Crazy Market Thoughts — Three Shams for the Price of One
It was only a matter of time before gold broke to new record highs given its stickiness around the $1000 level, and its move today was made in convincing fashion. If the momentum can be maintained in the days and weeks ahead, gold is theoretically capable of moving significantly higher. This is because there is no fundamental valuation measure that says “$1100 gold is fair value” or “$1500 gold is fair value” despite various pundits arguing otherwise. Gold will move higher simply because there are more buyers than sellers and vice versa. We see the same dynamic in the stock market currently: people are buying and therefore stocks are moving higher. No rhyme or reason to it other than that.
Fundamentally speaking, today’s rally in gold, silver, commodities and stocks — and a fall in the dollar — was based in part on a series of shams.
One was the rumor that unnamed Arab oil exporters have met with Russia, Brazil and China to discuss dumping the U.S. dollar as the currency in which oil is traded worldwide. The report was made by Robert Fisk, a noted anti-American journalist, and has not been corroborated by any credible source.
There was also the “upgrade” of the bank sector by Goldman Sachs (which is now a bank itself — how convenient!), whose analysts point out that banks have substantial earnings power not reflected in current share prices. Alas, Goldman Sachs seems to have been duped by the shiny new paint job and has failed to look under the hood where bad loans continue to stink up the joint. The fact is that most banks remain on perilous footing as demonstrated by the large reserve balances they are holding at the Fed. Let’s revisit the discussion when they pay off their remaining borrowed reserves and start to lend again in earnest. In this vein, we note that small business factoring leader CIT Financial can’t seem to get a bailout from the banks. So who does it turn to in a final desperate plea? Well of course the very same Goldman Sachs that is telling us that the banks are on the verge of being healthy again.
Another purported reason for gold’s possible breakout is the decision by the Australian central bank to raise official interest rates. Supposedly this is reinforcing the new role of the U.S. dollar as the “carry trade” of choice, which again is a total sham of an idea that has gained widespread popularity in the collective thinking of the Internet pundits and those who follow them. In our estimation, however, a carry trade in a currency requires (1) willing lenders, (2) something to buy, and (3) a relatively stable currency that is closer to its historic highs than its lows.
Those who insist that the U.S. dollar is being used in a carry trade need to answer the question of who precisely is lending dollars? They also need to answer what those dollars are buying? The refrain seems to be, “gold, of course”, but by definition that wouldn’t be a carry trade. It would be an outright speculation and once again this would raise the first question of who would lend for such purposes? The very same private and central banks that would allegedly suffer from the increasing legitimacy of gold? Preposterous! Next, they need to answer how it is that the U.S. dollar is falling when a carry trade requires buying the currency as a hedge (via a derivative position) to protect against potential appreciation in the dollar exchange rate? Finally, they need to answer why a carry trade would ever be made in a currency at a time when it is already near record lows? Any answer that claims the dollar is doomed to fall is wrong because that is speculation and a carry trade is not about speculation but rather locking in a risk-free profit. And just where is that risk-free profit when everybody already seems to be on the same side of the trade, we ask?
Don’t get us wrong, we believe a carry trade in the dollar would be possible, or even probable, under some conditions. Such conditions would include willing lenders, stagflationary conditions (inflation accompanying stagnant economic activity), a strong balance of trade, and/or a demand for dollars as an instrument of exchange. To the extent there is demand for dollars right now, it isn’t to buy stuff but rather to pay off debts. This is provocatively contrary to a carry trade. In addition, the rumor that oil will no longer be traded in U.S. dollars is the exact opposite of what we would expect if a dollar carry trade was currently in force.
As much as the move in gold and silver is a cause to celebrate, we continue to be uncomfortable with the underpinnings. For those who think this is the big one, the final flight out of the dollar, we caution that the gold and silver basis are saying otherwise: this is a purely speculative move in sympathy with the rest of the crazy markets, eagerly anticipating good times right around the corner. Markets can always go much farther than it seems possible while they are not restrained by reality, but without a fundamental underpinning the party simply will not last. Moreover, the slide is usually much uglier than the ascent was marvelous. Therefore, we are maintaining moderate upside exposure to “assets” (that includes gold and silver) while looking for value opportunities and otherwise keeping substantial cash on hand.
Tom, will you be making the trip to Canberra for the Gold Standard Institute seminar in November?
TOM…..so you say there is no real FUNDAMENTAL VALUATION for $1100 or $1500 GOLD. You say it based on a SERIES of SHAMS. That may or may not be true. If it is true and the GOLD and SILVER BASIS is not showing it…as per this article:
http://www.zerohedge.com/article/gold-move-not-confirmed-backwardation
It would be nice to see stuff like that in the METAL AUGMENTOR.
Then, yes it could be a SPECULATIVE LEVERAGE MOVE. But….and I say BUT…this so called “SHAM” can also be painted on the BOND MARKET. The US TREASURY BOND market is not one that is based in any sort of REALITY. The US TREASURY MARKET is indeed the next BIG BUBBLE. The world is heading down EXETER’S PYRAMID….getting out of worthless US MORTGAGE BONDS and heading into US TREASURIES. We must remember, the stairs don’t end at the US TREASURIES. It ends at GOLD and SILVER.
When the world realizes that US TREASURIES are just as worthless as SUBURAN REAL ESTATE….there will be a GREAT PANIC out of these worthless pieces of US GOVT GARBAGE.
Yes…we keep waiting patiently for the PERMANENT BACKWARDATION of GOLD and SILVER to give us JOE-BAG-OF-DOUGHNUTS a clue when SMART MONEY is getting into GOLD. Tom….I believe the BIG SMART MONEY is already into GOLD. The ULTRA-RICH have been adding to their STASH ever since they BAMBOOZLED the CENTRAL BANKS to cough up the PUBLICS GOLD for a pittance. Do you remember when that MORON…GORDON BROWN sold off the BRITISH PUBLICS gold for a song. JEEESH….how STUPID the poor MASSES have been to alow these CRETINS to ROB them blind.
Tom…with all honesty, by the time we see BACKWARDATION in GOLD and SILVER…the TITANIC will have gone under water and sunk. Thus, it will be TOO LATE. Lastly….how about this to get your SILVER MOUTH WATERING:
India’s HDFC Bk looking at selling silver bars:
http://www.reuters.com/article/rbssFinancialServicesAndRealEstateNews/idUSBOM36068620091007
The PRECIOUS METAL’S STORMS a BREW’N. Time to get in is now….not when you can’t get any, when GOLD and SILVER head into PERMANENT BACKWARDATION.
I agree once it’s in permanent BW you won’t be able to get any but at least it will tell us to hold on for dear life and that this time TSis reallyHTF.
That’s why I can’t follow the advice to be 50% in cash. I will stay 95% fully invested in PM and resource stocks with some trading of not more than 10% of my positions. So far so good.
Sure, but I don’t think you have given any credible evidence that your call for any ‘ugly’ slide in the gold price is anything but speculation.
an ‘ugly’ slide
@Bron Suchecki
No, unfortunately I will not be able to make it.
@SRSrocco
There is nothing going on with the basis, these people don’t know what they are talking about, in fact they are giving the basis analysis a bad name.
With respect to smart money going into gold, what we are really talking about is being panicked into gold, not accumulating. This money will go into gold as a last resort of ultimate safety at the tip of Exter’s pyramid, and it will go in ahead of the dumb crowd. This is what the basis will warn us, members of the “dumb crowd”, about.
@rob
No, even with “permanent BW” there will be opportunities to get in, as there will always be misinformation in the market and therefore buyers and sellers. The only way there will be no more opportunities is if the market itself is no longer functioning, at which point it would probably be a better idea to own a gun and lots of ammo instead of some shiny metal.
@Justin
There will always be a periodic “ugly slide” in the gold price when measured against something else, even if gold were the world’s reserve currency. So the only speculation is about the timing and in respect of this I merely said that we are uncomfortable with the lack of underpinnings.
TOM….I understand your warning of the basis concerning the DUMB CROWD. This is what had spiked my interest in following and understanding the BASIS. You might say it is like watching the barometer fall as the HURRICANE approaches.
Unfortunately, I believe the amount of manipulation in the PAPER GOLD market has made the BASIS now unrealiable. Of course at some point in time it will be in permanent backwardation….but as I said before, it will be too late for anyone to get in reasonably. The time to get off the USS AMERICAN TITANIC is not right when it starts to go underwater for GOOD, but hours before it sinks.
You say ROB KIRBY and JIM WILLIE are not reliable as analysts. Yes, maybe some of the stuff that KIRBY comes out with maybe a bit out in LEFT FIELD, but WILLIE has had over 30 correct forecasts. I am on the side that the majority of the FINANCIAL SYSTEM is now corrupted along with several branches of the US GOVT. When you understand that line of reasoning…..then it is not a far stretch to state that the GLD and SLV probably don’t have the metal they state….or the CENTRAL BANKS for that matter.
The ULTRA RICH through the SYNDICATES have looted the PUBLICS GOLD BOOTY over the past 2 or so decades. The last fraction of so called SMART BUYERS coming into the market and buying gold to DROP the BASIS into BACKWARDATION is now a FOOLS PLAY in my book. We are past the point of no return.
I listened to HUGO SALINAS PRICE on KING WORLD NEWS describe the situation of CENTRAL BANKS RESERVES. Up until 1971, the RESERVES of the Central Banks did not change all that much. Now in just the past year the worlds central banks reserves have risen $450 BILLION. SALINAS states that when US DOLLARS are traded for goods or EUROS, nothing is being PAID, or SETTLED. The US DOLLARS the foreign country gets goes and buys US TREASURIES. So we have had an exponential increase of BONDS and TREASURIES all over the world. Nothing is being SETTLED. Only GOLD can do it.
HUGO SALINAS PRICE INTERVIEW HERE:
http://www.kingworldnews.com/kingworldnews/Broadcast/Entries/2009/10/9_Hugo_Salinas_Price.html
TREASURIES and BONDS for the most part are WORTHLESS PIECES of PAPER. Sure, they might have a BID all the time….but that is due to MONETIZATION. When this UNRAVELS, it will be he end of the world as we know it. People will need more than GOLD and SILVER BULLION to make it through the day
“the majority of the FINANCIAL SYSTEM is now corrupted”
I’m shocked to hear that!
well at least we’re trying to clean it up.
Goldman exec named first COO of SEC enforcement
http://news.yahoo.com/s/ap/20091016/ap_on_bi_ge/us_sec_enforcement_official;_ylt=AvqmyuF6lWSfzXuylpCWi3Fv24cA;_ylu=X3oDMTJ1c2Z2aDlqBGFzc2V0A2FwLzIwMDkxMDE2L3VzX3NlY19lbmZvcmNlbWVudF9vZmZpY2lhbARjcG9zAzUEcG9zAzUEc2VjA3luX3RvcF9zdG9yaWVzBHNsawNnb2xkbWFuZXhlY24-
Bastards!
Don’t know if it’s true, but here is a worrisome report about GLD by Rob Kirby:
http://news.goldseek.com/GoldSeek/1255630435.php
http://news.goldseek.com/GoldSeek/1255885200.php
@Serge
Personally I’m skeptical of this report. But now even Dr. Fekete seems to be believing it. I don’t see why they couldn’t get out of their short positions as the daily volume on the LBMA is probably about 20 times the 20 tons they’re short (plus the comex and gld volume) so offering a 25% premium makes no sense. Also someone being short the last day of trading when you don’t have any intention or ability to deliver is totally uncredible to me.
Now if it was an expired lease they had to deliver back the gold on that makes a little more sense, but I still think they could obtain the metal on the LBMA or even the GLD. Maybe they tried to deliver substandard metal on the contract and the lessor wouldn’t accept it so now they’re scrambling.
If it were true and there isn’t 20 tons of gold to be had at either the LBMA or GLD then gold would be going through the roof and beyond. For now I’m filing this with last years Dec. comex default rumors
Would love to hear Tom and Dave’s take.
thanks
maybe they covered the 20 tons after all!
About 15 tons were withdrawn from PHAU last week. close enough for me.
http://www.etfsecurities.com/msl/etfs_physical_gold.asp.
check out the bar lists/totals. the only metal to show outflows was gold and only recently.
when I see a notice of default or some first hand named source then maybe there’s something to it. other wise just another rumor gold writers love to start up.
which isn’t to say physical supply isn’t tight and there aren’t problems with reputed stocks. It is and there are and it is being squeezed. They’d love for these rumors to set of a gold run. I wouldn’t mind it either sooner or later it will happen probably for real reasons.
Regarding all the above comments and recent articles by ZeroHedge,Rob Kirby and Prof. Fekete i too believe someting BIG is going on.
For instance this peice of news released yesterday:
NEW YORK, Oct 19 (Reuters) - CME Group Inc (CME.O), the world’s top derivatives exchange operator, began accepting physical gold as collateral for all trading products, marking the first time an exchange has allowed gold bullion to be used for margin requirements.
TAKE THE ABOVE NEWS FURTHER AND RECALL THIS EDITORIAL(last paragraphs taken).
ULTRACREPIDARIAN MUSINGS
by Antal E. Fekete,
Professor Emeritus, Memorial University of Newfoundland
May 11, 2006
What to expect now? Sooner or later exchange officials will declare “liquidation only” policy. Thereafter the longs can close out their profitable positions only through cash settlement. The shorts are absolved of their obligation to deliver as contracted. At that moment all offers to sell cash gold will be withdrawn around the globe. Gold is not for sale at any price. Producers of essential commodities such as grains and crude oil will refuse to accept payment in dollars and will demand gold in exchange for their product. The same goes for providers of essential services such as doctors and lawyers. Scales will fall off their eyes and they will decline to give up real goods and real services in exchange for irredeemable promises to pay. The dollar, and all other paper currencies along with it, will go the way of the assignat and mandat.
SHOULD WE CONCLUDE THAT THE CME IS SETTELING TRANSACTIONS OF COMMODITIES IN GOLD RATHER THAN THE DOLLARS AND THE MARGIN/COLLATERAL B******T IS JUST BEING USED AS A COVER?
DOES THIS SIGNIFY THE DOLLAR AS AN ACCEPTED MEANS OF PAYMENT/SETTLEMENT IS DRAWING TO A CLOSE AS THE PRICING MECHANISM OF THE FUTURES MARKETS HAS BECOME DYSFUNCTIONAL I WONDER?
THIS ALSO BRINGS ME BACK TO THIS CONVERSATION WITH SRSrocco LAST NOVEMBER:
#
November 19th, 2008 at 09:08 | #106
Reply | Quote
I bet my GRANDMA that the gold sold to the Saudi’s bypassed the “Crock of S**t” COMEX and was sold for probably upwards of $1000 i firmly believe all gold transactions are being settled at much higher price than that bullshit ticker price you see on the screens.
#
SRSrocco
November 19th, 2008 at 09:12 | #107
Reply | Quote
Freddy Krug….I believe you are right. Looking at this part of his article, Peter Cooper states the same thing:
“News about the Saudi gold rush is bound to fuel speculation about the alleged large physical gold transactions that have been taking place at prices will above the spot price set in the futures market. It is very unlikely that such a large hoard of physical gold could have been bought for the depressed current price.”
—–
And now CHINA wants to increase its GOLD RESERVES by 4,000 TONS…I don’t think they can do it without affecting the price of GOLD on the COMEX….I am rubbing my LUCKY GREENSPAN HAIR RABBIT FOOT for a DEC COMEX DEFAULT.
Ain’t LIFE GRAND when you are on the RIGHT SIDE OF THE TRUTH.
@SRSrocco
Backwardation in the basis cannot be hidden for long. The only way to do it would be to flood the market with physical sales, but since by definition that represents physical supply, it would also necessarily mean that there is no backwardation. Only once such a seller has run out of ammo in the form of physical gold can the basis go into backwardation. Let’s look at this in terms of the alleged central bank gold selling conspiracy: if there was such a suppression scheme it would essentially mean that the basis has been suppressed for years, and thus creating an artificial contango. Yet even in this scenario if we get backwardation, it means the central banks can no longer suppress the basis because there is no more physical gold to sell. So you see, we get back to the same point that you cannot manipulate the basis to show that the shit isn’t hitting the fan when it actually is hitting the fan.
With respect to Jim Willie being correct about 30 things, he has probably said 30,000 things so that’s a pretty low success rate. Still, it’s better than some others so I still find it worthwhile to listen to him but I only do so with a gigantic grain of salt.
With all due respect to Hugo Salinas Price, changing reserves were an issue even under the quasi gold standard prior to 1971, in fact that is why Nixon reneged on it — U.S. gold was being shipped offshore at such a rate it would have been depleted in a few years. As for the growth in reserves today, this is primarily a result of expanded global trade, tariff reductions and the ascent of third world countries as export powerhouses. This wouldn’t have worked under the gold standard, which also means that Japan, China, etc. would never have become economic miracles.
@Serge
I’m not surprised they found gold bars filled with tungsten in an Asian depository. Those places don’t have a centuries old reputation and that is why people with a lot of gold probably won’t store their gold in an Asian depository (unless they are Asian). Instead they will choose London, Dubai, Switzerland, Australia (Perth Mint), Canada or the U.S. where they have not found an tungsten filled gold bars.
@rob
Professor Fekete tends to fall for conspiracies and sometimes is a bit too trusting. Like many top theoretical academics, he has incredible “professorial” smarts but not necessarily a lot of “common sense” smarts. His recent association with Rob Kirby is disappointing.
@Frederico K.
With respect to using gold as collateral for futures, you do understand that now commercial shorts can use gold held anywhere in the world as a fully margined hedge, not just gold in the form of COMEX warehouse certificates? What the COMEX has essentially done here is send a warning to long speculators that they are watching for corner attempts and will act to confound it. I think they are doing this because they realize there is a long speculative attack coming out of Hong Kong. Note that the rumors about dollar oil trading, delivery defaults, gold filled with tungsten, etc. are coming out of “Asian” banking sources. It is possible these sources have loaded up on COMEX gold and then are spreading dollar-bearish, gold-bullish rumors in an attempt to profit from a speculative rise in the gold price. Essentially the COMEX has just said, not so fast! I’ll have more to say about this but if it is big, that’s not necessarily a positive for gold bulls.