investors? A promise to cash settle on the gold price. Who sold it? Someone who agrees to take the other side of that bet. What impact on gold pricing, physical reserves or availability of gold to be purchased was made by the selling of these contracts? Potentially NONE if I'm understanding the author correctly. Basically the seller doesn't have to own gold to sell the contract. He (the seller) can stand in front of all demands to buy gold contracts (that cash settle) and absorb these buyers indefinitely assuming an unlimited pocket book or at least a limited amount of buyers (which is normally the case). IF the buyers are not looking for physical settlement, then there is a net of zero demand for gold and the price should move accordingly. The seller only has to cash settle at the end of the period with an occasional trader taking delivery of a small percentage out of comex. So, on any given day, price discovery on the gold exchange should reflect in some manner a ratio of naked (I use this term to mean someone without gold reserves) sellers to futures buyers with the sellers being able to totally control the gold pricing if they have deep enough pockets. Because no gold is required to be set aside to cover a futures sale, there is no price discovery that accurately reflects gold demand or availability of gold. Thus investor interest in gold does not translate into increased price vis-a-vie futures buying should a determined (naked) seller step in front of the buyers. Yet this is how the spot price is set? What am I misunderstanding here?

      So assuming I'm at least partially correct in my analysis of how this system works, what can an investor do to make sure the money he is investing will translate into actual gold demand for the purposes of price discovery? Nothing, apparently. I mean the physical bullion sellers usually mark up with regard to spot price. When the physical inventory of small gold dealers runs out then demand would be fulfilled via people standing for delivery. However, one still has to look to inventory levels to assess demand as opposed to spot price because of this built in ability of large sellers to manipulate/depress the spot price. I think this is why some analysts are using open interest and short positions to assess demand as opposed to price movements?

      The institutions I know of that appear to be legitimate and actually hold gold for their clients are Bullion Vault, Goldmoney, PHYS, CEF/GTU, GLD is a question mark for me because of it's opaque language regarding trustee accounts, audits, etc.

      Now, picture a large bank with unlimited funding from say a central bank (hell, with the size of the gold market the big banks can use the petty cash drawer), mix in cash settlement along with no position limits and one can easily see how price discovery is manipulated/controlled and takedowns are easily executed.

      While I agree with the author that an investor should know the rules of the game before investing, I don't agree that a commodity exchange should allow it's price discovery mechanism to be controlled through this cash settlement/naked futures writing scheme. Perhaps they need to separate the actual physical market from the derivative side for price discovery purposes and force 100% backing with metal on those contracts along with 100% contract price up front? I really don't know what would work, but what we currently have doesn't seem legit and practically begs for manipulation.

      The author also alludes to another problem and that is the ability of precious metal funds to loan or rent out their gold which is then resold into the market against the best interests of their clients. The same criticism applies to mutual funds that lend out shares to be shorted against the best interests of their clients. It's a fucked up world out there in high finance for sure and it appears rigged to me, but what do I know.

      Comment


      • #18
        Re: Debunking the Precious Metals Fear Mongering Campaign - Erik Townsend

        Originally posted by $#* View Post
        Here we disagree. The existence of PM derivatives does is not diluting the value of physical PM.
        Alan Greenspan in his congressional testimony DIRECTLY contradicts your assertion here. In fact, he makes the direct claim that derivatives are of benefit to monetary authorities PRECISELY because they absorb excess monetary emission that might otherwise flow into demand for real goods, namely commodities.

        In simple terms, the only reason the excess monetary/credit emission of the FIRE era has NOT produced massive inflation is because the derivative "sponge" soaked them all up.

        My question is thus "what happens when people loose trust in derivatives as an asset class"? Where will the flow of funds be directed? Will they lose trust is debatable, but that's not the question I'm asking here. (I obviously THINK that this process is already well underway, but that is a discussion for another thread.)

        The cause doesn't even have to be that people lose trust in derivatives. The actions of the FED show that simply monetizing these flows are producing the same effect. As long as the Fed monetizes bad assets on bank balance sheets, the effect will be detrimental and yield the exact opposite outcome that their increasing use was intended to produce.

        After all, $1.25 Quadrillion in derivatives (a Million-Billion to us lay people) dwarfs the actual tangible wealth in the world (including stocks, bonds and currency) by AT LEAST an order of magnitude, if not several orders of magnitude.

        These are the larger issues that this article hints at, but doesn't address in depth.

        I'm not refuting you, Alan Greenspan is.

        (And welcome back! You've been missed by at least one person 'round these parts )
        Last edited by jtabeb; 04-20-10, 11:57 AM.

        Comment


        • #19
          Re: Debunking the Precious Metals Fear Mongering Campaign - Erik Townsend

          "derivatives are of benefit to monetary authorities PRECISELY because they absorb excess monetary emission that might otherwise flow into demand for real goods, namely commodities."

          I don't see that, even if Greenspan said it.

          To the extent one party to a futures contract is hedging physical, that futures contract is not locking up moneys that would otherwise flow into physical. Same thing with forwards, swaps & leasing.

          To the extent the parties to futures contracts are pure speculators, they are margined to the hilt and there is no capital there that could flow into physical. Same thing with options.
          Justice is the cornerstone of the world

          Comment


          • #20
            Re: Debunking the Precious Metals Fear Mongering Campaign - Erik Townsend

            "First, isn't the spot price for gold set on the futures market?"

            Jesse has a nice piece on this recently:

            The Case for Position Limits: What is the 'Spot Price' of Gold and Silver And How Is It Set?

            http://jessescrossroadscafe.blogspot...nd-silver.html
            Justice is the cornerstone of the world

            Comment


            • #21
              Re: Debunking the Precious Metals Fear Mongering Campaign - Erik Townsend

              Originally posted by cobben View Post

              To the extent the parties to futures contracts are pure speculators, they are margined to the hilt and there is no capital there that could flow into physical. Same thing with options.
              When these "bets" go BAD, what happens to them? Answer is the Fed monetizes them. There is your capital source and there is also your BIG PROBLEM. Because if that capital ever leaks out of the financial sector AND into the tangible wealth sector.......

              Let's just say prices you see now for tangible goods would READJUST accordingly.

              Comment


              • #22
                Re: Debunking the Precious Metals Fear Mongering Campaign - Erik Townsend

                Originally posted by medved View Post
                Not easily. Only short-term within certain limits.
                In this case "easily" is a relative term. One can actually do the math and model the price displacement power of a dollar used for buying/selling a physical PM and that of the dollar to buy/sell a paper PM. With respect to "short-term" this is also relative, plus since the Goldman Sachs invention of anchoring OTC residuals (on contracts referenced to the spot price on regulated future markets), basically you can have a Vampire Squid entity making money in a perpetual scam by riding the spot price up and down. If it can be done with oil futures, it should be much easier to do with PM's

                Originally posted by medved View Post
                Paper trading increases volatility and distorts short-term price dynamics. This shell game only exists because there are enough patsies ready to lose their money. Long term this game changes nothing. PMs keep moving from mines and CBs to jewelery and physical PM investors.
                Here we disagree. First, if we dwelve a little bit into the history of commodity exchanges. The paper trading of commodities (and we are not talking only about PM or oil here)was allowed in order to stabilize the price, make the price discovery more efficient, reduce volatility and prevent the cornering of the market by a few large producers of physical commodities.

                In fact, the classic commodity speculators are good for commodity trading. They are necessary for having efficient commodity markets, and in this case it is true that no classic commodity speculator can have a major and long term influence on the spot price.

                The problem arises when a commodity (any commodity) is financialized, transformed into an investment instrument by a large institution such an investment bank. Such a financial entity not only that has disproportionate resources to influence/manipulate the price, but also can channel investment money from their clients in the direction they desire, becoming market makers and price setters.


                Originally posted by medved View Post
                It is possible that being arrogant SOBs, some paper pushers will be caught with their pants down and some shorts will not be covered.
                Well, it happened to Bear Sterns, when they were caught pants down, loaded with shorts in an attempt to hit on their financial competition (JPM and GS probably)


                Originally posted by medved View Post
                But then the gov't and CBs will bail them out either by giving them physical metal or suspending PM trade altogether. Either way, most people will not pay attention.
                Or the government can let them fail, and give their assets away to their competition. As it happened to Bear Sterns.... But it is true that either way, most people will not pay attention.

                Originally posted by skidder View Post
                Thus investor interest in gold does not translate into increased price vis-a-vie futures buying should a determined (naked) seller step in front of the buyers. Yet this is how the spot price is set? What am I misunderstanding here?
                If you refer to investor interest in physical gold or silver, you are correct.


                Originally posted by skidder View Post
                So assuming I'm at least partially correct in my analysis of how this system works, what can an investor do to make sure the money he is investing will translate into actual gold demand for the purposes of price discovery? Nothing, apparently.
                That is correct. About a year ago there was an interesting discussion on this forum, about the fact that there are actually two separate gold markets and spot prices for gold. One is the market for financial gold, having the COMEX spot price established for financial gold, and the other one is the gold market for the small physical PM, buying and selling retail gold products, with the spot price established on eBay. The difference between these two prices is perceived as premium for retail products.

                Originally posted by skidder View Post
                Now, picture a large bank with unlimited funding from say a central bank (hell, with the size of the gold market the big banks can use the petty cash drawer), mix in cash settlement along with no position limits and one can easily see how price discovery is manipulated/controlled and takedowns are easily executed.
                Yep. The potential collusion between large banks involved in gold/silver futures and large central banks (we are not talking here about the Central Bank of Albania), interested in keeping gold prices depressed, raises serious questions about the integrity of the price discovery process for PM markets.

                Originally posted by skidder View Post
                While I agree with the author that an investor should know the rules of the game before investing, I don't agree that a commodity exchange should allow it's price discovery mechanism to be controlled through this cash settlement/naked futures writing scheme. Perhaps they need to separate the actual physical market from the derivative side for price discovery purposes and force 100% backing with metal on those contracts along with 100% contract price up front? I really don't know what would work, but what we currently have doesn't seem legit and practically begs for manipulation.
                Here is the crux of the problem. Historically, commodity speculators (dealing in paper commodities and not interested in selling and buying the actual commodities) were welcomed on the futures markets, in order to prevent a few large producers to interfere with the prices. The classic speculators interested only in paper commodities had a beneficial influence on the price discovery process. The system broke down when big financial players were allowed to enter the future markets with formal or implicit exemption from position limits.

                In the case of PM futures, the situation is made worse because these big financial players, by definition, have to be in bed with central banks, which are interested in controlling gold prices.


                Originally posted by skidder View Post
                It's a fucked up world out there in high finance for sure and it appears rigged to me, but what do I know.
                Yep. And GATA has to do a better job in explaining to the public, why and how exactly is rigged. For that they need a better understanding of the market.

                Comment


                • #23
                  Re: Debunking the Precious Metals Fear Mongering Campaign - Erik Townsend

                  Originally posted by jtabeb View Post
                  To the extent one party to a futures contract is hedging physical, that futures contract is not locking up moneys that would otherwise flow into physical. Same thing with forwards, swaps & leasing.
                  That is the FULLY qualified statement of the year! (And begs the obvious question "What volume of transactions fail to meet this criteria?")

                  Comment


                  • #24
                    Re: Debunking the Precious Metals Fear Mongering Campaign - Erik Townsend

                    Originally posted by jtabeb View Post
                    Alan Greenspan in his congressional testimony DIRECTLY contradicts your assertion here. In fact, he makes the direct claim that derivatives are of benefit to monetary authorities PRECISELY because they absorb excess monetary emission that might otherwise flow into demand for real goods, namely commodities.

                    In simple terms, the only reason the excess monetary/credit emission of the FIRE era has NOT produced massive inflation is because the derivative "sponge" soaked them all up.
                    Well, that is the famous Greenspan Scam, and the reason the whole G30 was so keen on promoting derivatives. You are partially right, but paper futures have existed long before the Greenspan era and not only in gold. There are also paper pork bellies, and I haven't heard of any complains of JPM in collusion with the FED involved with depresing the spot of pork bellies....

                    The increase in the volume of derivatives has a depressing effect on prices of all commodities. Basically, the inflation produced by the Fed is absorbed by the continuous increase of the volume of derivatives. At a constant ratio between physical commodities and paper commodities, the effect of commodity derivatives on spot prices is minimal or non-existent as long as position limits (being them paper or physical) are enforced.

                    Originally posted by jtabeb View Post
                    My question is thus "what happens when people loose trust in derivatives as an asset class"? Where will the flow of funds be directed? Will they lose trust is debatable, but that's not the question I'm asking here. (I obviously THINK that this process is already well underway, but that is a discussion for another thread.)
                    Well, I think this subject has been discussed here before. Bart can explain it better than me. If people lose trust/interest in derivatives, then the Fed induces a deleveraging shock as they did when Lehman collapsed, and the the losses accumulated in the system are spread all over the world. The Fed in collusion with the minion banks has the power to do that. Do you remember that famous 666 paper? The mechanism they used last time is relatively simple.

                    Of course they can do that only if they are in collusion with a few big banks, and any such deleveraging shock would have as unintended effect a small proportion of losses showing on the balance sheets of those minion banks. But it's a mutual back scratching exercise, and the minion banks will skate free through a bailout, payed for by the taxpayer. It's the perfect scam: the big Wall Street crooks always win, while everybody else allways loses.

                    Originally posted by jtabeb View Post
                    As long as the Fed monetizes bad assets on bank balance sheets, the effect will be detrimental and yield the exact opposite outcome that their increasing use was intended to produce.
                    Not necessarily. The scam is quite sophisticated. By deleveraging the global financial system (as they did it in 2008) instead of having to cover the collapse of derivatives with high inflation, the FED transforms everything into losses for all those who indulged in the derivative fest. Naturally, the children of the Fed, who were involved in promoting the game and pushing derivatives, would take a small share of this loss. The Fed takes care of its children by cleaning their balance sheet.
                    Since they have to monetize only a small fraction of that bad debt, there is going to be no consequent inflationary shock, and metalman can keep watching keenly the treasury rates until he runs out of Visine. Most of the losses will occur (be transfered) elsewhere.

                    If the Fed had to monetize all the derivatives they pushed in the global financial system, then, I agree, the treasury yields would go through the roof, we would have hyperinflation and all that jazz.

                    Originally posted by jtabeb View Post
                    (And welcome back! You've been missed by at least one person 'round these parts )
                    Glad to be back, at least for a while. I missed too our conversations here.

                    Comment


                    • #25
                      Re: Debunking the Precious Metals Fear Mongering Campaign - Erik Townsend

                      Originally posted by jtabeb View Post
                      At a constant ratio between physical commodities and paper commodities, the effect of commodity derivatives on spot prices is minimal or non-existent as long as position limits (being them paper or physical) are enforced.



                      The Fed takes care of its children by cleaning their balance sheet.
                      Since they have to monetize only a small fraction of that bad debt, there is going to be no consequent inflationary shock,



                      But the ratio is NOT constant! Look at the growth of derivatives since they became unregulated, you see super-exponential growth ( size doubles while time interval halves).

                      Here is what happens when the Fed tries to do as you describe.

                      Comment


                      • #26
                        Re: Debunking the Precious Metals Fear Mongering Campaign - Erik Townsend

                        Originally posted by Camtender View Post
                        Exactly!

                        We just went in a big circle to come back to the same conclusion.

                        A derivative is something that derives is value off of something else. The PM derivatives are diluting the value of the PMs because it artificially manipulates the supply/demand curve.

                        Anyone who thinks they fully understand the derivatives markets and the resulting market effects is only fooling themselves.

                        Are people so arrogant that they fail to realize that people (us at Itulip) can read these articles and employ sufficient skepticism to pick up the facts and leave the subjectiveness behind?

                        So you don't like the people at GATA or Andrew or how they conduct themselves or argue their beliefs, but at the end of the day - the derivatives are diluting the value actual of physical PM's...............................
                        Even if that's true you fail to consider that this dilution is conversely diluted by derivatives in everything gold is valued against. The Forex market, for example, is much larger than the PM futures market and, by your argument, dilutes the value of all currencies. I may be wrong but I believe that the largest derivatives market out there is the stock index futures (E-Mini S&P et al) so their values are arguably way more diluted than gold or silver. The real problem, to me, still boils down to where the consumer is actually forced by government in his decisions: legal tender laws. All contracts must be derived from and settled in U.S. dollars.

                        Comment


                        • #27
                          Re: Debunking the Precious Metals Fear Mongering Campaign - Erik Townsend

                          John Embry of Sprott Asset Management


                          "While on the subject of gold manipulation, last month I referred to the cartel's specific modus operandi on those days when its members choose to take gold lower. However, this is only one of their ploys. Another page in their playbook relates to keeping enthusiasm in the gold sector as subdued as possible. Gold is seldom, if ever, allowed to rise more than two percent on a given day. If strong buying propels gold higher, massive selling inevitably appears when it has risen two percent and continues until gold is stopped dead in its tracks. The next day, to ensure that there is no follow-through fervor, any further upside is capped at a one percent gain. Following that, gold is held in check until the long speculators who propelled the original rise lose patience. At that point, the cartel looks for an opportunity to clean them out. I realize this sounds pretty Machiavellian but I can only point to the trading patterns as confirmation."
                          Attached Files

                          Comment


                          • #28
                            Re: Debunking the Precious Metals Fear Mongering Campaign - Erik Townsend

                            Originally posted by Mashuri View Post
                            Even if that's true you fail to consider that this dilution is conversely diluted by derivatives in everything gold is valued against. The Forex market, for example, is much larger than the PM futures market and, by your argument, dilutes the value of all currencies. I may be wrong but I believe that the largest derivatives market out there is the stock index futures (E-Mini S&P et al) so their values are arguably way more diluted than gold or silver. The real problem, to me, still boils down to where the consumer is actually forced by government in his decisions: legal tender laws. All contracts must be derived from and settled in U.S. dollars.
                            This whole issue reminds me of the RMBS and related CDOs and synthetic CDOs arguments......................at the end of the day it comes down to fundamentals and summed up entirely as "Borrowers could not afford homes", period.

                            The old saying, possession is nine/tenths ownership, it this case it may be 9.99/tenths ownership (100:1 ratio) , but it still comes down to fundamentals and the "I told you so" and "I know more"………………is just noise at this point.

                            Comment


                            • #29
                              Re: Debunking the Precious Metals Fear Mongering Campaign - Erik Townsend

                              Originally posted by jtabeb View Post
                              But the ratio is NOT constant! Look at the growth of derivatives since they became unregulated, you see super-exponential growth ( size doubles while time interval halves).
                              We are talking about three different things here.
                              1) The high ratio of paper commodity to physical (delivery) commodity allow a few big players to manipulate the prices up or down, making the price discovery process a joke.
                              2) In the case of PM's, central banks in collusion with a few big players can artificially depress the spot prices, because they need those prices (especially the price of gold) depressed, by gaming the future markets through 1.
                              3) The derivatives circus allows the Fed to escape from the monetary expansion-inflation paradigm.

                              Instead of paying for lax monetary policies through inflation, they can convert some of the excess money in losses on someone else's balance sheet. By tweaking and channeling the losses from derivatives they can keep a relatively stable dollar while having a continuous monetary expansion. This is the perfect scam.

                              Look what happened with the price of gold (and most commodities) at the begining of 2008. Money was pouring into commodity derivatives and instead of having the spot prices going down, all commodities were soaring because the big players were making truckloads of money pushing spot prices up.

                              When the deleveraging wave hit, if the correlation was so simple, the decrease in the volume of derivatives was supposed to hike even further the price of commodities. But guess what? The prices began to go down. (With gold was a little bit more complicated because of the flight to safety issue, which also floored the treasury yields, instead of sending them through the roof).

                              The game is completely rigged, and probably for gold is worse than for other commodities.

                              All the Fed has to do is to tweak the ratio between crappy derivatives covered through monetization and those transformed in losses to the balance sheets of foreign banks or to individuals, and they can keep a relatively stable dollar, perpetuating the derivatives scam.

                              Crappy derivatives monetized --> Inflation
                              Crappy derivatives transformed into loss --> Deflation (disinflation)

                              Of course the process cannot be very smooth and there is some volatility when one trend is temporarily overtaking the other, but the Fed and its Wall Street minions are able to control it fairly well.


                              Originally posted by jtabeb View Post
                              Here is what happens when the Fed tries to do as you describe.
                              That was the old paradigm when Glass-Steagal was still in effect. I don't think it is valid anymore.

                              Look what will happen when China depegs, one way or another. If the depeging is sudden, you will see first the transient inflationary effect, T yields going throught the roof, gold price soaring, then yields being floored again and gold prices going up. There will be a certain lag between these two, due to the different effect of the flight for safety in financial gold and treasuries, but this is the subject for another thread.

                              And people will scatch their heads trying to figure out why the gold price and treasury yields would not go in the same direction anymore, when we were supposed to be hit by the mother of all inflations. Those who don't accept the fact that the whole financial game is a scam and the dollar is the vehicle for perpertuating this scam, will never figure out the answer.

                              Comment


                              • #30
                                Re: Debunking the Precious Metals Fear Mongering Campaign - Erik Townsend

                                "And people will scatch their heads trying to figure out why the gold price and treasury yields would not go in the same direction anymore, when we were supposed to be hit by the mother of all inflations. Those who don't accept the fact that the whole financial game is a scam and the dollar is the vehicle for perpertuating this scam, will never figure out the answer."

                                We will get our "mother of all inflations".

                                Yes, Yes and Yes, I agree with you. (Because eventually all scams end BADLY for everyone). This chart I posted is how this "scam" is going to end. (Unless you actually believe the BS from the BLS.) Notice the chart says PHYSICAL economic activity meaning tangible economic input and output. Not NOMINAL, and Not REAL (In BS BLS inflation adjusted terms).

                                The USA is Argentina writ large, same as it ever was, same as it ever was...
                                Last edited by jtabeb; 04-20-10, 04:06 PM.

                                Comment

                                Working...
                                X