When it comes to the gold market, perhaps the old saying should be changed to “buy low and sell high-if ever.” That is likely the mentality behind gold investors at this point, as the yellow metal remains stuck in a trading range.
The gold market has some issues working against it currently. Higher stocks, a stronger economy and overall robust appetite for risk are all playing a role in the market’s current lack of upside follow through. In the absence of any fresh, bullish catalyst, gold could remain on the weaker side of the ledger going into the New Year.
Such a view is, however, dangerous as it does not really examine the bigger picture. If there were no significant reasons for gold to eventually start moving higher, the market would likely have sunk far below its recent lows by this point. Despite short sellers and others taking a bearish view of the metal currently, the market has held its ground. This is undeniably a sign of underlying strength.
Investors have an interesting tendency to view gold very differently from other asset classes such as stocks, for example. But in many ways, some of the same investment principles still apply. For example, if you were a long-term investor in Microsoft, would you rather buy shares at $25 per share or $30 per share? Obviously, buying the stock at $25 per share would be preferable, allowing the investor to potentially realize more gains if the price goes up while also possibly making better overall use of investment capital.
The gold market is no different in this regard. While many investors seemingly want to wait and see the market moving higher before taking action, the savvy investors realize that the old notion of buy low and sell high still applies. This is exactly why the market has not been able to really breakdown-the buyers have met and neutralized any significant selling pressure.
For the investor that is interested in value, and is taking more of a long-term view rather than a short-term view, the current range in the gold market could represent an excellent long-term buying opportunity. The market has shown time and time again that it has the ability to move sharply higher in a short period of time, and the next upside breakout could see such price action once again. Would you rather buy gold at $1250 per ounce or $5000 per ounce?
Now is the ideal time to add to a gold portfolio, and if you don’t already have an allocation in this key asset class, now is the ideal time to get started.
Adding physical gold to your holdings has never been easier than it is today, and you can get started by simply picking up the phone. Speak with an Advantage Gold account executive today about the potential benefits of gold ownership. Our associates are here to answer any questions you may have, and can even show you how to make this asset class a key part of your portfolio using an IRA account.
There is a Disinformation War taking place in the silver market as certain industry analysis is confusing individuals by purposely disregarding the tremendous impact of rising investment demand. Not only do I find this troubling, but I am also quite surprised how much the silver industry pays attention to this faulty analysis. So, it"s time once again to set the record straight.
Setting the record straight has now become a new mission for me at the SRSrocco Report because the amount of disinformation and faulty analysis being published in the mainstream and alternative media is quite disturbing. I decided it was time to say enough was enough, so I started by destroying the myth about the 1 million tons of gold hidden in the Grand Canyon in my recent article, THE BLIND CONSPIRACY: The Gold Market Is Heading Towards A Big Fundamental Change.
If you haven"t read that article and are still confused on whether or not there are billions of ounces of gold hidden in the Grand Canyon, I highly recommend that you do. Now, if you read the article and still believe the U.S. Government decided to make the Grand Canyon a national park to protect all that gold, then you have my sympathies. However, the reason certain individuals in the U.S. Government decided to make the Grand Canyon a national park because it was probably a GOOD IDEA to keep a beautiful part of the country off-limits from those who had no problem with destroying the banks of the Colorado by trying to extract gold at a pathetically low uneconomical yield.
If you have seen some of the episodes of the Discovery Channel"s Gold Rush show, the result of gold dredging operations isn"t pretty. Here is a picture of the beautiful landscape outside of Dawson City in the Yukon that shows the effects of placer mining and gold dredging. Now, how many families in the U.S. and abroad would have taken their kids on vacation to the Grand Canyon if it looked like this? I am quite amazed at the lack of dignity and respect by individuals who only seek at the almighty Dollar.
(aerial photo of Dawson City, Yukon - picture courtesy of Peter Mather)
To tell you the truth, I am glad that Teddy Roosevelt had the foresight to dedicate the Grand Canyon as a national monument back in 1908. At least some politicians had the wisdom to keep OFF LIMITS parts of the country, so we weren"t able to destroy it by mining it for ultra low-grade gold or bulldoze it, pour concrete and build another million suburban homes.
Okay, let"s get back to subject at hand... Silver Market Disinformation.
The motivation to write this article came from several of my readers who sent me an interview by CPM Group"s Jeff Christian, at the San Franciso Gold and Silver Summit. In the video, Jeff claims that there has been a silver market surplus for ten years and those industry analysts, who have reported deficits, "Are simply wrong." Jeff goes onto to say, "they have been wrong the entire time they have been on the silver market."
Jeff continues by explaining that to analyze the silver market correctly, you must look at surplus and deficits based on total supply versus total fabrication demand. Furthermore, he criticizes industry analysts who may be promoting metal by throwing in investment demand to arrive at a deficit. He says this is not the proper way to do "commodities research analysis."
Jeff concludes by making the point, "that if you keep silver investment demand as an "off-budget item," then the price matches your supply-demand analysis almost perfectly." Does it? Oh... really?
If we look at the CPM Group"s Supply & Demand Balance chart, I wonder how Jeff is calculating his silver price analysis:
This graph is a few years old, but it still provides us with enough information to show that the silver price has nearly quadrupled during the period it experienced supposed surpluses. According to the CPM Group"s methodology of analyzing total fabrication demand versus supply, how on earth did the silver price rise from an average of $5.05 during the deficit period to an average of $19.52 during the surplus period? I arrived at the silver prices by averaging the total for each time-period.
Again, Jeff states during the interview that their supply-demand analysis, minus investment demand, provides an almost perfect price analysis. According to the CPM Group"s 2016 Silver Yearbook, the total surplus for the period 2008-2016 was approximately 900 million oz. With the market enjoying a near one billion oz surplus, why would that be bullish for a $20 silver price?? It isn"t... and I will explain why.
As I have mentioned in many articles and interviews, the price of silver has been based upon the price of oil which impacts its cost of production. If we look at the following chart, we can plainly see how the price of silver has corresponded with the oil price going back until 1900:
You will notice the huge price spike in the 1970"s after Nixon dropped the Gold-Dollar peg causing inflation to run amuck in the United States. Now, the oil price didn"t impact just silver; it also influenced the value of gold:
As with the oil-silver trend lines, the gold and oil price lines remained flat until the U.S. went to a 100% Fiat Currency system in 1971. So, if we decided to throw out all gold and silver supply-demand forces, we can see that these precious metals prices paralleled the oil price. Now, the reason the price of silver shut up to an average of $19.52 from 2006-2017 was due to its average cost of production. Today, the market price of silver is $16.42, and the average cost of primary silver production is between $15-$17 an ounce. According to my analysis of the top two gold mining companies, their cost of production is about $1,150. Hence, the 71-1 Gold-Silver price ratio.
Did Jeff Christian include the cost of production in his analysis of the silver price? How many silver mining companies are producing silver for $5 an ounce and making an $11 profit? Or how many silver mining companies are producing silver at $35 and losing nearly $20 an ounce? I will tell you... ZERO.
The only way an individual would believe that the primary silver mining companies are producing silver at $5 an ounce is if they believe in the investor presentations that report CASH COSTS. Anyone who continues to use CASH COST accounting needs to get their head examined. It is by far the most bogus metric in the industry that has caused more confusion for investors than anything else... well, if we don"t include faulty analysis by certain individuals.
I find it utterly amazing that the CPM Group entirely omits silver investment from their fundamental analysis. Here is a chart of their total world silver fabrication demand from their 2016 Silver Outlook Report:
If you are a silver investor, your demand doesn"t count. It doesn"t matter if you purchased 100 of the half a billion oz of Silver Eagles sold by the U.S. Mint since 1986. How many Silver Eagles have been sold back, melted down and returned to the market to be used for industrial applications?? According to the 2017 World Silver Survey (GMFS), total Official Silver Coin sales were 965 million oz (Moz) since 2007. If we add Official Silver Coin sales for 2017, it will be well over one billion. I highly doubt any more than a fraction of that one billion oz of Offical Silver Coins were remelted and sold back into the market.
Moreover, what term do we give to companies who produce Silver Eagles or private silver rounds?? Aren"t companies fabricating silver bars and coins? While it is true that physical silver bar and coins can be sold back into the market, a lot of new demand is coming from fabricating new silver bullion products.
CPM Group only values silver as a mere commodity for the sole purpose of supplying the market for industrial, jewelry, silverware, photography and photovoltaic uses. I gather 2,000+ years of silver as money no longer matters. Yes, I would imagine some precious metals investors are feeling a bit frustrated as they watch Bitcoin go vertical towards $12,000. But a word of caution to Bitcoin investors who are dreaming about sugar plums dancing in their heads and dollar signs in the eyes.
There is a wonderful scene where a pole dancer is explaining to a fund manager how she"s buying five houses.
A lowly paid pole dancer who survives on unpredictable tips should not be able to afford multiple houses, but this was the sub-prime USA where the ability to repay a loan was apparently not a prerequisite.
What a coincidence... ah?? Pole dancers buying five homes and becoming a Bitcoin Guru. What"s next? LOL.
Regardless, the notion by CPM Group that investment demand shouldn"t be included in supply and demand forecasts suggests that the gold market has experienced a total 418 million oz (Moz) surplus since 2006. Yes, that"s correct. I calculated total global gold physical and ETF investment demand by using the World Gold Council figures:
The reason for the drop-off in net gold investment in 2013-2015 was due to Gold ETF liquidations. For example, 915 metric tons (29 Moz) of Gold ETF inventories were supposedly liquidated into the market. Even though the gold market experienced a record 1,707 metric tons of physical bar and coin demand in 2013, the liquidation of 915 metric tons of Gold ETF"s provided a net 792 metric tons of total gold investment. Please understand, I am just using these figures to prove a point. I really don"t care if the Gold ETFs have all their gold. I look at Global Gold ETF demand (spikes) as an indicator for gauging the amount of fear in the market.
The CPM Group does the same sort of supply and demand analysis for gold. They omit investment demand from the equation:
(CPM Group Chart Courtesy of Kitco.com)
Again, according to the CPM Group, gold bar and coins aren"t fabricated. They must be produced by Gold Elves in some hidden valley in the Grand Canyon. No doubt, under the strict control by the NSA department of the U.S. Government.
For anyone new to reading my work... I am being sarcastic.
Moreover, the significant change in gold investment demand is a clear sign that investors are still quite concerned about the highly inflated bubble markets. If we go back to 2002, total gold investment was a paltry 352 metric tons compared to 358 metric tons of technology consumption and 2,662 metric tons of gold jewelry demand. However, in 2011, the gold market experienced a massive 1,734 metric tons of total gold investment versus 2,513 metric tons of jewelry and technology fabrication.
What is significant about this trend change? In 2002, global gold investment was a mere 10% of total gold demand. However, by 2011, gold investment demand surged to 41% of the total, not including Central Bank demand. Even in 2016, global gold investment demand was still 40% of the total. As we can see, investors still represent 40% of the market, whereas they were only 10% in 2002.
Precious metals investors need to understand there is a huge difference between Gold and Silver versus all other metals and commodities. The overwhelming majority of commodities are consumed while gold and to a lesser extent, silver, are saved. And, they are being purchased as investments and saved for an excellent reason.
The world continues to add debt at unprecedented levels. In just the month of November, the U.S. Government added another $137 billion to its total debt. This doesn"t include the $610 billion of additional debt added since the debt ceiling was lifted on September 8th. So, the American public is indebted by another $747 billion in less than three months.
Getting back to silver, according to the GFMS team at Thomson Reuters, who provide the World Silver Survey for the Silver Institute, the market will experience a small annual silver surplus this year for the first time in several decades:
The reason for the surplus has to do with a marketed decline of silver investment demand this year. With the election of President Trump to the Whitehouse and the "Pole Dancing Guru" Bitcoin market moving up towards $12,000, demand for the silver investment fell by 50% this year. However, I don"t look at it as a negative. Oh no... it"s an indicator that the market has gone completely insane.
This reminds me once again of the movie, The Big Short. In the movie, the main actor bets big against the Mortgaged-Backed Securities. Unfortunately, just as the housing markets start to crash and the mortgage-back security market begins to get in trouble, the bets that the main actor in the movie made, began to go against him. That"s correct. His short bets against the market should have started to gain in value, but the banks wanted to dump as much of that crap on other POOR UNWORTHY SLOB INVESTORS before they would let it rise.
We are in the very same situation today. However, the entire market is being propped up, not just the housing market.
It is impossible to forecast a more realistic gold and silver price when 99% of the market is invested in the wrong assets. So, for the CPM Group to value gold and silver based on their fabrication demand totally disregards 2,000+ years of their use as monetary metals.
Thus, it comes down to an IDEOLOGY on why Gold and Silver should be valued differently than mere commodities, or even most STOCKS, BONDS, and REAL ESTATE. Valuing gold and silver can"t be done with typical supply and demand fundaments. The only reason I analyze supply and demand fundamentals is to understand what is happening to the market over a period of time.
For example, if we look at total global silver investment demand and price, there isn"t a correlation:
But, if we look at what happened to silver investment demand since the 2008 Housing and Banking collapse, we can spot a significant trend change:
As we can see, world physical silver bar and coin demand nearly quadrupled after the 2008 Housing and Banking collapse. This is the indicator that is important to understand. While silver investment demand after 2008 has increased partly due to the higher price, the more important motivation by investors is likely a strategic hedge against the highly-leveraged fiat monetary system and stock market.
Investors who follow the CPM Group"s analysis on gold and silver based upon fabrication demand only, are being misinformed. Jeff Christian who runs the CPM Group has no idea about the Falling EROI - Energy Returned On Investment or does he understand the dire energy predicament we are facing. Thus, Mr. Christian and the CPM Group still look at the markets as if they will continue business as usual for the next 50 years.
We are heading into a future that we are not prepared. The economy and markets will likely disintegrate much quicker than anything we have experienced before. I believe the Bitcoin-Cryptocurrency market is going to collapse shortly due to what I see as extreme leverage in the system with very little in the way of cash reserves. I hear stories that trading in and out of cryptos isn"t a problem until you want to receive a substantial amount of funds in your bank. That is a huge RED FLAG.
So, take this warning... as well as the knowledge that pole dancers are becoming Bitcoin gurus. If it"s too good to be true, it"s likely too good to be true.
Lastly, I want to thank everyone who continues to support the SRSrocco Report site. Those who have become members of my site or Patreon might wonder why the membership count does not rise that much. This is because while I receive new members, some fall off each month for various reasons. However, I sincerely appreciate the support and believe the SRSrocco Report site is providing analysis, information, and data not found anywhere else on the internet.
One of the most notable events in Russia’s precious metals market calendar is the annual “Russian Bullion Market” conference. Formerly known as the Russian Bullion Awards, this conference, now in its 10th year, took place this year on Friday 24 November in Moscow. Among the speakers lined up, the most notable inclusion was probably Sergey Shvetsov, First Deputy Chairman of Russia’s central bank, the Bank of Russia.
In his speech, Shvetsov provided an update on an important development involving the Russian central bank in the worldwide gold market, and gave further insight into the continued importance of physical gold to the long term economic and strategic interests of the Russian Federation.
Firstly, in his speech Shvetsov confirmed that the BRICS group of countries are now in discussions to establish their own gold trading system. As a reminder, the 5 BRICS countries comprise the Russian Federation, China, India, South Africa and Brazil.
Four of these nations are among the world’s major gold producers, namely, China, Russia, South Africa and Brazil. Furthermore, two of these nations are the world’s two largest importers and consumers of physical gold, namely, China and Russia. So what these economies have in common is that they all major players in the global physical gold market.
Shvetsov envisages the new gold trading system evolving via bilateral connections between the BRICS member countries, and as a first step Shvetsov reaffirmed that the Bank of Russia has now signed a Memorandum of Understanding with China (see below) on developing a joint trading system for gold, and that the first implementation steps in this project will begin in 2018.
Interestingly, the Bank of Russia first deputy chairman also discounted the traditional dominance of London and Switzerland in the gold market, saying that London and the Swiss trading operations are becoming less relevant in today’s world. He also alluded to new gold pricing benchmarks arising out of this BRICS gold trading cooperation.
BRICS cooperation in the gold market, especially between Russia and China, is not exactly a surprise, because it was first announced in April 2016 by Shvetsov himself when he was on a visit to China.
“We (the Central Bank of the Russian Federation and the People’s Bank of China) discussed gold trading. The BRICS countries (Brazil, Russia, India, China and South Africa) are major economies with large reserves of gold and an impressive volume of production and consumption of the precious metal. In China, gold is traded in Shanghai, and in Russia in Moscow. Our idea is to create a link between these cities so as to intensify gold trading between our markets.”
Also as a reminder, earlier this year in March, the Bank of Russia opened its first foreign representative office, choosing the location as Beijing in China. At the time, the Bank of Russia portrayed the move as a step towards greater cooperation between Russia and China on all manner of financial issues, as well as being a strategic partnership between the Bank of Russia and the People’s bank of China.
The Memorandum of Understanding on gold trading between the Bank of Russia and the People’s Bank of China that Shvetsov referred to was actually signed in September of this year when deputy governors of the two central banks jointly chaired an inter-country meeting on financial cooperation in the Russian city of Sochi, location of the 2014 Winter Olympics.
Deputy Governors of the People’s Bank of China and Bank of Russia sign Memorandum on Gold Trading, Sochi, September 2017. Photo: Bank of Russia
National Security and Financial Terrorism
At the Moscow bullion market conference last week, Shvetsov also explained that the Russian State’s continued accumulation of official gold reserves fulfills the goal of boosting the Russian Federation’s national security. Given this statement, there should really be no doubt that the Russian State views gold as both as an important monetary asset and as a strategic geopolitical asset which provides a source of wealth and monetary power to the Russian Federation independent of external financial markets and systems.
And in what could either be a complete coincidence, or a coordinated update from another branch of the Russian monetary authorities, Russian Finance Minister Anton Siluanov also appeared in public last weekend, this time on Sunday night on a discussion program on Russian TV channel “Russia 1”.
Siluanov’s discussion covered the Russian government budget and sanctions against the Russian Federation, but he also pronounced on what would happen in a situation where a foreign power attempted to seize Russian gold and foreign exchange reserves. According to Interfax, and translated here into English, Siluanov said that:
“If our gold and foreign currency reserves were ever seized, even if it was just an intention to do so, that would amount to financial terrorism. It would amount to a declaration of financial war between Russia and the party attempting to seize the assets.”
As to whether the Bank of Russia holds any of its gold abroad is debatable, because officially two-thirds of Russia’s gold is stored in a vault in Moscow, with the remaining one third stored in St Petersburg. But Silanov’s comment underlines the importance of the official gold reserves to the Russian State, and underscores why the Russian central bank is in the midst of one of the world’s largest gold accumulation exercises.
1800 Tonnes and Counting
From 2000 until the middle of 2007, the Bank of Russia held around 400 tonnes of gold in its official reserves and these holdings were relatively constant. But beginning in the third quarter 2007, the bank’s gold policy shifted to one of aggressive accumulation. By early 2011, Russian gold reserves had reached over 800 tonnes, by the end of 2014 the central bank held over 1200 tonnes, and by the end of 2016 the Russians claimed to have more than 1600 tonnes of gold.
Although the Russian Federation’s gold reserves are managed by the Bank of Russia, the central bank is under federal ownership, so the gold reserves can be viewed as belonging to the Russian Federation. It can therefore be viewed as strategic policy of the Russian Federation to have embarked on this gold accumulation strategy from late 2007, a period that coincides with the advent of the global financial market crisis.
According to latest figures, during October 2017 the Bank of Russia added 21.8 tonnes to its official gold reserves, bringing its current total gold holdings to 1801 tonnes. For the year to date, the Russian Federation, through the Bank of Russia, has now announced additions of 186 tonnes of gold to its official reserves, which is close to its target of adding 200 tonnes of gold to the reserves this year.
With the Chinese central bank still officially claiming to hold 1842 tonnes of gold in its national gold reserves, its looks like the Bank of Russia, as soon as the first quarter 2018, will have the distinction of holdings more gold than the Chinese. That is of course if the Chinese sit back and don’t announce any additions to their gold reserves themselves.
The Bank of Russia now has 1801 tonnes of gold in its official reserves
A threat to the London Gold Market
The new gold pricing benchmarks that the Bank of Russia’s Shvetsov signalled may evolve as part of a BRICS gold trading system are particularly interesting. Given that the BRICS members are all either large producers or consumers of gold, or both, it would seem likely that the gold trading system itself will be one of trading physical gold. Therefore the gold pricing benchmarks from such a system would be based on physical gold transactions, which is a departure from how the international gold price is currently discovered.
However, ‘gold’ trading in London and on COMEX is really trading of very large quantities of synthetic derivatives on gold, which are completely detached from the physical gold market. In London, the derivative is fractionally-backed unallocated gold positions which are predominantly cash-settled, in New York the derivative is exchange-traded gold future contracts which are predominantly cash-settles and again are backed by very little real gold.
While the London and New York gold markets together trade virtually 24 hours, they interplay with the current status quo gold reference rate in the form of the LBMA Gold Price benchmark. This benchmark is derived twice daily during auctions held in London at 10:30 am and 3:00 pm between a handful of London-based bullion banks. These auctions are also for unallocated gold positions which are only fractionally-backed by real physical gold. Therefore, the de facto world-wide gold price benchmark generated by the LBMA Gold Price auctions has very little to do with physical gold trading.
Conclusion
It seems that slowly and surely, the major gold producing nations of Russia, China and other BRICS nations are becoming tired of the dominance of an international gold price which is determined in a synthetic trading environment which has very little to do with the physical gold market.
The Shanghai Gold Exchange’s Shanghai Gold Price Benchmark which was launched in April 2016 is already a move towards physical gold price discovery, and while it does not yet influence prices in the international market, it has the infrastructure in place to do so.
When the First Deputy Chairman of the Bank of Russia points to London and Switzerland as having less relevance, while spearheading a new BRICS cross-border gold trading system involving China and Russia and other “major economies with large reserves of gold and an impressive volume of production and consumption of the precious metal”, it becomes clear that moves are afoot by Russia, China and others to bring gold price discovery back to the realm of the physical gold markets. The icing on the cake in all this may be gold price benchmarks based on international physical gold trading.
One of the most notable events in Russia’s precious metals market calendar is the annual “Russian Bullion Market” conference. Formerly known as the Russian Bullion Awards, this conference, now in its 10th year, took place this year on Friday 24 November in Moscow. Among the speakers lined up, the most notable inclusion was probably Sergey Shvetsov, First Deputy Chairman of Russia’s central bank, the Bank of Russia.
In his speech, Shvetsov provided an update on an important development involving the Russian central bank in the worldwide gold market, and gave further insight into the continued importance of physical gold to the long term economic and strategic interests of the Russian Federation.
Firstly, in his speech Shvetsov confirmed that the BRICS group of countries are now in discussions to establish their own gold trading system. As a reminder, the 5 BRICS countries comprise the Russian Federation, China, India, South Africa and Brazil.
Four of these nations are among the world’s major gold producers, namely, China, Russia, South Africa and Brazil. Furthermore, two of these nations are the world’s two largest importers and consumers of physical gold, namely, China and Russia. So what these economies have in common is that they all major players in the global physical gold market.
Shvetsov envisages the new gold trading system evolving via bilateral connections between the BRICS member countries, and as a first step Shvetsov reaffirmed that the Bank of Russia has now signed a Memorandum of Understanding with China (see below) on developing a joint trading system for gold, and that the first implementation steps in this project will begin in 2018.
Interestingly, the Bank of Russia first deputy chairman also discounted the traditional dominance of London and Switzerland in the gold market, saying that London and the Swiss trading operations are becoming less relevant in today’s world. He also alluded to new gold pricing benchmarks arising out of this BRICS gold trading cooperation.
BRICS cooperation in the gold market, especially between Russia and China, is not exactly a surprise, because it was first announced in April 2016 by Shvetsov himself when he was on a visit to China.
“We (the Central Bank of the Russian Federation and the People’s Bank of China) discussed gold trading. The BRICS countries (Brazil, Russia, India, China and South Africa) are major economies with large reserves of gold and an impressive volume of production and consumption of the precious metal. In China, gold is traded in Shanghai, and in Russia in Moscow. Our idea is to create a link between these cities so as to intensify gold trading between our markets.”
Also as a reminder, earlier this year in March, the Bank of Russia opened its first foreign representative office, choosing the location as Beijing in China. At the time, the Bank of Russia portrayed the move as a step towards greater cooperation between Russia and China on all manner of financial issues, as well as being a strategic partnership between the Bank of Russia and the People’s bank of China.
The Memorandum of Understanding on gold trading between the Bank of Russia and the People’s Bank of China that Shvetsov referred to was actually signed in September of this year when deputy governors of the two central banks jointly chaired an inter-country meeting on financial cooperation in the Russian city of Sochi, location of the 2014 Winter Olympics.
Deputy Governors of the People’s Bank of China and Bank of Russia sign Memorandum on Gold Trading, Sochi, September 2017. Photo: Bank of Russia
National Security and Financial Terrorism
At the Moscow bullion market conference last week, Shvetsov also explained that the Russian State’s continued accumulation of official gold reserves fulfills the goal of boosting the Russian Federation’s national security. Given this statement, there should really be no doubt that the Russian State views gold as both as an important monetary asset and as a strategic geopolitical asset which provides a source of wealth and monetary power to the Russian Federation independent of external financial markets and systems.
And in what could either be a complete coincidence, or a coordinated update from another branch of the Russian monetary authorities, Russian Finance Minister Anton Siluanov also appeared in public last weekend, this time on Sunday night on a discussion program on Russian TV channel “Russia 1”.
Siluanov’s discussion covered the Russian government budget and sanctions against the Russian Federation, but he also pronounced on what would happen in a situation where a foreign power attempted to seize Russian gold and foreign exchange reserves. According to Interfax, and translated here into English, Siluanov said that:
“If our gold and foreign currency reserves were ever seized, even if it was just an intention to do so, that would amount to financial terrorism. It would amount to a declaration of financial war between Russia and the party attempting to seize the assets.”
As to whether the Bank of Russia holds any of its gold abroad is debatable, because officially two-thirds of Russia’s gold is stored in a vault in Moscow, with the remaining one third stored in St Petersburg. But Silanov’s comment underlines the importance of the official gold reserves to the Russian State, and underscores why the Russian central bank is in the midst of one of the world’s largest gold accumulation exercises.
1800 Tonnes and Counting
From 2000 until the middle of 2007, the Bank of Russia held around 400 tonnes of gold in its official reserves and these holdings were relatively constant. But beginning in the third quarter 2007, the bank’s gold policy shifted to one of aggressive accumulation. By early 2011, Russian gold reserves had reached over 800 tonnes, by the end of 2014 the central bank held over 1200 tonnes, and by the end of 2016 the Russians claimed to have more than 1600 tonnes of gold.
Although the Russian Federation’s gold reserves are managed by the Bank of Russia, the central bank is under federal ownership, so the gold reserves can be viewed as belonging to the Russian Federation. It can therefore be viewed as strategic policy of the Russian Federation to have embarked on this gold accumulation strategy from late 2007, a period that coincides with the advent of the global financial market crisis.
According to latest figures, during October 2017 the Bank of Russia added 21.8 tonnes to its official gold reserves, bringing its current total gold holdings to 1801 tonnes. For the year to date, the Russian Federation, through the Bank of Russia, has now announced additions of 186 tonnes of gold to its official reserves, which is close to its target of adding 200 tonnes of gold to the reserves this year.
With the Chinese central bank still officially claiming to hold 1842 tonnes of gold in its national gold reserves, its looks like the Bank of Russia, as soon as the first quarter 2018, will have the distinction of holdings more gold than the Chinese. That is of course if the Chinese sit back and don’t announce any additions to their gold reserves themselves.
The Bank of Russia now has 1801 tonnes of gold in its official reserves
A threat to the London Gold Market
The new gold pricing benchmarks that the Bank of Russia’s Shvetsov signalled may evolve as part of a BRICS gold trading system are particularly interesting. Given that the BRICS members are all either large producers or consumers of gold, or both, it would seem likely that the gold trading system itself will be one of trading physical gold. Therefore the gold pricing benchmarks from such a system would be based on physical gold transactions, which is a departure from how the international gold price is currently discovered.
However, ‘gold’ trading in London and on COMEX is really trading of very large quantities of synthetic derivatives on gold, which are completely detached from the physical gold market. In London, the derivative is fractionally-backed unallocated gold positions which are predominantly cash-settled, in New York the derivative is exchange-traded gold future contracts which are predominantly cash-settles and again are backed by very little real gold.
While the London and New York gold markets together trade virtually 24 hours, they interplay with the current status quo gold reference rate in the form of the LBMA Gold Price benchmark. This benchmark is derived twice daily during auctions held in London at 10:30 am and 3:00 pm between a handful of London-based bullion banks. These auctions are also for unallocated gold positions which are only fractionally-backed by real physical gold. Therefore, the de facto world-wide gold price benchmark generated by the LBMA Gold Price auctions has very little to do with physical gold trading.
Conclusion
It seems that slowly and surely, the major gold producing nations of Russia, China and other BRICS nations are becoming tired of the dominance of an international gold price which is determined in a synthetic trading environment which has very little to do with the physical gold market.
The Shanghai Gold Exchange’s Shanghai Gold Price Benchmark which was launched in April 2016 is already a move towards physical gold price discovery, and while it does not yet influence prices in the international market, it has the infrastructure in place to do so.
When the First Deputy Chairman of the Bank of Russia points to London and Switzerland as having less relevance, while spearheading a new BRICS cross-border gold trading system involving China and Russia and other “major economies with large reserves of gold and an impressive volume of production and consumption of the precious metal”, it becomes clear that moves are afoot by Russia, China and others to bring gold price discovery back to the realm of the physical gold markets. The icing on the cake in all this may be gold price benchmarks based on international physical gold trading.
- "Technical issue" at Fidelity blocks access to online accounts, stops online trading - Fidelity is 3rd largest brokerage by client assets: $1.7 trillion at the end of 2016 - NatWest, RBS, Ulster Bank have experienced online banking "issues" in November - Clients left without access to funds & failed payments & little to no recourse - Social media exposing the banks" and online trading platforms" shortcomings - Reminder that online accounts can be rendered non-viable and vulnerability of absolute dependence and digital cash, digital gold etc
Editor: Mark O"Byrne
Yesterday, customers of Fidelity, the third largest brokerage in the world, found themselves unable to access their online accounts.
The company is responsible for an estimated 8% of total US wealth management. With such a huge responsibility, Fidelity, like most companies, works hard to ensure clients have access to online accounts at all times.
Yet it still happened, reminding investors of the risks posed by digital assets - be they stocks, gold or indeed deposits - held solely through online accounts and platforms - the "Single point of failure".
Fidelity is just one of many online "outages" or "glitches" reported by financial institutions in the last year. In Europe, particularly the United Kingdom, banking customers have found themselves regularly facing bank account "glitches". It is thanks to social media that some of these even come to the fore, with many organisations keen to sweep them under the carpet.
Investors, savers and, in fact, any user of online services needs to be aware of the risks and how to protect themselves in the case of a sudden "access denied" message or worse, a prolonged period of not being able to access, trade and or withdraw funds from an online account.
Not like the old days...
Prior to online accounts it rarely occurred to users that they could suddenly be without access to funds, unable to make transactions or even receive their wages. Sadly, with the dawn of the internet and growing cyber security risks this is something no-one can afford to be without a plan-B for.
Outages can happen for a number of reasons, but many result in customers being unable to transact and being without funds.
In the case of Fidelity, it appears to have been an internal error, which also seems to be the common thread among many banking outages. However, cyber security is a major threat to any account that involves personal data and financial information.
Just this week Uber finally admitted exposing hackers to over 2.7 million customers" data, putting savings and futures at risk.
We must also consider what happened in Puerto Rico for a lesson in how vulnerable we are should natural disasters impede access to much needed personal funds for days and weeks.
Absolute reliance on online accounts and digital cash and digital gold is not prudent. When such accounts can be rendered non-viable in a matter of seconds, there is little recourse for the digital saver and investor should they not also own some tangible assets.
Social media prevents cover-up
Online account failures are becoming more common. We are increasingly aware of this thanks to social media. Whilst the majority of outages experienced in the West are resolved within a few hours (in the case of Fidelity it was hours) or days, customers are left feeling nervous and frustrated and in some cases they experience real repercussions. Rents are not paid, important direct debits fail and charges are incurred.
This last month Lloyds and Halifax Bank of Scotland experienced major issues with accounts. Some account holders not only found transactions weren"t processed but also logged in to be told they no longer had an account with their bank.
Many customers in the recent Natwest outage were particularly frustrated at the bank"s lack of communication and failure to alert account holders to the problem.
“Not just an online problem, my bank card is not working now as well for online payments! People have bills to pay, how much longer?”
“You were acknowledging this problem over an hour ago but only to those that tweeted you directly. Why has it taken so long for a public tweet?”
Also this week Nationwide customers found themselves embarrassed when their funded accounts suggested they had no money:
Banking outages are becoming so common that we no longer hear reports in the mainstream media of them. Users report to feeling "embarrassed" but the reality and severity of the situation and can have far-reaching complications.
One would have thought that banks would have learnt from the 2012 disaster that was seen in the summer of 2012 for customers of RBS, NatWest and Ulster Bank. Users found they could not access funds for a week or more as account balances had to be manually updated. RBS was fined £56m for the inconvenience and risk placed on account holders.
Complacency amongst bank and online account users
I don"t think I am aware of a single person who has not experienced problems with bank or financial account services. Whether access to, payment issues or information failure everyone I know has come up against such issues in the past.
Concern regarding the risks to online customers is so high that the European Banking Authority this week mentioned the growing reliance on online digital platforms as a major risk to customers.
What do the majority of people do? Get a bit annoyed then shrug their shoulders and make some comment about "banks today". The same goes for the likes of Fidelity, Uber and TalkTalk, non-banks who have also exposed their customers with little to no recourse for the end user.
The lethargy regarding customers" switching banks is astonishing when one considers the problems that have been caused in recent years. This is for two reasons, the first is because there is little knowledge of the alternatives out there and secondly, because there is a belief that this is just what you have to put up with these days.
This is a sad state of affairs. Those who earn and save money have every right to be able to access their funds at all times, for whatever purpose. It is tragic that the digital, online economy has made many feel otherwise. For something that was heralded as giving customers so many more options, it is instead making many feel trapped and without options.
Cyber-attacks, natural disasters and technical errors are all very good reasons for those who wish to hold money and data with an organisation to seek out ways to diversify their investments. This is not just in terms of spreading the risks between digital accounts, but also away from solely digital assets.
Gold and silver often get a bad rap when it comes to discussions about their role as money. Both are pushed to the bottom of the pile when you consider the convenience of spending on a card, paying out wages or making quick gains when trading stocks and shares.
But one thing that is guaranteed with physical, allocated and segregated gold and coins and bars for delivery as offered by GoldCore, is that you know you will always have access and liquidity due to outright legal ownership of bullion. Either with bullion in your possession or with direct ownership in some of the safest vaults in the world. That is not the case with fiat electrons bank accounts or online trading accounts, whether in times of crisis or technical outages.
In addition many such platforms force you to only buy and sell through their online account and their online platform and website. Such digital platforms are “closed loop systems” where liquidity and pricing are dependent on a single platform, website and large corporation. A buyer can only buy and sell through that one online platform. An investor is in effect “captive” and massively dependent on that one counter party and a single point of failure.
No matter the town, city or country you find yourself in, times such as these pose multiple threats whether military, natural or just digital.
Today we still assume banks, companies and governments are competent and will look after our accounts. We cannot bring ourselves to imagine electricity systems and our banking systems including ATMs going down and not having access to our hard earned savings. This is despite it clearly happening increasingly frequently.
A popular phrase in segments of the mainstream financial media is that “You Can’t Eat Gold”. We don’t know who first uttered this comment, but it was more than likely a talking-head or Wall Street analyst on CNBC or Bloomberg.
The disparaging claim seems to be based on concluding that in a financial or monetary crisis, if you own gold, that “You Can’t Eat It”. And so, according to the logic of whoever came up with the phrase, this would make gold useless during a financial crisis.
In addition to the misleading and irrelevant nature of the comment, which we will discuss below, the claim that “you can’t eat gold” is actually factually wrong. And that is because you can eat gold. And also drink it.
Eating and Drinking Gold
While gold can be eaten, it cannot be digested. But it is non-toxic to the human body. And it does not react chemically in the human body. That is why gold can and does appear safely in a number of foods and drinks, not surprisingly foods and drinks which are predominantly at the luxury end of the market.
Some readers will have heard of Goldschläger, a Swiss/Italian liquor which has flakes gold suspended within it. On a similar note, a Swiss gin called ‘Studer Swiss Gold Gin’ also contains flakes of gold. Staying within Switzerland, you can also buy edible gold products including “Swiss chocolate truffles with gold flakes”. Not to be outdone by the Swiss, the Emirates Palace Hotel in Abu Dhabi (United Arab Emirates) offers a ‘Palace Cappucino” which is sprinkled with gold flakes.
In Selfridges department store in London, you can buy a “billionaires soft serve” ice cream cone topped with both sprinklings of gold leaf and a gold leaf covered flake. While in New York, in Manhattan’s Upper East Side, a high-end restaurant offers a "Golden Opulence Sundae” topped with gold leaf, for US$ 1000 a glass. Back in England, a specialist cheese producer in Leicestershire created Britain"s most expensive cheese - "Clawson Stilton Gold", a stilton cheese interwoven with edible gold leaf and shot-through with gold liqueur. These uses of gold in food and beverages illustrate that gold is a sought after and prestigious substance, but also that gold is real, that gold is tangible and that gold is of value.
Wall Street"s Selective Focus
The logic of the “you can’t eat gold” comment, as well as being wrong, is also flawed. Because by extension, you can’t eat any of Wall Street"s favorite investment assets. Imagine chewing on financial securities or fiat currencies. But whoever coined the phrase “you can’t eat gold” conveniently failed to mention this on CNBC. We would challenge anyone, especially CNBC and MSNBC, to eat share certificates or bond certificates or the electronic equivalent thereof.
Nor can you eat the electronic coins of cryptocurrencies such as Bitcoin, Ethereum’s Ether or Litecoin. Real assets such as art, antiques, real estate, agricultural land, or vintage cars are also off the menu. A possible exception is that can drink an expensive investment wine collection, but would you really want to do this, as then you would be consuming your principal investment?
Wall Street analysts fail to mention that you can"t eat stocks and ETFs
Gold"s Many and Varied Benefits
But beyond the fact that you can in fact eat gold, and that Wall Street never points out the non-edibility of stocks and bonds, there are many beneficial reasons to buy and own investment grade physical gold of which we recently pointed out in 28 reasons to buy and own physical gold. What we are talking about is real physical gold in the form of gold bars and gold coins. This is true both during times of financial crisis, and also over the long-term as a form of investment and savings.
Gold is without doubt the ultimate safe haven asset. In times of financial crisis and turmoil, investors and savers flock to gold as a wealth preservation strategy. The reason for investing in gold during times of crisis is based on the fact that investors instinctively know that the gold price behaves differently to the prices of other assets, particularly during crises. This is because the gold price moves independently of economic and business cycles.
In times of war and social upheaval, physical gold"s benefits also come to the fore. Since gold has a high value to weight ratio, significant personal wealth can discreetly be carried in the form of gold across borders and frontiers and within areas of conflict.
Since gold is a universal money supported by a highly liquid global market, it will always be accepted everywhere at the going gold price. Gold can easily be sold. Gold can easily be traded or even bartered with, especially in non-functioning economies where the local paper currency has collapsed or has become worthless. The fact that gold coins are regularly issued to elite military personnel in areas of conflict attests to gold"s critical benefits in times of monetary crisis and localized economic collapse.
Gold as Store of Value
But gold is not just of use during financial crises. It is also an essential asset to own over the long-term as a strategic form of saving and investment. Physical gold retains its purchasing power over long periods of time. This is in contrast to fiat currencies issued by the world"s central banks, which generally lose most of their purchasing power over time. In other words, gold is a great hedge against inflation, as the gold price adjusts upwards to offset inflation. The gold price even adjusts to inflation expectations, hence it is sometimes called an inflation barometer and is watched like a hawk by central bankers because the gold price signals future inflation.
Physical gold is also an asset without counterparty risk. This is because when you own physical gold in the form of gold bars or gold coins, there are no counterparties. In other words, the physical gold that you own outright is no one else"s liability. Nor are there any governments or central banks involved in issuing gold, or in trying to increase and debase its supply. Gold also lacks default risk, because it cannot default.
Physical gold is also inherently valuable because it is a scarce precious metal that is difficult and costly to mine and refine. Gold"s price will never go to zero because it has a finite and significant production cost. Physical gold is difficult to counterfeit, impossible to create artificially, and cannot be debased.
These are just some of the reasons for buying and owning physical gold. Please see BullionStar"s recent article"28 Reasons to Buy Physical Gold" for a list of reasons why you should consider buying physical gold.
Gold in Zimbabwe & Venezuela & South Korea
In the real world, owning physical gold can be of critical importance in scenarios where trust in a nation"s money supply has evaporated, such as is currently the case in Venezuela or Zimbabwe.
Gold can also be of critical importance when entire nations suffer economic shocks. A case in point is the interesting experience of South Korea during the Asian financial crisis that swept the region in the late 1990s. This crisis left the South Korean economy severely impaired, with it’s currency, the Won, collapsing against the US dollar.
In addition to a bailout by the International Monetary Fund, the South Korean government also launched a patriotic campaign in early 1998 to actually collect physical gold from the South Korean citizens which was then sold on the international market to raise much-needed foreign currency. This collective campaign was pursued precisely because the South Korean government understood that gold is a high-quality liquid asset that has substantial value.
National Mobilization of Gold
By mid-March 1998, the South Korean citizenry had donated more than 220 tonnes of gold, worth over US$2 billion, in the form of investment gold coins and bars, and other gold in the form of rings, jewelry, and gold medals. More than 3 million households were said to have contributed. This collective mobilization of gold to overcome a nation"s economic adversity and raise financing is a great illustration of how gold comes to the fore in a time of crisis, due to its store of value, safe haven, and high liquidity characteristics.
In conclusion, knowing the many compelling reasons to buy and hold gold, and how gold can sometimes be a lifeline in a time of crisis, the claim that "you can"t eat gold" is exposed for what it is, misguided and disingenuous, and shows either ignorance on the part of the people who use it, or more likely, a deliberate intention to mislead and deceive.
This article originally appeared under the same title on the BullionStar.com website.
The physical fundamentals are stronger than ever for gold.
Russia and China continue to be huge buyers. China bans export of its 450 tons per year of physical production.
Gold refiners are working around the clock and cannot meet demand.
Gold refiners are also having difficulty finding gold to refine as mining output, official bullion sales and scrap inflows all remain weak.
Private bullion continues to migrate from bank vaults at UBS and Credit Suisse into nonbank vaults at Brinks and Loomis, thus reducing the floating supply available for bank unallocated gold sales.
In other words, the physical supply situation has been tight as a drum.
The problem, of course, is unlimited selling in “paper” gold markets such as the Comex gold futures and similar instruments.
One of the flash crashes this year was precipitated by the instantaneous sale of gold futures contracts equal in underlying amount to 60 tons of physical gold. The largest bullion banks in the world could not source 60 tons of physical gold if they had months to do it.
There’s just not that much gold available. But in the paper gold market, there’s no limit on size, so anything goes.
There’s no sense complaining about this situation. It is what it is, and it won’t be broken up anytime soon. The main source of comfort is knowing that fundamentals always win in the long run even if there are temporary reversals. What you need to do is be patient, stay the course and buy strategically when the drawdowns emerge.
Where do we go from here?
There are many compelling reasons why gold should outperform over the coming months.
Deteriorating relations between the U.S. and Russia will only accelerate Russia’s efforts to diversify its reserves away from dollar assets (which can be frozen by the U.S. on a moment’s notice) to gold assets, which are immune to asset freezes and seizures.
The countdown to war with North Korea is underway, as I’ve explained repeatedly in these pages. A U.S. attack on the North Korean nuclear and missile weapons programs is likely by mid-2018.
Finally, we have to deal with our friends at the Fed. Good jobs numbers have given life to the view that the Fed will raise interest rates next month. The standard answer is that rate hikes make the dollar stronger and are a head wind for the dollar price of gold.
But I remain skeptical about a December hike. As I explained above, the market is looking in the wrong places for clues to Fed policy. Jobs reports are irrelevant; that was “mission accomplished” for the Fed years ago.
The key data are disinflation numbers. That’s what has the Fed concerned, and that’s why the Fed might pause again in December as it did last September.
We’ll have a better idea when PCE core inflation comes out Nov. 30.
Of course, the Fed’s main inflation metric has been moving in the wrong direction since January. The readings on the core PCE deflator year over year (the Fed’s preferred metric) were:
January 1.9%
February 1.9%
March 1.6%
April 1.6%
May 1.5%
June 1.5%
July 2017: 1.4%
August 2017: 1.3%
September 2017: 1.3%
Again, the October data will not be available until Nov. 30.
The Fed’s target rate for this metric is 2%. It will take a sustained increase over several months for the Fed to conclude that inflation is back on track to meet the Fed’s goal.
There’s obviously no chance of this happening before the Fed’s December meeting.
A weak dollar is the Fed’s only chance for more inflation. The way to get a weak dollar is to delay rate hikes indefinitely, and that’s what I believe the Fed will do.
And a weak dollar means a higher dollar price for gold.
Current levels look like the last stop before $1,300 per ounce. After that, a price surge is likely as buyers jump on the bandwagon, and then it’s up, up and away.
Why do I say that?
There’s an old saying that “a picture is worth a thousand words.” This chart is a good example of why that’s true:
Gold analyst Eddie Van Der Walt produced this 10-year chart for the dollar price of gold showing that gold prices have been converging into a narrow tunnel between two price trends - one trending higher and one lower - for the past six years.
This pattern has been especially pronounced since 2015. You can see gold has traded up and down in a range between $1,050 and $1,380 per ounce. The upper trend line and the lower trend line converge into a funnel.
Since gold will not remain in that funnel much longer (because it converges to a fixed price) gold will likely “break out” to the upside or downside, typically with a huge move that disrupts the pattern.
At the extreme, this could imply a gold price on its way to $1,800 or $800 per ounce. Which will it be?
The evidence overwhelmingly supports the thesis that gold will break out to the upside. Central banks are determined to get more inflation and will flip to easing policies if that’s what it takes.
Geopolitical risks are piling up from North Korea, to Saudi Arabia, to the South China Sea and beyond.
The failure of the Trump agenda has put the stock market on edge and a substantial market correction may be in the cards. Acute shortages of physical gold have also set the stage for a delivery failure or a short squeeze.
Any one of these developments is enough to send gold soaring in response to a panic or as part of a flight to quality. The only force that could take gold lower is deflation, and that is the one thing central banks will never allow. The above chart is one of the most powerful bullish indicators I’ve ever seen.
Get ready for an explosion to the ups ide in the dollar price of gold. Make sure you have your physical gold and gold mining shares before the breakout begins.
For What it is Worth: We are buying Gold in our small family fund. This is a trade, not an investment. Potentially a much longer term trade for us than normal, possibly a 12 month hold as opposed to our 3 day positions. We are buying physical in quantities that will not need to be sold if we are wrong, thus no leverage. We will also be swing trading gold with an upward bias as our indicators dictate below $1260 or above $1306.
Target picking is risky in an asset whose value is largely based on sentiment and prone to being "jawboned" into its proper place. But we believe for various reasons that if Gold does not pierce $1260 spot, its chances of a rally topping between $1450 and $1700 are strong over the next 12-18 months. The wide target range reflects the emotional factor in Gold"s behavior far outweighing supply, production costs, and its lack of fundamentals to measure using tools like EBITDA, PE, and cash flows. And our own analysis is corroborated from several different disciplines from whom we did not seek out to rationalize. It"s a trade, that"s all. But it"s a very good and very rare risk reward trade. it has set up right now. Further, it will either be violently and decisively confirmed (or negated) above $1306 or below $1260.
Why are we sharing this? That same question should be asked of Ray Dalio, Jeff Gundlach and others who announce they are bullish on Gold after they have bought. Our own position is not relevant to the market overall and we do not need to market our tiny positions to create an exit strategy a la George Soros. The premise for the trade happens so rarely its worth writing about, if for no other reason as an exercise in outsourcing our self-discipline on the trade.
When trading short term periods, intraday and intraweek, we use a volatility system for alerts to incipient movement. We risk 1 to make 2 and move on when wrong. It works about 50% of the time. it is net profitable. And best of all, positions that are in limbo are closed expeditiously. This is after all a volatility system. No vol, no position. It"s been cited here many times in the past. When it is right, it is very right. when it is wrong, you are out. Past posts and a 25 year track record of use bear this out from our active days. The bottom of this post goes into more detail on its use.
What we never did at Echobay or its predecessor fund CIS Energy, was use it on long term charts. We certainly looked at them, but only for bias in shorter term trades. Last month we took a serious look at our VBS algorithm on a monthly chart. Here is what we found:
Gold has a tremendous risk reward setting up above $1306 or below $1260..... which way from there is not known but can be handicapped once either number is breached
for a nexplanation of VBS see bottom Appendix
Step 2: How Equity Funds Play Gold
Portfolio managers at large equity funds who have contributed here anonymously use systems that advise them when being in cash as opposed to long stocks is prudent. What is also known is that funds like these punt gold positions with their discretionary in-house money for fun.
They use similar systems for entry and exit, and never risk much in their positions. Gold is a hobby to these guys. As a result, they like to buy and walk away with long term trade orientations and firm stops. This means using long term moving averages to avoid noise. We know this is true. And here is an example of how that type of positions is implemented:
In a recent interview a vocal critic of the Gold industry explained why he was buying Gold
…Gold is poised to close above its 12-month moving average for the second straight month. Going back to 1970, the average monthly return for gold following a close above the 12-month moving average is 1.47%. The average monthly return following a close below the 12-month moving average is -0.15%.
If you used the simplest of trend-following methods, investing in gold when it was above its 12-month moving average, and going to cash when it is below, the results would have been far better than just buying and holding gold. He continues:
The chart below shows when you would have been invested in gold and when you would have been out. Granted, prior to GLD, this could only have been done with futures contracts, or gold bullion, with the former adding a degree of leverage that I would not have been comfortable with, and the latter adding a degree of paranoia that also would have made me uncomfortable.
About Physical vs. ETF: While we agree with the rationale behind GLD vs futures if you are trading and not investing, we feel for multiple reasons the physical gold market is going to open up and become a serious competitor to ETF allocations within 12 months. Specifically, blockchain products are coming, and if properly implemented as a pipeline, owning physical gold not held in trust by a GLD custodian will be as easy as clicking a mouse. You will buy and sell physical Gold that will be yours and verified via the blockchain system.
So for us, physical gold now has the benefit of increased liquidity on the horizon, which means increased transactions and exposure. Which ultimately means decentralization of the Gold market from a few large firms to grass roots stackers, owners, and value preservers. We view emerging technologies as putting physical assets in a position to have their true value unlocked. Whether that be the tea farmer in India who can"t currently get a loan on his land due to government rules, to Silver whose value is somewhat disconnected from its price. The effect will not be unlike when a private company goes public. Accessibility and liquidity creates safety and increases demand. Owning physical metals is like owning a beneficiary of technology down the road.
Monthly Chart Through July 2017 using the 12 Month MA described above
Step 3: Optimizing the Simple 12 month MA Tool
by optimizing the MA with one factor we back tested greater successes when in trades. Conversely, we were also in less trades. On balance it was a wash. But right now the employed filter says the 12 Month MA has bigger upside than the average if profitable at all. A rare chance to buy close to the level the fund punters did with a statistical chance of greater profits than the 1.47% monthly average generated by the original backtest.
Updated and Optimized by the Author
The chart below shows the hypothetical results from each of the 30 exits following an entry (going back to 1970). Using these rules would have resulted in a loss two-thirds of the time. But as you can see, the losses have been relatively shallow, not exceeding 10%, while the gains have been good to extraordinary.
Step 4: Using VBS for Confirmation of Direction
Simply put: If we get a VBS signal trigger when $1306 trades, a decision must be made to add, sell, or hold based on the data that comes with the signal. If we get one on a $1260 print, the same must be assessed.
Step 5: Actions
We are buying Gold now based on the "Fund Finder" signal with a monthly stop out below the yellow line in that chart above.
$1306- we will consider adding a shorter term amount in a rally if the monthly VBS is triggered higher
$1260- we will consider either adding physical, or selling paper Gold for swing trading purposes if the VBS is triggered lower.
Per #1- we will close or hedge the first physical purchased on a monthly settlement below $1244 - the wide berth on monthly exits necessitates no leverage
Bonus: Moor Analytics comes to a similar conclusion from a different perspective.
Within the overall bearishness I noted that a possible area of exhaustion for this move down from 13624 comes in at 12732-644. We basically held this, but with a $1.6 violation, and rallied to 13084 before rolling over and rejecting from it again (although this time down the 12628 was simply support, not exhaustion)
And Michael"s most recent weekly report of Nov. 10th
I would note that we broke above a well-formed macro line in the week of 8/7 that came in at 12629. The
break above here projects this upward $183 minimum, $501 (+) maximum—the maximum to be attained likely within 9-12
months. This line comes in at 12357 today. I am late to the game on this, but we were only $18 from the original breakout
when I mentioned this, and have a lot of room to go in the projection.
Appendix
What is VBS?
Volatility Based Risk Reward Generator
+ Originally developed as an alert to when the risk of being short implied volatility is larger than being long it, and vice-versa
+ It is a probability model that handicaps risk reward
+ As a by-product of its original purpose, it gives risk/reward scenarios in market direction.
+ Due to its accuracy in predicting volatility expansion, directional applications are right or wrong quickly and is very useful in efficient use of capital
How VBS Works
Time is precious, Price is noisy, Volatility is less so.
+Volatility is less noisy than price, therefore more reliable as an indicator.
+Volatility cycles more cleanly and can be seen to "inhale and exhale" when viewed graphically with Bollinger Bands
+VBS is based on several relationships between historical and implied volatility across different time frames
+ It can be applied by traders on any time frame
VBS and Direction
It doesn"t predict price, only speed of movement
+It gives non-directional alerts and was initially developed for optimizing option portfolio risk.
+While not predictive directionally, VBS gives as a by-product excellent risk-reward setups for directional plays
VBS Process
Radar, Alert, Trigger, Entry, Exit
Radar- VBS generates 2 prices, one above and one below current prices for a "breakout" in market volatility
Alert- One of the prices is breached and closes its bar/ candle beyond that price level.
Trigger- Real volatility will expand
Market direction does not have to continue in the direction the price in #1 was broken
volatility based risk- reward prices are generated for directional use. I.E. Risk 1 to make 2
Entry- using the VBS risk/ reward generated levels, a decision is made to either go with the directional trend, against it, or do nothing
The trigger gives 2 bites at the apple if the trader so desires.
In "first way, wrong way" scenarios reversal levels are generated (N.B.- our preference is to not play the reversal and have left money on the table in favor of the trauma of being "chopped up". if compelling, we have used options to remain in the game on reversals)
Exit- is either from a stop-out, a profit capture, or a time limit
Stop-Loss- are generated by VBS and adhered to religiously. Profitable trades trail stops higher based on expanding volatility
Profits- exits can be subjective, we prefer taking 90% of position at target and leaving a tail if the VBS is not signalling Vol is overbought
Time Exit- trades that are neither profitable nor stopped out are exited in 3 bars/ candles. The signal is designed for quick confirmation / rejection of the trigger
Good Luck
About the Author: Vince Lanci has 27 years’ experience trading Commodity Derivatives. Retired from active trading in 2008, Vince now manages personal investments through his Echobay entity. He advises natural resource firms on market risk. He pioneered and executed the Nat Gas EOO arbitrage trade of 2006 to 2008, netting over $90MM for a NYC hedge fund before retiring. Over the years, his expertise and testimony have been requested in energy, precious metals, and derivative fraud cases. Lanci is known for his passion in identifying unfairness in market structure and uneven playing fields. He is a frequent contributor to Zerohedge and Marketslant on such topics. Vince contributes to Bloomberg and Reuters finance articles as well. He continues to lead the Soren K. Group of writers on Marketslant.
