Snippets on Euro, Gold, Dollar and International Trade

Taking the twitter functions of WordPress to the limit … Warning: Loading this page may be a little slow due to all the embedded tweets.

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Central Bank Gold Leasing

The salespeople of the gold investment industry publish a lot of bold claims about central bank activities in the gold market (for example, here) along the lines of “All central banks want to suppress the gold price.“, “The central banks have secretly leased and sold most of their gold.” The present article is an attempt to summarize the facts that we know and to offer a rather different interpretation.
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GLD – The Central Bank Of The Bullion Banks

The black curve (left scale) of the following chart shows the London pm gold fixing in U.S. dollars from 1 January 2006 to 30 April 2012. During the light-blue intervals which span about 35% of the entire period, the gold price increased at an annualized rate of 41.1%. During the remaining intervals, the price increased only at an annualized rate of 7.9%. The light-blue intervals are the result of a trading algorithm whose buy signals are indicated by the green dots and whose sell signals by the red dots.

GLD Inventory Strategy from 1 January 2006 to 30 April 2012

In this article, we explain how the signals can be computed from the variations of the inventory of the SPDR Gold Shares exchange traded trust (NYSEArca:GLD). We explain why the inventory adjustments can hardly be caused by price arbitrage between the GLD share price and the loco London spot price alone. We rather claim that bullion banks finance their inventory by lending it or selling it to GLD investors and that bullion banks manage their physical reserves by accessing the physical gold inside GLD.

The fact that a certain type of inventory adjustments has predictive power, supports the idea that large inventory changes are the result of active reserve management. This provides us with a unique window into the flow of physical gold that is usually obscured by the dominance of paper gold trading. A similar, but somewhat less robust result is shown for the iShares Silver Trust (NYSEArca:SLV).

WARNING (April 2013): This article uses the term buy signal in a technical sense. It does not mean that you ought to buy anything without understanding what you are doing. Notably, the rapid price increases after the buy signals have been absent since the fourth quarter 2012. Now you might dismiss the trading algorithm as a statistical fluctuation. Alternatively, you can wonder whether something might have changed.
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Beware Of The Muppets In The Oil Market

The following chart shows the West Texas Intermediate (WTI) crude oil spot price in US$ (source: US Energy Information Administration).

West Texas Intermediate (WTI) from June 2002 to April 2012

Obviously, there was a speculative bubble from early 2007 to mid 2008 which then collapsed during the second half of 2008. In a series of articles, Chris Cook claims that the crude oil price has been in another bubble since the end of 2009 and that this bubble is just beginning to pop. The present article is an attempt at understanding the mechanics underlying Chris Cook’s ideas.
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Before the Thoughts! and Before the Trail

Jeff at FOFOA’s blog has discovered a partial copy of the old Kitco mailing list. The following is a compilation of what I hope are the relevant messages by The Writer, Big Trader, GFD and SimpleMan (as far as they relate to contact with Big Trader), and ANOTHER.

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How Credit Suppresses the Gold Price (with Alice and Bob)

Alternative title: How Credit Creates Inflation
Alternative title: How Gresham’s Law Destroys the Gold Standard

Our small closed economy has five main protagonists, Alice the Automobile Saleswoman, Bob the Banker, Charlie the Capitalist, Dave the Debtor, and Steve the Saver. This small economy is on a gold coin standard, i.e. gold coins circulate as cash. In order to see how the real price of gold (measured in Ferrari sports cars) depends on the creation of credit, we consider the following scenarios.

  • A cash based economy without any lending and without any banks.
  • An economy with banks, but without lending.
  • An economy with banks and with fractional reserve lending.
  • An economy without banks, but with private-to-private lending.
  • An economy without banks, but with commercial Real Bills.

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Currency Wars: Why The United States Cannot Return To A Gold Standard

The book Currency Wars by James G. Rickards (Penguin, 2011) quickly became a bestseller not only in goldbug circles. One of the main theses presented by Rickards is that the United States ought to return to a Gold Standard.

Have you ever wondered whether this would be possible? The answer is No. But why not? The reason we give might strike you as rather unexpected, but it leads you right into the question of what will be the future international monetary system. The answer is that it is the existence of the Euro that prevents the United States from returning to a gold standard.

The Euro zone is set up in such a way that it values gold at its free market price. Since the Euro zone is a major global trade hub, they are in fact in a strong position to block any attempt by the United States at returning to a gold standard. They can rather force the US to value gold at its free market price, too. Any attempt at linking the US dollar to a fixed weight of gold is futile in the long run because this would eventually lead to an under-valuation of gold in US$ and thereby irreversibly drain gold reserves from the United States. In the present article, we explain these ideas in greater detail.
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The Many Values Of Gold

The present article gives an overview of various ideas on how much an ounce of gold might be worth.

We know the price of an ounce of gold. Last week, on 3 February 2012, the price of gold was US$ 1734.00 per ounce (London pm fixing). So much about the price. But what is its value?
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Backwardation and Declining COMEX Inventory

Silver inventory at the New York Commodity Exchange (COMEX) is declining. Since the beginning of 2011, in addition to the overall decline, a lot of inventory has been shifted from the registered to the eligible category.

For much of 2011, the COMEX silver futures market has been in backwardation. Similarly, the London OTC silver forward market is in backwardation as reported by the London Bullion Market Association (LBMA). Figure 1 shows the Silver Forward Offered Rate (SIFO) from November 22, 2010, to May 19, 2011.

The LBMA Silver Forward Offered Rate (SIFO)

Figure 1: The LBMA Silver Forward Offered Rate (SIFO) 2010-2011

 
We see from Figure 1 that the contango of the LBMA silver forward market collapsed on January 19, 2011, and silver has been in backwardation ever since – with the exception of about 4-5 weeks in March and April. For more background, please take a look at Backwardation in The Case of a Monetary Metal.

In this article, I briefly explain why it is perfectly natural if

  • COMEX inventories are declining,
  • Silver is being moved from the registered to the eligible category,
  • Silver deliveries occur as late in the delivery period as possible,
  • Silver deliveries suddenly appear out of nowhere and are checked into the registered category only at the last minute before delivery,

as long as silver is in backwardation. None of these indicates that there is a shortage of physical silver or that there is a short speculator about to default.

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Synthetic supply of gold?

In the comment section at FOFOA’s blog (see the messages by DP and Jeff), we had a discussion about whether you can create synthetic supply, i.e. a form of paper gold, using the futures markets such as the New York Commodities Exchange (COMEX).

In the following, I explain why I think the answer is no.
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