Bron Suchecki

Gold Retains Its Value, as Usual

idiot bureaucrats - agree, never underestimate the stupidity of others. Of course there could also be idiot evil bureaucratic criminals at the helm. Either way gold is your only protection.

Misinterpretation of Gold Lease Rates and Why Gold Could Rise

dr funkenstein,

Firstly, I do know what I am talking about because I worked for many years in the treasury department of the Perth Mint. Secondly, the Perth Mint has leased from central banks and bullion banks. Anyway, don't take my word for it.

You say: "Bullion Banks pay Central Banks GOFO to borrow gold."

Your Blanchard pdf link documents says, on page 5: "A central bank loans a bullion bank some amount of gold with a lease rate"

Bit of a contradiction from your own souce document. Blanchard go on to say (with my comments in []):

"The carry return [ie GOFO] is the return on the bonds [ie LIBOR] minus the gold lease rate."

This is the same formula as the London Bullion Market Association (LBMA) : “Forward rate = Dollar interest rate – metal lease rate”. GOFO is a Gold Forward Offered Rate, not an interest rate for gold. The LBMA defines GOFO as "rates at which the Market Making Members will lend gold on swap against US dollars."

The key here is "on swap against". This makes GOFO different to gold "placed on deposit to earn interest ... and generically the interest rates applied to such lending of bullion are often referred to as lease rates." (LBMA, A Guide to the London Bullion Market, page 13). QED

Misinterpretation of Gold Lease Rates and Why Gold Could Rise

The formula Brian mentions in his article is Lease Rate = LIBOR – GOFO. He therefore assumes that the amount that can be earned from the gold carry trade is the lease rate. However, that same formula can be restated as GOFO = LIBOR – Lease Rate. Which rate is the amount that can be earned from the gold carry trade?

Regrettably for Brian, it is GOFO, not the Lease Rate. How can I be so sure? Well when I worked in the Perth Mint’s Treasury and we borrowed gold, we were charged the Lease Rate, not GOFO. But don’t take my word for it. I quote from a booklet titled “A Guide to the London Bullion Market” issued by the London Bullion Market Association (who you would think would know what they are talking about): “Forward rate = Dollar interest rate – metal lease rate”

See my blog for further comment goldchat.blogspot.com/...

Why Should I Own Gold?

"a few banks control access to almost all the physical gold available for sale into the market" - incorrect. Newmont owns 40% of AGR Matthey (which refines over 10% of mine supply) and 46.72% of European Gold Refineries. They will supply to the highest bidder - do you really think Newmont is going to restrict the profits of those business by not selling to the highest bidder, which at the same time would lower the gold price, when their shares go up if the gold price goes up?

"supply was restricted so much that even the US Mint had to suspend making gold coins" - there was and is no supply restriction of physical out of refineries for 400oz bars, it is the supply of blanks to the US Mint that fell behind retail demand.

Why Should I Own Gold?

Article that may be of interest to those wanting more detail on gold as money www.fame.org/HTM/Feket...

Why Should I Own Gold?

In my previous job with the Perth Mint, I've sold gold to people with $10,000 through to $10 million. Why they buy I discuss at goldchat.blogspot.com/.... Why hold it long term? Insurance:

The way I like to think about this reason for buying gold is if you buy car insurance and then at the end of the year you have not had an accident, you don’t say to yourself “well that was a waste of money, I paid the premium and never got to claim on the insurance policy”. Instead you say “great, I didn’t have an accident, how lucky” and you write-off the premium. This is the same attitude these clients have towards gold – if the price goes down, they don’t moan about the money lost, they consider themselves lucky that there was no economic breakdown. They don’t want to make a lot of money out of gold, because in their view this means that they have lost all their other investments.

I did have a hard time being able to put myself in their shoes and understand where they were coming from until I dealt with this lovely lady who used to ring up every now and then to make sure we were still there and everything was OK. Where did she live? Israel. Might not sound rational, maybe there were better offshore places/ways to store her wealth, but having that gold save haven way over in Australia sure did make her sleep well at night.

The Disconnect Between Supply and Demand in Gold & Silver Markets

I thought this discussion was about to die - now day 4 and counting.

The Disconnect Between Supply and Demand in Gold & Silver Markets

Ken S - the US Mint does not make coin blanks, it just strikes the coin. It gets these blanks from other suppliers, so it is not just a case of taking delivery ex-COMEX. The metal has to be delivered to the supplier, they make the blank then deliver it to the US Mint for striking. So there is a bit of a delay in getting the raw gold into finished coin but once inventory is geared up then the coins should be coming off the line. I wouldn't be reading too much into the suspension so early on, give them a break. Now if this continues for six months, then there is something to talk about.

Jimmyboy - COMEX was never a spot price, spot means for immediate delivery. Quotation of the near contract price as "the" gold price is misleading. Also, obession with the behaviour of COMEX trading overstates the impact of that market. The over the counter spot market is much larger volume wise than COMEX but it is not visible. The unfortunate fact is that gold is not a nice transparent market so makes it hard to work out what is going on. See goldchat.blogspot.com/... for the numbers - only 2% of potential investment gold holdings are visible.

It is entirely, but boringly, possible that in the other 98% of the market some big hedge funds or institutions decided they had enough fun with gold and are moving there money into the next "hot" play. When the World Gold Council were first launching their ETFs in UK and then US, a bit marketing point was that it would allow institutional investors & funds to invest in gold because some fund rules don't allow direct investment in physical. There is no doubt that has driven the growth in the ETF holdings, along with retail investors, but those big investors can also pull out, if they haven't do so already. Surely this could be a factor?

The Disconnect Between Supply and Demand in Gold & Silver Markets

dangerbird9 - I'll be putting something up about gold confiscation in Australia in a couple a weeks, in the meantime check out goldchat.blogspot.com/...

d-train - it is only a conspiracy if your Kitco forum posts have also been deleted!

Chris B - Critical thinking test #5 Maybe a large miner has decided to start hedging again? See goldchat.blogspot.com/... for an interesting chart.

The Disconnect Between Supply and Demand in Gold & Silver Markets

Billyshores - I know the fee does cover it, I work at the Mint and see them attend the stocktake. We don't use sub custodians or lease (except to our 40% owned refinery AGR Matthey for their work in progress) all the gold is on one site, so it isn't some massive job. Any before you accuse AGR Matthey of being dodgy, it is 40% owned by Newmont, so do you really think it is in their interests to allow something they are involved in to be shorting gold/not holding physical?

Slugbait - so you've called the Mint today and they haven't got any silver? Funny I just checked with them and seems OK.

The Disconnect Between Supply and Demand in Gold & Silver Markets

Pretzel Logic - i disagree as to the identity of User 244350, I think it is Jason Hommel!

"I suspect that the theory is so strong, and the facts so obvious that this article has shocked the daylights out of the insiders. Are you one of those insiders? Has someone stumbled upon the dark secrets of the precious metals manipulation industry? Have they used simple logic, reason and deductive skills to expose the game?"

I'm not an insider, I just work at the Perth Mint and all we have done for 100 years and continue to do is make coins and bars. All I can do is speak from that experience and excuse me if I take offense at your attacks on my integrity, which is what you do when you attact the Perth Mint. We are a Mint, we need gold and silver work in progress to make stuff, so it makes no sense for us to take someone's money and not buy the gold and silver to back it - we don't need money, we need metal because me make money from fabricating gold coins and bars.

Can I guarantee one way or the other what the bullion banks are really doing, no - their activities are as opaque to me as they are to you. Am I surprised at Morgan Stanley, no, because if your "custodian" has no use for your metal and thus it is just a cost to them to hold it, then there is the risk that they will cut costs by not holding it.

All I can say is that Mr Conrad's interpretation of the facts (mints suspending coin sales, credit tightening on Indian banks etc) are not a "slam dunk" for his case. There are other more boring reasons for those observed facts that people in the industry can see. I do find it somewhat amusing how these facts are contorted into a theory.

When I get some time, I will gather all these facts and provide the alternative explanation for them on my blog. At the moment I am working on gold confiscation, which is sure to raise a whole new batch of rantings, but I will get around to it in due time.

The Disconnect Between Supply and Demand in Gold & Silver Markets

Mr User 244350,

Perth Mint clients can turn up any time to check on their Allocated metal, and plenty do. Not really possible to do with Unallocated, because it is backed by working gold inventory and is not segregated. Similar issue with GoldMoney and Bullion Vault, where there is a long list of liabilities to clients backed by 400oz bars. In these cases all that clients can rely on is an auditor adding up all the liabilities and then counting all the gold.

Just like GoldMoney and Bullion Vault, who have regular audits done by outside firms, the Perth Mint is independently audited by a Top 5 accounting firm, on contract to the Auditor General of Western Australia, which you can consider our "regulator". The auditor is right now finalising our June 2008 financial year end accounts. They attend our stocktake, confirm the precious metal assets and liabilities. Do you really think that if there was a shortage that the auditor would issue an unqualified report, expose itself to massive financial claims from our clients, for the lousy $150,000 in audit fees they get?

Anyway, regarding bullion banks, it is important not to confuse conspiricy with manipulation because they can have the same effect on the market/price. Since bullion banks deal with all players, be they central banks, miners, refiners and manufacturers of gold, they know the real underlying physical supply and demand. It doesn't matter what happens with paper, the most powerful force on the price is fundamental physical demand/supply balance and you can be sure that a bullion bank is not going to trade against that trend in the long run.

Alternatively, if you believe that it is a central bank conspiricy with bullion banks so that is why they are trading against the trend, then why did they let it get to $1000 in the first place? In the late 90s when the price was heading to $250, there was similar talk about a conspiricy and how all the "shorts" would be stuffed if the price got above $400 etc etc. If they have all this "paper power" why didn't they use it then to stop the bull run from $250 to $1000 before it got too much steam?

The Disconnect Between Supply and Demand in Gold & Silver Markets

Mr Conrad,

FYI, London Metals Exchange doesn't trade precious metals, it is the London Bullion Market Association (www.lbma.org.uk/core_p...) and London Platinum and Palladium Market (www.lppm.org.uk/). Anyone with even basic practical experience in the precious metal markets know this, so leads me to believe you don't.

In respect of your belief in a shortage, in the wholesale market there is no problem getting physical in 400oz gold or 1000oz silver bars. See www.goldmoney.com/en/c... quote:

"GoldMoney has not experienced any shortages of metal because we transact only in large bars, namely, those that meet the standards of the London Bullion Market Association (LBMA)."

The shortage is simply the US Mint stuffing up its forecasting and running out of blanks (which it purchases from outside suppliers). There will naturally be a delay until these suppliers can replenish the US Mint's inventory. Converting a 400oz bars ex-refinery into a 1oz coin is not like turning on a water tap, it takes time to make stuff, in case you didn't realise. If you walk into a car dealer and they don't have your model/colour in stock, do you go around ranting about how it is a conspiricy by Green lobby groups to force everyone to cycle?

A reasonable response would have been to highlight the shortage of fabricated product at a few places, note that it is an interesting development and should be watched to see if it expands but at this time no problem in the wholesale market. But then that wouldn't be enough to scare everyone into buying GLD.

Disclosure: I work at the Perth Mint, but if we make money from selling coins and bars (no shortage here) why wouldn't I be agreeing with you? Because it is all BS and I have some integrity!