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An Inside Look At The Shocking Role Of Gold In The "New Normal"
From Paul Mylchreest of ADM Investor Service International
Long Nikkei/Short Gold: Profitable, dangerous and missed by everybody?
Has the market completely missed a huge long/short trade which has helped to drive up the Nikkei and drive down the gold price for more than 2 years? One that puts risk-taking and leveraged speculation by our industry in an unfavourable light again.
* * *
Executive Summary
In the report we outline a thesis which draws together a complex web of interactions between Japanese equities, the gold market, repo financing, BoJ monetary policy meetings and anomalies in the silver market.
These interactions began forming in late-2012, specifically around September, as far as we can tell. With hind-sight, this was a pivotal period in recent financial history, when central banks embarked on a new phase of aggressive credit creation. We found no evidence of these interactions beforehand and think it is fairly unlikely that they are merely the result of coincidence.
At the centre of this, it looks to us like a large, leveraged long/short trade has been built up which is long the Nikkei index and short gold. The more the Nikkei has risen, the more the gold price has been pushed down.
It’s a clever trade from a cynical perspective, as we’ll explain. However, it also raises concerns regarding risk taking and the measurement of risk which have made speculative abuses by some entities in our industry (especially banks) only too infamous in recent years.
If we are correct about this trade, a shock affecting either the long or short side could roil financial markets if it was unwound in a disorderly fashion. Potential threats include:
- Growing criticism of Abenomics and weak economic performance in Japan;
- Increasing signs of schism in gold and silver markets between strong physical demand and price discovery which is dominated by paper instruments and which has almost reached nonsensical levels; and
- Interest rates in the repo market have started to rise with the Fed winding down QE3.
Going into a bit more detail…
We suspected that gold might be the short in a long/short trade when we noticed a reasonably close correlation between gold and interest rates in the repo market. The more the cost of repo funding declined, the more the price of gold declined.
The repo market is a major part of the aptly-named “shadow banking” sector. It is also the nexus for investment strategies involving leverage and short selling. If gold was the short in a long/short trade, the next question was whether there was a corresponding long? We think that the answer is yes, the Nikkei.
If we cast our minds back to September 2012, we had the announcements of “QE3” by the Fed and the “Enhancement of Monetary Easing” by the Bank of Japan (BoJ). The initial reaction of the gold price was positive, which was hardly surprising, although it turned out to be short-lived.
The subsequent collapse in gold has been counterintuitive, especially when the demand for physical gold bullion has remained strong as we show. It has also given the impression that the impact of monetary policies which are “loose”, to a degree which is unprecedented, is benign. It is much too early to reach that conclusion.
Major upward moves in the Nikkei and coincident weakness in the gold price can, in most cases, be closely tied to BoJ policy meetings for the past more than two years. This is especially true when BoJ meetings have included announcements of more aggressive monetary policy in support of “Abenomics.” We cover examples of such price moves which followed BoJ meetings in January 2013, April 2013, October 2013, May 2014, August 2014 and October 2014.
A number of unpleasant ironies are immediately apparent:
- It is helping to drive up equity prices in the country with the most rapidly expanding credit bubble and credit bubbles don’t tend to have happy endings;
- It is simultaneously driving down the price of the ultimate safe-haven asset and thereby silencing price signals relating to market and financial system risk;
- It appears to be a leveraged trade, obtaining the leverage via ultra-low rates in the repo market. The latter is a source of systemic risk which is known to regulators but remains unaddressed; and
- The logical conclusion is that risk across the world’s financial system is even more under-priced than market participants realise and many believe it is woefully under-priced.
We are in a global credit bubble in which the multi-trillion dollar expansion of central bank balance sheets, their imposition of near zero (or even negative) interest rates and control of entire yield curves (directly or indirectly) are at the cutting edge.
This has encouraged more and more speculation in risk assets which, in many cases, is being enhanced by leverage and without a commensurate sense of heightened risk.
Japan is the “cutting edge of the cutting edge” of this expanding global credit bubble.
The “Long Nikkei” side of the trade is profiting from what is starting to look like a reckless and failing Japanese monetary policy which, rather than ending the economic stagnation, has pushed the economy back into recession. Perhaps the most important indicator to monitor is growth in real household income, which has been negative for the past thirteen months.
Assets on the BoJ’s balance sheet are already equivalent to 60% of Japanese GDP. They are set to grow at an annual rate of 17% of current GDP after the BoJ’s latest increase in its asset purchase programme. One could argue that the more that the BoJ’s policy doesn’t work, the more aggressively it’s applied, the more the Yen falls and the more the Nikkei rises. Prime Minister Shinzo Abe’s special adviser, Koichi Hamada, was honest enough to call it a “mild Ponzi game” in a recent interview with the Daily Telegraph.
In the meantime, the “Short gold” side of the trade is profiting in a cynical way from structural flaws which are specific to gold and silver markets. In gold, price discovery is overwhelmingly dominated by an extreme ratio of paper gold instruments to physical bullion, estimated by official sources at about 90:1. This flaw in price discovery is being stretched to almost nonsensical levels in the face of strong physical demand.
If we are correct, the liquidity in the gold market, with well over US$100.0bn of gold instruments traded daily, implies that substantial financial firepower has been required to maintain the intense pressure on the short side of the trade during the last two years. A number of banks and hedge funds are likely to be involved, although it has undoubtedly attracted large numbers of trend followers.
Gold, and we are specifically referring to physical bullion, is also the only financial asset which has no counter-party risk. That alone should make it increasingly sought as a hedge in a credit bubble driven by monetary stimu-lus undertaken on a rolling basis by central banks.
In a normally functioning market, i.e. one where supply and demand for the physical good holds sway, the huge movement of gold bullion to China, the world’s largest creditor nation, should have dominated gold market news flow, seen western investors competing with Asia for scarce physical bullion and maybe even raised questions about the existing monetary order. As things stand, most investors could not care less about gold.
Where do we go from here?
While we have a strong preference for equities over nearly all forms of credit in an inflationary endgame, the road we are travelling – basically a never-tried-before monetary experiment to avoid debt deflation - is treacherous.
The question is whether deflation comes before inflation, as one of these two unpalatable outcomes will be required to extinguish the excessive debt burden carried by Japan and the global economy. It’s also ironic that the only asset which has historically outperformed in either inflationary or deflationary conditions, with a track record stretching back more than 400 years, is gold (cf “The Golden Constant” by Roy Jastram).
In Japan, Abenomics could lead to further substantial devaluation of the Yen. In extremis, the long side of the trade has almost infinite upside, especially if the architects of Abenomics refuse to let up and simply destroy the Yen. This is another reason why, being cynical, it’s a clever trade.
While the Nikkei could theoretically go to infinity, the gold price (at least in terms of physical metal) does not have unlimited downside. Consequently, the inherent risk in the trade is asymmetric.
If the gold price keeps falling, offers of physical metal will be withdrawn at some point. That would cause a schism in the respective pricing of physical bullion versus inferior paper substitutes. The potential for such a schism is already being foreshadowed, periodically, by negative GOFO rates and backwardation in the gold futures market.
We have also looked again at anomalies in the silver market which have left us scratching our heads for months. In contrast to gold, ETF silver holdings and open interest in the futures market remain elevated in spite of the even bigger decline in the silver price.
We question whether entities which have put on this long/short trade have acknowledged that a rapid exit from a large short position in gold could be problematic. If so, we wonder whether a short position in gold is being partially hedged by accumulating long positions in (high beta) silver.
The much smaller size of the silver market, limited above-ground silver inventory, and stretched level of the gold/silver ratio, means that a sustained reversal in the gold price would have a disproportionate impact on the silver price.
From a cynical perspective, that would make this trade really clever.
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Clues in the repo market
The repo market is a major part of what is aptly named the shadow banking system.
From the perspective of this report, the key aspect of the repo market is that it is the nexus for leverage and short selling for banks, broker-dealers and hedge funds operating in the financial markets.
In July 2013, the Treasury Borrowing Advisory Committee described repo as nothing less than.
“The silently beating heart of the market”
This was Tyler Durden of Zero Hedge commenting on the significance of the repo market in 2013:
“Most market participants will go through their trading life ignorant of the fact that the leverage in this market is what drives their assets up or down in most cases”
The repo market is very large.
The Federal Reserve estimated that the size of the US repo market in January 2014 was US$3.1 trllion. The European repo market is even bigger, estimated to be Eur5.8 trn in June 2014 by ICMA (International Capital Markets Association).
In the words of Mary Fricker from the Repowatch website.
“The repurchase (‘repo’) market is where large financial institutions borrow trillions of dollars from each other and from central banks every day, using securities as collateral.”
Here is a schematic of the US repo market, showing how securities dealers (including banks) and hedge funds can borrow cash against the provision of collateral.
The first time we suspected that the gold price might be caught on the short side of a large, leveraged long/short trade was in early October this year. This was when we noticed a reasonably close correlation between a falling gold price and the falling cost of funding in wholesale money (repo) markets.
On checking back, the correlation seemed to kick in from about September 2012 onwards. The summer of 2012 was a critical period when central banks ramped up the use of unconventional monetary policy, both actual (Fed and BoJ) and threatened (ECB).
One way to interpret the chart is that as repo rates fell from around 30bp (0.30%) in late 2012 to as little as 4-5bp (0.04-0.05%) at times during 2013-14, short sellers of gold used the increased financing capacity to intensify the downward pressure on the gold price, i.e. by borrowing more paper gold instruments to sell short.
Why did repo rates fall so sharply after the announcement of QE3?
It became apparent that the downside of very large QE programmes is that they silo “high quality” collateral, i.e. Treasuries and MBS, on the balance sheet of the central bank. This constrains the flow of collateral which is available to provide liquidity/leverage in the repo market.
A consequence of this “squeeze” in the availability of high quality collateral post-QE3 is that traders who were in possession of high quality collateral were able to increase leverage at increasingly lower interest rates.
If the repo market is being used to finance short positions to push down the price of gold, there is an irony since the repo market is a source of systemic risk to the financial system while gold is the ultimate safe haven asset .
The majority of repo funding is overnight and can suddenly evaporate, as Bear Stearns and Lehman discovered, when counterparty risk is recalibrated. Repo was “ground-zero” in the 2008 financial crisis as David Weidner outlined in the Wall Street Journal on 29 May 2013.
“The repo market wasn’t just part of the meltdown. It was the meltdown.”
Systemic risk in the repo market has still not been addressed by regulators, despite their full knowledge.
This comment comes from the Federal Reserve Bank of Dallas in a November 2012 report “Understanding the Risks Inherent in Shadow Banking.”
“Currently, the drivers of systemic risk remain largely intact, and shadow banking appears poised to grow considerably, and dangerously, if it does not acquire the necessary market discipline to shape risk-taking activities.”
While we can’t offer an opinion on what collateral is being provided in order to borrow funds to short gold, it’s worth noting that the major banks and securities dealers routinely use re-hypothecation in expanding their repo activities.
Investopedia defines re-hypothecation thus.
“The practice by banks and brokers of using, for their own purposes, assets that have been posted as collateral by their clients. Clients who permit re-hypothecation of their collateral may be compensated either through a lower cost of borrowing or a rebate on fees.”
The practice of re-hypothecation increases risk in the repo market itself, adding risk on top of risk.
Having shown the relationship between the gold price and repo rates after September 2012, what was the situation before then?
The chart below suggests that there was no evidence of any correlation in the prior year, i.e. from September 2011 to August 2012.
Going further back, here is the chart from January 2009 to August 2011, which shows no correlation either.
Summer of 2012
It’s worth casting our minds back to recap the major events in financial markets around September 2012 when this repo/gold relationship was established.
Summer 2012 was a very significant period for the implementation of central bank policy.
The Eurozone was in a major (almost terminal) crisis, which was relieved by Draghi’s “Whatever it takes” speech on 26 July 2012. The latter included a verbal threat to use the ECB’s balance sheet in a potentially unlimited fashion.
The ECB “move” was followed by concrete action in terms of money printing from the Fed and BoJ with their major QE announcements beginning in September 2012.
- The Fed’s announcement of QE3 on 13 September 2012; and
- The Bank of Japan’s “Enhancement of Monetary Easing” announcement on 19 September 2012.
Summarising these briefly…
The Fed’s QE3 was an open-ended commitment to purchase US$40bn/month of MBS and maintain the Federal Funds rate near zero “at least through 2015.” In December 2012, the Fed increased its open-ended purchase programme by an additional US$45bn/month of Treasury securities, making US$85bn/month in total.
It was around this time that market participants began referring to the Fed’s policy as “QE to infinity” to express the large and potentially unlimited nature of Federal Reserve money creation.
In September 2012, the BoJ initially increased the size of its then existing Asset Purchase Program from Yen 70 trillion to Yen 80 trillion, which it expected to reach by end-2013. The increased purchases would be achieved on a 50/50 basis in terms of T-Bills and JGBs.
On 30 October 2012, the BoJ increased the size of its Asset Purchase Program once again – this time from Yen 80 trillion to Yen 91 trillion by end-2013. Besides T-Bills and JGB, the increased purchases included Commercial Paper, Corporate Bonds, REITs and ETFs.
So from Summer, through the Autumn and into the Winter of 2012, the world’s three largest central banks were ramping up monetary largesse (actual or threatened).
What was the initial reaction in the gold market?
It was hardly surprising that the initial reaction to these moves from mid-July to early-October was positive.
It’s also worth emphasising that financial markets were expecting the Fed to announce QE3 in the run up to the FOMC meeting in September. For example, this was from a Goldman Sachs report on 7 September 2012.
“With today’s August employment report showing a nonfarm payroll gain of 96,000 and an unemployment rate of 8.1% because of a drop in the participation rate, we expect a return to unsterilized and probably open-ended asset purchases at the September 12-13 FOMC meeting…We previously forecasted QE3 in December or early 2013.”
It was the peak in the gold price shortly after the initial Fed/BoJ announcements which logic suggests was counterintuitive…especially in light of the chart below comparing the gold price with the growth in central bank balance sheets since 2009.
There was a big trend change in late-2012/early-2013…

Source: Bloomberg, ADM ISI
The peak in the gold price was followed a few days later by a low in the Nikkei. This made sense when Japanese equities were “bombed out” and investors realised that the BoJ was serious about turning on the “liquidity tap” (even if it had yet to go “nuclear”).

Source: Bloomberg, ADM ISI
Shorting the gold market
If our thesis about a long/short trade is correct, our contention is that it would take substantial financial firepower to maintain intense downward pressure on the gold price given the liquidity in the gold market.
Let’s consider gold market liquidity, beginning with the LBMA.
Since September 2012, the AVERAGE DAILY NUMBER OF OUNCES TRANSFERRED via the LBMA’s clearing process is 20.4m oz. That is equivalent to about 656 tonnes, some 20% of annual mine production worldwide and, in dollar terms, $24.5bn.
However, there is an important difference between the amount of gold which is TRANSFERRED on the LBMA and the amount TRADED. While the 656 tonnes might sound like a large amount of gold, it substantially understates the true amount of gold TRADED.
LBMA members net out their own and third party trades so that only the level of account transfers between LBMA clearing members is reported.
From an article in January 1997 when the LBMA first published clearing data:
“traders insisted the association’s statistics were only part of the picture…Mr Jeffrey Rhodes, of Standard Bank, London, said the 30m ounces should be multiplied by three, and possibly five, to give the full scope of the global market.”
In a letter to the European Commission from the LBMA’s Chief Executive, Stewart Murray, on 2 March 2007, he stated that:
“Previous estimates of the daily volumes traded in the London market have suggested that the quantities are a positive multiple of the clearing volumes with a multiplier of between 5 and 9.”
Let’s be conservative and use a multiple of 4, which means that the average daily amount of gold traded was 80.8m oz. or 2,600 tonnes since September 2012. On that basis, roughly 80% of the entire annual production of the world’s gold mines is traded on an OTC basis each day.
In dollar terms, the average daily turnover in gold is about US$93.0bn – and that’s just OTC gold. It excludes exchanges such as COMEX, TOCOM (Tokyo), Singapore and Shanghai.
The daily average number of gold contracts (100oz. per contract) traded on the COMEX in New York recently has been approximately 130,000. This is equivalent to a notional gold value of approximately US$15.0bn.
In aggregate, the average daily turnover in gold is well over US$100.0bn.
Most commentators underestimate the size of the gold market.
If we assume that sufficient financial firepower (including leverage) can be mustered to finance a large short position in gold, the specific characteristics of the gold market can work to the advantage of this trade…at least over the short/medium term.
Why?
Because the gold market, as currently structured, is a fractional reserve system, with a comparatively small amount of bullion supporting a huge amount of speculative trading.
As we’ve said before, one of the biggest misunderstandings in the history of finance is the mechanism of price discovery in today’s gold and silver markets
The vast, and we really mean vast, majority of trading in the gold market is in what are nothing more than “paper facsimiles” purporting to represent gold bullion, rather than actual gold bullion.
When we say “paper facsimiles”, we include things like:
- Unallocated gold accounts on the LBMA;
- Futures and options contracts on COMEX;
- Unbacked ETFs; and
- OTC derivatives.
This is a perversion of the investment case for gold and its true role in the financial system. This has been obvious to forward-thinking people, like monetary scientist, Professor Antal Fekete, for more than four decades.
“The world’s first gold futures market opened in the Winnipeg Commodity Exchange in 1970... In 1971 I went to Winnipeg to be witness to history. I purchased a seat on the exchange…Buy orders came in a steady stream from all corners of the world. In the absence of gold futures this demand would have shown up as demand for cash gold”
There is even a widespread belief among non-specialists that the LBMA is primarily a market for physical gold.
That is only true to a limited extent.
The reality is that less than 5% of gold traded on the LBMA is settled by the delivery of physical metal into what are known as “allocated” gold accounts. In an allocated gold account, specific gold bars are held in clients’ names with full title. The bank is not permitted to use the gold for its own purposes.
Instead, more than 95% of gold traded on the LBMA is of “unallocated” gold, which is settled via nothing more than debits/credits in “metal accounts” with bullion banks. The holders of these accounts are merely unsecured creditors of the bank with general claims on an unspecified volume of gold in the bank’s vault. Any gold backing unallocated gold which is actually in the vault is part of the bank’s working capital, to do with it as it wishes.
Give the most rudimentary understanding of the investment case for gold, this is another irony in the gold market. Why would anybody trade unallocated gold on the long side when they are nothing more than the most junior of creditors in the banking system? Financial system risk is often one of the risks which gold investors are trying to insure against.
In its January 2013 report “Report of the Working Group to Study the Issues Related to Gold Imports and Gold Loans by NBFCs”, the Reserve Bank of India estimated the ratio of paper gold trading to physical gold trading at 92:1.
On page 58 of the RBI’s report is the following data sourced from the CPM Gold Yearbook 2011:

Source: Bloomberg, ADM ISI
According to the RBI (with our emphasis):
“the traded amount of ‘paper linked to gold’ exceeds by far the actual supply of physical gold: the volume on the London Bullion Market Association (LBMA) OTC market and the major Futures and Options Exchanges was OVER 92 TIMES that of the underlying Physical Market.”
Aside from futures trading on COMEX, there is very little real-time, or even close to real-time, data regarding positioning in the gold market.
In spite of that, when you look back at the gold bull market during 2001-11, one thing stands out very clearly regarding the relationship between the gold price and the net positioning of the Commercials (primarily the bullion banks).
On the three occasions when the Net Commercials stopped increasing their net short position into a rising market, the gold price went parabolic.

Source: Bloomberg, ADM ISI
- The price discovery mechanism in the gold market is dominated by the trading of paper tokens which are nothing more than gold in “facsimile” form;
- Given sufficient financial firepower, the trading of paper gold instruments can override underlying supply and demand trends for actual physical bullion, unless or until there is a limitation in the supply of paper gold OR a problem emerges in delivering sufficient physical bullion; and
- In this scenario, vital price signals which could be provided by the gold market regarding financial market risk, can be effectively hijacked and nullified
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What is the long side of the long/short trade?
If we are correct about gold being the short side of a large, leveraged long/short trade, the key question is what is on the long side of this trade?
It was almost certainly a large, liquid market too. But which one?
Here is the chart of Gold versus the Nikkei since September 2012. There is not much to see...

Source: Bloomberg, ADM ISI
...until you invert the Nikkei axis and the remarkably close correlation becomes obvious.

Source: Bloomberg, ADM ISI
We doubt that this is merely coincidence.
Here is the same chart for the prior year, i.e. from September 2011 to August 2012. As you can see, there is no sign of correlation.

Source: Bloomberg, ADM ISI
Here is the same chart for Gold versus the Nikkei (Inverted) from the beginning of the current gold bull market in 2001 to August 2012.

Source: Bloomberg, ADM ISI
Since the rise in the Nikkei broadly mirrors the fall in the Yen since Shinzo Abe was elected Prime Minister in December 2012…

Source: Bloomberg, ADM ISI
While the long side of the trade could be Yen...
…we think that it is more likely to be the Nikkei where the correlation is arguably superior – shown again for comparison.

Source: Bloomberg, ADM ISI
BoJ meetings - tying together the two sides of the trade
When we looked back and examined major moves in the Nikkei index and the gold price since September 2012, we found that most of them were closely tied to BoJ monetary policy meetings, especially announcements of increased monetary stimulus.
While gold had peaked and the Nikkei bottomed within a few days of each other in early October 2012, the long/short Nikkei versus gold trade really “got going” after Shinzo Abe’s government took office in December 2012.
The first major move from the BoJ, bowing to pressure from the new political leadership, was announced with the unusual step of a joint BoJ/Japanese government statement on 22 January 2013.
The BoJ doubled its inflation target to 2% “at the earliest possible time” and committed to an open-ended programme of asset purchases beginning in 2014, which would follow the completion of its existing programme.
Not surprisingly, the Nikkei responded positively to the BoJ’s announcement.

Source: Bloomberg, ADM ISI
The 22 January 2013 BoJ/government announcement marked the peak in the gold price to the day. After that, it fell by US$121.7/oz. during the next six weeks.

Source: Bloomberg, ADM ISI
But the “shock and awe” from the BoJ was still to come.
The next major “enhancement” to Abenomics in terms of monetary policy was unleashed with the BoJ’s 4 April 2014 policy meeting.
This was a bigger one.
The BoJ’s new plan was for asset purchases at an annual rate of Yen 60-70 trillion which aimed to DOUBLE THE MONETARY BASE in two years from the end-2012 level of Yen 138 trillion, to Yen 200 trillion by end-2013 and Yen 270 trillion by end-2014.
The same day Reuters commented.
“The Bank of Japan unleashed the world's most intense burst of monetary stimulus on Thursday, promising to inject about $1.4 trillion into the economy in less than two years, a radical gamble that sent the yen reeling and bond yields to record lows. New Governor Haruhiko Kuroda committed the BOJ to open-ended asset buying and said the monetary base would nearly double to 270 trillion yen ($2.9 trillion) by the end of 2014, a dose of shock therapy officials hope will end two decades of stagnation. The policy was viewed as a radical gamble to boost growth and lift inflation expectations and is unmatched in scope even by the U.S. Federal Reserve's own quantitative easing program.”
The BoJ’s more aggressive easing saw the Nikkei surge by more than 3,000 points, or a massive 23.7%, in only seven weeks between 4 April 2013 and 22 May 2013.

Source: Bloomberg, ADM ISI
The “shock and awe” from the BoJ was quickly seen in the gold market…except in reverse.
The huge upward move in the Nikkei was the mirror image of the collapse in the gold price which began shortly afterwards.

Source: Bloomberg, ADM ISI
The vast majority of gold’s collapse took place in what is now viewed as an infamous two-day trading period in the gold market – Friday 12 April 2013 and Monday 15 April 2013 – during which the price fell more than 12%.
This was how Ross Norman at the 230-year old bullion broking firm, Sharps Pixley, described events on the Friday.
“The gold futures markets opened in New York on Friday 12th April to a monumental 3.4 million ounces (100 tonnes) of gold selling of the June futures contract in what proved to be only an opening shot. The selling took gold to the technically very important level of $1540 which was not only the low of 2012, it was also seen by many as the level which confirmed the ongoing bull run which dates back to 2000. In many traders’ minds it stood as a formidable support level... the line in the sand.
“Two hours later the initial selling…(was followed) by a rather more significant blast when the floor was hit by a further 10 million ounces of selling (300 tonnes) over the following 30 minutes of trading. This was clearly not a case of disappointed longs leaving the market - it had the hallmarks of a concerted 'short sale', which by driving prices sharply lower in a display of 'shock & awe' - would seek to gain further momentum by prompting others to also sell their positions as they hit their maximum acceptable losses…The selling was timed for optimal impact with New York at its most liquid, while key overseas gold markets including London were open and able to feel the impact. The estimated 400 tonnes of gold futures selling in total equates to 15% of annual gold mine production - too much for the market to readily absorb
“Futures trading is performed on a margined basis - that is to say you have to stump up about 5% of the actual cost of the gold itself; making futures trades a highly geared 'opportunity' of about 20:1 - easy profit and also loss! Futures trading is not a product for widows and orphans. The CME's 10% reduction in the required gold margins in November 2012 from $9133/contract to just $7425/contract made the market more accessible to those wishing both to go long or, as it transpired, to go short…”
We hope that you noted that the selling was specifically gold futures contracts, not physical gold.
Here is an intra-day chart showing the “one-two” hit to the gold price on 12 April 2013.

Source: Bloomberg, ADM ISI
And let’s remind ourselves that the financial system wasn’t exactly falling apart in April 2013, so if you happened to have 400 tonnes of gold, even paper rather than “actual” gold, which at the time was worth $20.0bn, you’d have to be insane to sell it in such fashion.
Unless…
…you were acting for a central bank (lacking the profit motive), OR your aim was to cause the maximum down-ward pressure on the price because, let’s speculate for a moment…
...it was the short side of a long/short trade?
In such a scenario, events in the gold market start making sense.
Despite its ferocity, another interesting aspect of the collapse in the gold price in mid-April 2013 was that it contradicted free market signals of tightness in physical gold supply at the time.
This was clear from the GOFO rate. GOFO is the Gold Forward Offered Rate on the LBMA and is the cost, in terms of the interest rate, of borrowing dollars using gold as collateral. GOFO moving close to zero implies that the market has a greater need to borrow physical gold, i.e. to swap it for dollars.
GOFO had been on a declining trend since the gold price peaked on 4 October 2012, suggesting that investors (whether official, institutional or retail) had been taking advantage of the falling price to accumulate physical gold.
By the time the gold price collapsed on 12 April 2013, the GOFO rate had fallen to only 17 basis points and briefly went negative the following month.

Source: Bloomberg, ADM ISI
GOFO should not go negative in an efficiently functioning gold market with adequate physical supply. Negative GOFO implied that the market was so short of physical that it would pay an interest rate to holders of bullion to borrow their gold (who could also put their swapped dollars on deposit).
The futures market was telling a similar story via the “gold basis.” The gold basis is the difference between the spot price of gold and its price in the near-month futures contract. The gold market should never move into backwardation (negative basis), i.e. where the offer price of the near-month future is lower than the bid price of spot gold, since it implies a risk-free profit. That is, unless the market is concerned about the availability of physical gold when the futures contract expires.
Sandeep Jaitly and his mentor, Professor Antal Fekete, are the world experts on the gold basis. Below is a chart from Sandeep Jaitly’s Gold Basis Service on 1 May 2013.

Source: Bloomberg, ADM ISI
The gold basis (blue line) crossed into negative territory on 5 April 2013 and the backwardation was intensifying until the price was smashed (light green arrow). As the price fell, gold almost moved out of backwardation before the latter intensified – essentially telling the same story of tight supply as GOFO.
We’ll return to physical gold supply and demand again below.
After surging from early-April to late-May 2013, the Nikkei experienced a sharp correction from 21 May 2013 through to mid-June 2013. This correction stemmed from the Bernanke “taper tantrum” as it became known, which hit equity markets around the world.
The correction was short-lived. The bottom in the Nikkei at 12,445 occurred on 13 June 2013, which was two days after the BoJ’s Monetary Policy Meeting (and eleven days before the bottom in the S&P 500). In little more than a month, the Nikkei recovered more than 2,000 points to 14,809 on 18 July 2013.

Source: Bloomberg, ADM ISI
As the Nikkei recovered during the second half of June 2013, the gold price collapsed again during 20-27 June 2013. This included a fall of US$82/oz. on 20 June 2013.

Source: Bloomberg, ADM ISI
Having briefly gone negative in May 2013, the renewed downward pressure on the gold price pushed GOFO back below zero in early-July 2013. It oscillated between slightly negative and slightly positive for the remainder of 2013, suggesting a contradiction between the collapsing gold price and underlying demand for physical bullion.

Source: Bloomberg, ADM ISI
The same contradiction was evident in COMEX gold inventories which declined by almost 40% during January-July 2013.

Source: Bloomberg, ADM ISI
Having traded sideways through August 2013, the Nikkei began its next ascent in early September, which lasted through to the end of the year.
While maintaining its stimulus programme at the Monetary Policy Meeting on 5 September 2013, the BoJ up-graded its view on the Japanese economy, stating that it was “recovering moderately.” Here is the Nikkei chart from September-December 2013.

Source: Bloomberg, ADM ISI
The BoJ maintained asset purchases at an annual rate of Yen 60-70 trillion on 31 October 2013, but upgraded their forecast for 2013 inflation from 0.6% to 0.7%. However, at least two of the nine Policy Board members were known to have expressed doubt as to whether the BoJ could meet its inflation target of 2% by 2015. This led to market participants anticipating a further loosening of monetary policy in early 2014.
The prospect of more aggressive BoJ policy marked renewed heavy selling in the gold market. Here is the corresponding chart of the gold price for September-December 2013. The price made an intra-day low of US$1182/oz. in December 2013.

Source: Bloomberg, ADM ISI
On 18 February 2014, the BoJ maintained its annual rate of asset purchases at Yen 60-70 trillion but doubled the scale of measures to stimulate bank lending, measures which had been due to expire. For example, financial instiuations were permitted to borrow funds up to an amount equivalent to twice as much as the increase in their net lending. After this there was no change to policy during the March, April and May 2014 meetings.
The Nikkei traded downwards/flat during January to mid-May 2014. This was a relatively good period for gold. The gold price recovered from c.US$1,200/oz. at the beginning of the year and came close to testing US$1,400/oz. in March 2014, before easing back to the US$1,300/oz. level.
After bottoming on 19 May 2014, the Nikkei embarked on a major upward move from 14,006 to an intermediate top of 16,374 on 25 September 2014. This was in tandem with many other equity markets, notably the S&P 500.
The 19 May 2014 was the day before the two-day BoJ Monetary Policy Meeting on 20-21 May 2015.

Source: Bloomberg, ADM ISI
On 20 May 2014, Zero Hedge had an intriguing report which connected an attack on gold with a movement in Japanese asset prices.
“An initial dump in gold happened when Europe was getting going late last night but as the US wakes up and markets get active, someone (panic-seller) decided it was an entirely optimal time to sell $520 million notional gold futures - sending the price of the precious metal down $7. Intriguingly, though the notional size was large, the actual move is not as large as we have become used to with the ubiquitous slamdowns (and it's a Tuesday). At the same time, USDJPY was ramped...”

Source: Bloomberg, ADM ISI
That relatively modest attack on gold intensified towards the end of May 2014 as the upward move in the Nikkei accelerated.
As we moved through June/early-July 2014, the Nikkei continued to rise. Meanwhile, the gold price was threatening to break out of the Long Nikkei/Short Gold stranglehold. It rebounded from US$1,244/oz. in early June 2014 to an intermediate high of US$1,339/oz. on 11 July 2014.
Then bang…

Source: Bloomberg, ADM ISI
The peak in the gold price on 11 July 2014 was a Friday. Gold was attacked on the following Monday the 14 July 2014, which (coincidentally) was the first day of the BoJ’s two-day July Monetary Policy Meeting.
Zero Hedge described events in the gold market on 14 July 2014 in an article “Gold Slumps Most in 2014 As ‘Someone’ Dumps $1.37 Billion In Futures At US Open.”
“UPDATE: Gold is down 2.5% - the biggest daily drop since early Dec 2013. In a status-quo reinforcing smack-down, gold and silver prices have been clubbed lower this morning to one-month lows with the biggest drop in almost 2 months. The customary USDJPY surge (and risk asset spike) has accompanied this high volume dump”
The Zero Hedge chart showed how the selling began at the market open in Europe.

Source: Bloomberg, ADM ISI
Another “one-two” hit.
Moving into August 2014 and there was no change to BoJ policy at its meeting which ended on 8 August 2014. If you refer back to the charts above, you will notice that this coincided precisely with an intermediate low in the Nikkei and was only two days before another intermediate high in gold
There was no change to BoJ policy at its meeting which ended on 4 September 2014. Meanwhile, the Nikkei continued rising while the gold price proceeded to fall US$51/oz. in 11 trading days.
Now…moving (almost) up to date.
After another “no change” meeting in early-October, the BoJ went “nuclear” on 31 October 2014 when it announced the “Expansion of the Quantitative and Qualitative Monetary Easing.”
In brief, the BoJ committed to increasing its annual rate of asset purchases by an additional Yen 10-20 trillion from Yen 60-70 trillion to Yen 80 trillion (US$724bn).
Besides the weakness in the economy and slippage versus the 2% inflation target, there also seems to have been a need to coordinate increased QE with the GPIF (government pension fund) rebalancing its asset allocation. Kuroda denied the link, but some of the numbers are almost perfectly aligned. Taking its end-June 2014 asset allocation, GPIF was already down to 55.4% JGBs so the additional sell-off in domestic bonds to cut the allocation to 35% is approximately Yen 28trn.
This dovetailed neatly with the increased JGB purchases by the BoJ.
“The Bank will purchase JGBs so that their amount outstanding will increase at an annual pace of about 80 trillion yen (an addition of about 30 trillion yen compared with the past).”
The JGB market, parts of which have not even traded on some days, no longer functions as a true market. So one has to ask what would have happened if the GPIF had sold Yen 28 trillion into an illiquid market…and raised borrowing costs in one of the world’s most indebted countries?
Instead, the BoJ is ready and waiting with an enlarged bid and the relationship between the Japanese MoF, the BoJ and now the GPIF is, to borrow the description from our colleague, Andy Ash.
“…akin to swapping soccer stickers in the playground.”
The BoJ’s latest move is a major step towards liquefying Japanese financial markets, and effectively much of the economy, since purchases of equity and real estate ETFs are also being ramped up.
Before we consider the desperation of this move on the part of the BoJ, including Abe’s decision to postpone the second sales tax increase and call a general election, let’s look at its impact on the Long/Short Nikkei versus Gold trade.
Firstly, the Nikkei.

Source: Bloomberg, ADM ISI
It seems that some traders might have got wind of the likelihood of more aggressive policy before the 31 October 2014 meeting. James Aitken of Aitken Advisors is someone we admire in terms of his deep knowledge of credit markets and central bank policy. Writing on 4 November 2014, he explained that Japanese insiders had been hinting to market participants that the end-October policy meeting could be “live.” So it turned out.
Speculation had also been growing in the Japanese media, e.g. this from Nikkei on 23 October 2014.
“The Bank of Japan now sees a much bigger possibility of inflation slipping below 1%, pushed down by falling crude oil prices, according to people familiar with the central bank’s thinking, a development that could rekindle market speculation for additional easing. “
The gold price had peaked on 21 October 2014 and started to fall sharply on 30 October 2014 during Asian hours (29 October 2014 in London/NY terms).
The price collapsed during the next two days…

Source: Bloomberg, ADM ISI
…taking it through the critical technical level of US$1,180/oz. which was the low in 2013.
This latest attack on gold, coordinated with aggressive BoJ stimulus and a surging Nikkei (again), lasted five days as Zero Hedge highlighted in an article “Because Nothing Says ‘Best Execution’ Like Dumping $1.5 Billion In Gold Futures At 0030ET.”
“For the 5th day in a row, "someone" has decided that 0030ET would be an appropriate time (assuming the 'seller' is an investor who prefers best execution rather than the standard non-economically-rational share-repurchaser in America) to be dumping large amounts of precious metals positions via the futures market. Tonight, with over 13,000 contracts being flushed through Gold - amounting to over $1.5 billion notional, gold prices tumbled $20 to $1151 (its lowest level since April 2010).”

Source: Bloomberg, ADM ISI
The suspicious trading activity was noticed by Reuters who commented on 20 November 2014.
“Some of the biggest price moves in gold since late October have, unusually, occurred in Asian hours and traders more accustomed to following the lead of their Western counterparts suspect a big increase in algorithmic trading may be to blame. Sensitivity to the dollar-yen exchange rate may also help explain the moves, although some traders speculated that the timing looked suspiciously like attempts to catch Chinese traders off-guard during their lunch break. Liquidity in Asia tends to be thin until Europe wakes up but recent weeks have been different: COMEX gold futures, the busiest gold contract in the world, have suffered sharp sell-offs in Asia, sometimes sparked by the news flow or currency moves but often for no identifiable reason. ‘It is unusual for Asia to be seeing these busy trading sessions,’ said David Govett, head of precious metals at broker Marex Spectron in London. ‘I have spoken to a lot of people about it and the general consensus seems to be that there is a big increase in algorithmic and high-frequency trading in this time zone nowadays as it can be quite easy to push about,’ he said.”
It’s not our intention to publish a detailed critique on Abenomics in this report. However, the evidence that it’s not working was brought into sharper focus with the 3Q 2014 GDP decline of 1.6%. This followed the 7.3% reduction the previous quarter and confirmed that the economy had returned to technical recession.
Desperation on the part of Abe is behind his decision to delay the rise in the sales tax and his calling of a snap general election.
Common sense suggests that the last thing that a society with an ageing demographic needs is the Abenomics prescription of zero interest rates coupled with rising inflation. Nonetheless, if we exclude the April 2014 tax hike, Japan’s core CPI is moving in the “wrong” direction, 1.0% versus the 2.0% target.
The recent fall in the oil price will take CPI even further away from target…
Perhaps a further decline in Japanese inflation in the coming months will be met with even greater monetary stimulus. Indeed, Kuroda stated on 5 November 2014 that there is potentially no limit to the BoJ’s attempts to meet its inflation target.
“It’s natural to act should downside risks to prices become substantial…last week’s easing was a true display of the Bank’s unwavering commitment…As for measures for additional easing, I don’t think there is a limit, including on bond purchases.”
As a percentage of GDP, the BoJ’s balance sheet is now almost 60%, which even leaves the Fed a long way behind in its wake.

Source: Bloomberg, ADM ISI
At the current rate of asset purchases and assuming growth in Japanese nominal GDP of 2.0% p.a., the BoJ’s balance sheet will be almost 75% of GDP in a year’s time.
Theoretically, there is no limit to the weakness in the Yen. To the extent that the Nikkei keeps repricing itself in weaker Yen, which helps to obscure the sin, there is no limit to the upside in nominal terms.
This is the beauty of the long side of the long/short Nikkei versus Gold trade, at least in Yen terms.
Of course, Abenomics might still work and the need for monetary stimulus could recede. Alternatively, rising opposition either from the Japanese political establishment or public opinion could yet halt Abe’s policy.
Physical gold demand
The short Gold part of the trade is obviously very different to being long Nikkei in the sense that the downside, in this case, is not infinite.
While price discovery in the gold market is almost entirely dependent on supply and demand for paper gold instruments, the price cannot go to zero since, at some point, offers of physical gold will dry up.
A default on some form of paper gold instrument would lead to a fundamental change of the current market structure and support a repricing of physical gold.
Following the most recent sell-off, the gold market is showing renewed signs of tightness in physical supply. The 1-month GOFO rate is -0.298%.

Source: Bloomberg, ADM ISI
This is the lowest it’s been since 2001, which marked the low in the gold price prior to the 2001-11 bull market.

Source: Bloomberg, ADM ISI
The gold basis is also negative again…which you can see from your Bloomberg or Reuters terminal, i.e. the bid on spot gold is above the offer on the December 2014 gold future.
Negative GOFO and a negative gold basis are early warning signs that offers of physical gold at the current price are beginning to dry up.
Forgetting paper gold instruments for a moment, what else can we glean about the market for physical gold?
Despite what you may have read, it is impossible to model supply and demand for physical gold.
The reason for this is the extreme stock-to-flow ratio of monetary metals such as gold (especially) and silver, i.e. the stock of available gold is many multiples of annual supply. Unlike other commodities which are produced for consumption, the vast majority of all the gold ever mined remains in a form, e.g. bars, coins, jewellery, etc, which makes it either very easy or relatively easy to turn it back into supply.
The WGC estimates that there are 177,200 tonnes of gold on the surface of the planet (actually too low) compared with 3,054 tonnes of gold mined in 2013. In contrast, known stocks of other commodities such as industrial metals, bulks like iron ore and agricultural commodities like grains are a fraction of annual production. The situation is completely inverted compared to gold.
Data from the World Gold Council and industry consultants is nothing more than their best guesses for incremental supply in terms of newly-mined gold, together with scrap supply and official sales, and where they think that incremental supply goes. There is no way to calculate the supply and demand within the existing inventory of, for example, gold bars and coins.
If modelling supply and demand is impossible what can we do?
Besides market indicators, such as GOFO and the gold basis, we look at the net impact of four quantitative indicators which are major swing factors in physical gold demand.
- Gold withdrawals on the Shanghai Gold Exchange (data from the SGE);
- Gross gold imports into India;
- Net change in gold holdings of all-known ETFs (Bloomberg); and
- Net change in central bank gold holdings (WGC, quarterly data weighted on a monthly basis according to the WGC’s incomplete data for the latter).
The chart below shows the net changes in gold demand from these four sources from January 2010 to October 2014.

Source: Bloomberg, ADM ISI
There are several points to note.
- Gold demand from these sources can be relatively volatile on a month-to-month basis, anything from under 150 tonnes to more than 300 tonnes;
- Despite the month-to-month volatility, there has been no significant change in the net demand from these four sources during this period;
- The chart understates the strength of demand since the raising of import duties by India (the world’s largest gold market in 2010-12) has led to a well-documented surge in gold smuggled into the country since early 2013;
- It also likely understates the demand since it EXCLUDES PBoC purchases, as the latter only publishes its holdings every six years. China’s policy of diversifying its more than US$3.9 trillion of foreign exchange reserves and its desire to become a gold market hub puts the probability that it hasn’t used the fall in the gold price to accumulate additional gold reserves at almost zero; and
- The most recent aggregate net demand from these sources has been some of the strongest during almost four years. This supports market indicators, such as GOFO and the gold basis, which are also indicating tight supply of physical bullion.
We should take a moment to explain the significance of withdrawals on the Shanghai Gold Exchange.
Under Chinese law, all gold either mined domestically or imported has to be sold through the SGE, which allows the Chinese authorities to monitor non-government gold reserves. Once bars are withdrawn from the SGE, they are not allowed to be redeposited (Article 23 of the SGE rule book). Withdrawn SGE bars which are re-sold have to be recast and assayed as new bars. This gold is counted as scrap supply.
Consequently, SGE withdrawals are a close proxy for incremental Chinese demand.
The aggregate of SGE withdrawals in 2013 was 2,197 tonnes, which was equivalent to 72% of the world’s newly mined gold…and that was just Chinese demand (and it excluded PBoC purchases – see below). Chinese demand of c.2,000 tonnes last year was higher than the WGC’s figure but can also be corroborated by adding net imports into China from Hong Kong (only) to domestic mine production.
It was also confrimed by official Chinese sources. The China Gold Network reported a speech by the Chairman of the Shanghai Gold Exchange (SGE), Xu Luode, on 15 May 2014 in which he stated.
“Xu pointed out that the current gold market, especially the physical gold market, is actually in the East, mainly in China. Last year China’s own gold-enterprises produced 428 tons; at the same time China imported 1,540 tons of gold, adding up to nearly 2,000 tons.”
Torgny Persson, CEO of BullionStar.com attended the LBMA forum in Singapore in July 2014. He reported on comments made by Xu Luode in another speech which Koos Jansen published on the “In Gold We Trust” web-site.
“In the speech Mr Xu mentioned and I quote from the official translation in the headphones ‘as the Chinese consumption demand of gold hit 2,000 tonnes in 2013.”
Koos Jansen is now publishing on the BullionStar.com website and has kept a tally of gold withdrawals on the SGE so far in 2014. These have amounted to 1,761 tonnes during the first 46 weeks, putting Chinese demand on a full year 2014 run rate of about 2,000 tonnes.

Source: Bloomberg, ADM ISI
Regarding the PBoC, in a September 2014 report written by Na Liu of CNC Asset Management, and published by Scotia Bank, Na Liu recounted the comment made during a meeting with the President of the SGE Transaction Department.
“The PBoC does not buy gold through the SGE.”
Which means that the PBoC’s purchases of physical gold on international markets are additional to the c.2000 tonnes p.a. of domestic Chinese demand we’ve seen during 2013-14. The last update to Chinese gold reserves was in April 2009 when it was revealed that China had increased its gold reserves by 76% from 600 to 1,054 tonnes. We await the forthcoming update in 2015 with interest.
Anomalies in the silver market
Has the gold short been partially hedged in silver?
During the writing of this report, we happened to think about two anomalies between the gold and silver markets which we’d been wrestling with for a long time.
The first one is the divergence between holdings of gold and silver in ETFs.
The volume of gold held in all known ETFs peaked in December 2012. The big declines in gold during the first half of 2013 helped to shake out many weak holders. Despite the fact that the silver price has fallen far more than the gold price since its post-QE3 peak in early-October 2012 (53% versus 33%), the volume of silver held in all known ETFs is very close to an all-time high.

Source: Bloomberg, ADM ISI
Why oh why?
Notice how the divergence kicked in at the end of 2012, shortly after we believe that the long/short Nikkei versus Gold trade was initiated.
Another coincidence?
The second anomaly is the divergence between the open interest in gold and silver on the COMEX futures market in New York.

Source: Bloomberg, ADM ISI
That divergence, depending how you look at it, either began in February 2012 or October 2012. The latter is obviously very close (here we go again) to when we think the long/short trade was initiated.
We started to question whether the entities which we believe are short gold had concluded that a rapid exit of the short position could be problematic?
If so, might they have considered hedging part of that position in the silver market?
That might account for the counterintuitive divergences in ETF holdings and COMEX open interest.
Alternatively, what if somebody knew that the gold price was being pushed down on the back of a leveraged short trade rather than on fundamentals? Might they gradually build up a long position in silver on the basis that the weakness in the gold price was not sustainable?
We don’t know but…
The much smaller size of the silver market, limited above-ground silver inventory, and stretched level of the gold/silver ratio, means that a major reversal in the gold price would have a disproportionate impact on the silver price.
Silver is unique as it is both a monetary metal and an industrial metal. Unlike gold, there are limited above-ground stocks of silver because so much has been consumed in industrial applications. As stated earlier, the official estimate for the world gold stock is 177,200 tonnes, or 5.7 billion oz. Nobody knows the level of above-ground silver stocks, although the majority of estimates are in the 1.0-2.0bn oz. range, i.e. between 17-35% of the comparable figure for gold.
Of the estimated 177,200 tonnes of above-ground gold stocks, approximately 31,500 tonnes are reportedly held by the central banks. These institutions are able to lease this gold into the market to affect the price. Central banks, as far as we are aware, have divested their silver reserves.
The gold/silver ratio is currently 73.0 having averaged 15-16x for several thousand years. At times, it has even been considerably lower. For example, the ratio was 12.5 times during the era of Alexander the Great in the fourth century B.C. and was fixed at 12.0 during the Roman Empire. The ratio started to rise with the progressive demonetisation across Europe and the US in the late nineteenth century which culminated in China jettisoning the silver standard in 1935.
During the last 20 years, the ratio has generally traded within the 50-70 range. Having said that, there was only 8.3 times more silver mined than gold in 2013, so some “reversion to the mean” (15-16x) might be justified in the coming years.
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Fantastic post and since everyone here is so adept to spam these days this was published earlier this morning at TFMetals Report and was sent to ZH by a loyal turdite.
March on Turd's Army...Keep Stacking.
http://www.tfmetalsreport.com/blog/6425/new-paul-mylchreest
Rock does not lie, because it is what it is. Debt based proxies, fiat, and political promises are all bullshit because they are what they are. Choose accordingly.
Great work Tyler!
An excellent, detailed job by Mylchreest - again.
Check out gold in USD vs USD/Yen over the last 5 weeks.
About a .95 correlation.
A new pattern has emerged - gold is increasing in USD on par with the Yen debasement.
Japanese buying of gold is one of the sources of stress in the physical gold market.
........+1 and will continue to be, in my opinion. Sooner or later, there will come a concerted reach for zero counterparty risk - even within this long short trade on the Nikkei. Stackers have been "zero counterpartying" it for years. But, I hate to sound corny or use Carlin's "spooky language", but, evil will come to the evil doers. They will turn on themselves.
In my opinion, the short gold/long Nikkei trade has reached its end. That is, they might hold gold to 1200 or thereabouts (tracing a fib from its breakout out of $600 takes it to $1,117 from the $1929 high), but, I think its cursmashing days are over and I write this with nothing to do with charts or whatever. More like just taking a look around and seeing too too many contradictions - loose money and credit good, saving and investment bad, ZIRP and borrowing to the max good, not spending and saving bad. Its getting fucking goofy, and while I recognize that the market canbe a lot more goofy than I can be solvent, I look around and see a lot of insolvency - EVERYWHERE. Where there is not enough collateral to cover debt obligations and I'm not even talking government debt. Consumption debt. Levered investment debt. CB balance sheet bullshit. Debt is everywhere!! In Canada, for example, National Post wrote that 22% of homeowners are in deep caca should the economy (price of oil) continue south or stay south for any extended period of time. Eventually the levee breaks don't it? Like SNL's motivational speaker - many are just two paychecks away from living in a van down by the river!
If the short gold/long Nikkei trade is "on" I think the more interesting calculation, is that if the Nikkei sky rockets while the Yen goes to zero, at what point does the short gold part of that trade reverse. The author writes, either gold has to retrace to historical gold silver ratios, or silver rises by 15 or so times. But, what about the subject of the short? - that which is being suppressed at all costs (just like interest rates - also a check on batshit crazy monetary policy). It doesn't seem apparent to me that something of value (in this case gold) can be artifically suppressed and then remain suppressed even after the short gold/long Nikkei is taken off.
In any event none of this is consolation to the average guy - who as always - will never see it coming, including us.
Fuck the money changers!
Great post, Pareto.
Yields are trending toward zero on a global basis. Gold seems to have found a home at the 1100 -1200 paper range. Something will give eventually. Whatever happens it will be one helluva show.
Here's another chart, for the kidz:
http://static5.businessinsider.com/image/516d8dc9eab8ea846a000017-1503-1...
(interesting that they left this chart out lol)
As Pareto stated, do a Fibo retrace on the 10 year gold chart...
That was a big fucking post......
Anyone have a REAL executive summary......is it good for Gold or is it bad for Gold?
Nasty little Nikkei.
everyone here knows gold is suppressed to support the value of fiat & stoxx. what this article means is that this suppression is conducted with a greater emphasis on supporting the nikkei
it also means that a freakout in the yen/nikkei will have an exaggerated effect of reducing their ability to sacrific gold at the altar of fiat
Thanks
Chuck Munger is not amused by this post......not at all.
By the time I get done reading this, it's morning and time to go to work.
"Gold, and we are specifically referring to physical bullion, is also the only financial asset which has no counter-party risk." Untrue, Bitcoin also has no counter-party. Gold and Bitcoin both have counter-party risk when we are not storing and securing these assets ourselves.
Silver Bitchez. lol
Could the current drop in oil be a part of this long Nikkei/short trade? Been wodering what else could propel oil lower in such a sharp fashion, much to the same degree that gold has suffered under this trade.
Nathaniel Rothschild (yes they are still around)
....served on the board of...
Barrick (world's largest gold miner)
2010~2013
mission accomplished for bankers
Buy the spread. Easy money here, the trend has some support, it's time to surf that trend while it lasts.
The financial crisis is not over...
http://www.planbeconomics.com/2014/12/is-financial-crisis-really-over.html
PU239 @ $4,000.00 @ Gram.....zerohedge #Fukushima
Longest post ever on ZH?
There was a longer one on global warming....I waited for the punchline.....which never came.
Wait... What?
When you get a week in.....you'll understand it.
Lulz...
Hopefully CrownThomas will be blasting out his "year in review" soon. That usually takes up some space.
Thanks Squidward!
Deadly little Nikkei.
fixed
....is it good for Gold or is it bad for Gold?
Short answer: Yes.
Executive Summary: So long as the Nikkei keeps going up on the back of a weakening Yen, and so long as the bet is that Gold is going down, it will be bad for Gold. However, there was never a historical correlation between the two and sentiment can change very quickly. The trade is based on a "Central Bank Omnipotence" (Don't fight The Fed) assumption that equity markets will be kept elevated whilst PM's will continue to be suppressed so it has been good so far, but won't last forever.
Mylchreest came down from the mountain and said, "Lo, I have seen the enemy. Sit my fellow ZH econ-warriors, and I will describe him." And he did. And it was good. After what seemed an eternity, the clouds parted and the brilliant light of clarity shone down illuminating and exposing the enemy. After several moments of stunned silence, cheers of joy roared through the valley. The celebration lasted deep into the night, with much dancing around the fire and the shaking of spears....
That's me on the left, with a whole lotta shaking of the spear, shots in the air and torch in hand.
Indeed. Glad Tyler put it back up...
And then they broke the fat kid's glasses...
Yes. That's all I want to know too.
Great article but here is the one thing that really caught my eye.
"We question whether entities which have put on this long/short trade have acknowledged that a rapid exit from a large short position in gold could be problematic. If so, we wonder whether a short position in gold is being partially hedged by accumulating long positions in (high beta) silver."
This makes more sense than Harvey Organs thesis that someone is going to stand for delivery on all the open interest. It also gives a little bit more perspective as to what the end game is going to look like. Gold will make a moonshot but silver will go interstellar.
But are there large enough long positions being opened in silver at the same time they are shitting billions on the gold bid stack to hedge (even in mark-to-myth MS excel world)?
That's why an analysis of the actual orders in the various markets would be so useful... ending the speculation-- ours and "theirs" until "they" find the next viable trade.
The correlation with Japan is relatively new, and works because they can clear offsetting billion dollar trades in the f/x market, and to a lesser extent the nikkei, without disrupting the bid/ask, while they are blowing it out in gold.
Actually I summarized the entire article in 1 post/4 steps - a couple weeks ago.
Just because I'm named Redneck don't mean I ain't scary smart... or I couldn't put on back on the Berluttis and sell my soul back to Wall Street...
http://www.zerohedge.com/news/2014-11-21/asian-gold-traders-suspicious-r...
To the contrary there is a great mystery.
Lot's of people like to hurl allegations of conspiracy that rely on the existence and utility of the Magic Money Tree, even though they claim the MMT is bullocks and they are advocates of hard money. It doesn't work both ways.
Even the CIA has to balance the books of the ESF if it dips its fingers that cookie jar. The closest thing to a bottomless pit balance sheet exists at the DoD, whose "clients" generally require payment in specie (Au or Pb) and we found out what the limits of that bottomless pit actually were on September 10, 2001. And when you drag in private sector banksters, not only do the books have to balance, but you have to compensate both the shareholders and bonus pool. So the mystery is this:
Step 1) short gold (in large quantities, while the Chinese are at lunch and you get the most bang/price movement for each paper buck)
Step 2) ???
Step 3) ???
Step 4) PROFIT!
Since the people doing this are professionals, they are hedging their short gold positions (step 2) before exiting their trades (step 3). Since JPY has an obscene correlation to gold during the period of paper dumping in question and trades in volume at the hours in question, it is an ideal market to hedge in. If they hedge this way, then their net exposure is (while the trade is open) is not short x billion in gold (notional) it is an infinitesimal fraction of that, if it is even net short. The PROFIT! is also less, but for each billion deployed 100bps of intra-day gain is almost $30K into the hookers and blow petty cash/bonus pool.
Being a bankster isn't that complicated, one employs spread arithmetic to achieve profit. But yet, very few mere mortals seem to understand the classical mechanics dictating and constraining actions in the parallel bankster universe.
Um, so why does the NYFRB need a Trading desk and a new Office in Chicago to be milliseconds closer to Citadel? I didn't think that trading and manipulating markets was within the remit of a CB? And is so, what would be the purpose of that?
You Wall Street types are all MOMO without being able to look at the big picture. Until it's too late. Like 2008. And naked shorting a commodity like Gold where world demand FAR exceeds supply is not a very sensible strategy UNLESS you believe that market supply and demand fundamentals are totally broken, markets are manipulated and The Fed has your back?
Just as with all the other manipulations, the truth will come out some day. I will be sure to ask you then.
Take your ad hominems and choke on them. Your response to my post last month, combined with your post above, exposes what you are, and how little you understand about me (or how finance actually works).
It's the bottom 80% that seems to struggle with the definition of PROXY and notion of substitution, as well as the implications of "something else" in regards PAPER gold. As I've elsewhere -- Paper is NOT Gold, it is "something else" -- only mass delusion and stupidity allows them to perpetuate the fraud. The ignorance of people who confuse objective reality with how they think the world should work - only facilitates the perpetuation of the status quo.
Yes, you are so smart and I'm sure that as you are not in the "Bottom 80%" you are correct. Is your real name Jonathan Gruber by any chance? Anyway, because I am so clueless is why I was able to retire at age 50 and now live on the beach in Bali. It's raining tonight, incidentally. Cheers.
PS. You might also like to check the dictionary for the definition of "Ad hominem". You will then find that in no way did I attack the individual and not the argument.
"You Wall Street types" - 'nuff said re: ad hominems.
You keep going on about retiring at 50, like I should be impressed. If I didn't think you were lying (and know that even on the off chance you aren't lying - that it is utterly IRRELEVANT to any discussion here)... I might ask What took you so fucking long? (but might be that Bottom 80% thing that you seem uncomfortable with).
I see that you have finally checked the definition of an "Ad Hominem" and now understand how to use it.
Incidentally, you can believe what you wish and I dont "Keep going on about" anything except to advise you that I am not as stupid as your comments seem to suggest. But as a Wall Street Troll, you probably "Say that to the Girls"?
I wonder why you only ever comment on posts about Gold?
Do you really think I checked the definition of ad hominem?
I will give you one chance to demonstrate to the entire world that you are not simply making an idiot of yourself insulting YOUR INTELLECTUAL SUPERIORS before the entire world.
Cite the exact location, where PRIOR TO NOVEMBER 22, 2014, you argued that institution(s) were shorting gold as one side of a trade involving Japan, and doing so profitably.
I rest my case, Good night.
By proving my point? Perhaps there is more than correlation between dementia and retirement (there's a reason I gave it up a couple times). More importantly (and usefully), in the bizzaro bankster universe -- correlation leads to causation which leads to bubbles, and the people who understand this and do manipulate it for their advantage can retire earlier than either of us (assuming they are told or figure it out very early).
Systems (and particularly complex systems) are much easier to take down, when they people trying to take them down thoroughly understand them.
Are those guys gone yet?
Where does CIA drug money fit in? I'd say the CIA has the most "bottomless" budget. Not even mentioning forged paper.
they would tell you but then they would have to kill you.
The CIA's books balance (very precisely for government work). The problem and complexity with CIA finances is that not all their revenues come through congressional appropriation. Furthermore, neither the CIA CFO nor CIA Comptroller is subject to Senate approval - they are career SIS officers and "institution men"... So you can imagine where all the money is not subject to Congressional whims comes from and where it goes to (seems to be a popular past time in a lot of places anyway). Any drug running or counterfeiting would be a relatively small side businesses anyway due to the "paper" constraint - the CIA bankstas are at least on par with a top tier Wall Street firm.
9,800 words. 42 graphics
Murf_DaSurf
That was a big fucking post......
Anyone have a REAL executive summary......is it good for Gold or is it bad for Gold?
If you are asking this type of question, we have some problems here, don’t we?
You see, that’s the problem of financialization of an economy. Even you, as a Hedger, it’s made to look stupid.
Did you see anyone here asking the real question that needs to be asked?
If work is not available to generate income to support American middle class—the backbone of keeping the masses sedative and off each other’s throat, how will gold (deflation) helps?
Just a fact not a rant! Health, job (income), and liberty. If you don’t have these three, your life will be pretty miserable.
The problem with the article is that, it goes beyond information into believing that gambling with gold will help with the coming matters.
Many Hedgers fail to understand that the US is the (financially and militarily Empire) boss of the world. If the financial fails, they will have to take by force (war).
Neither does the vast majority of Americans understand these issues either. They believe that they were the ones who cause it.
Anyway, these misplaced believes are not what you should worry about it.
We have horrifying times ahead that will challenge this US Empire as their financial, military, and private sectors will be bankrupted.
You will need to have your ‘Physical’ gold outside America. Or, don’t waste your time wondering.
Naa..it was just a late night Article, it was Long and I was off my Ritilan
Sometime, I must admit, it’s hard to keep up with the side effects.
only unemployed ppl have time to waste to read such senseless graph porn...
It's saturday.
I agree. And the show, this time, is going to be a lot more real than it was the last time in that it is going to touch and probably scar a lot more than people anticipate/expect.
One correlation Mylcreest missed - I believe the argument can be made that a number of the times GOFO has abated over the last year+ have correlation with gold seizures (like the Ukraine) and with Goldman SUKS leasing deals with hammered economies like VZ and Bolivia.
How about the WGC recommending that India's temples lease out their gold!?!
Can you think of any proposal more counter to the interest of the struggling miners?
Or why the WGC grossly under estimates China demand year after year despite the overwhelming evidence they are flat out wrong? The China government has repeatedly stated gold demand twice the WGC BS numbers.
Shills for the banks. Add them to your - "they will all rot in hell" list.
"have correlation with gold seizures" BINGO
Who would be short gold with so much confidence, unless they have the power of seizure (i.e. persuasion to make central banks, miners and other bullion holders surrender their stacks)
I bad-mouthed this article for its verbosity, but I cannot deny its intrigue. I do wish more words were dedicated to useful action steps. I think I can do so very succinctly with this obvious implication:
In "short", all shorts must be covered.
+1 DING DING DING!! Yup
Excellent review. Just one issue. The writer states that "Some have speculated that the correlation with JPY is the case but we believe that the Nikkei is a better correlation".
IMHO, actually they are BOTH part of the same trade. The writer describes the trade as Long Nikkei/Short Gold. I believe THIS trade (As opposed to the classic Yen carry trade) is actually Long JPY/Long Nikkei/Short Gold. In other words, with the continued weakening of the JPY as a result of Abenomics, BORROW Yen at 0%, buy Nikkei and Short Gold. In fact, the reason why Nikkei/Gold might have a slightly closer correlation than Yen/Gold might be that the impact of the trade on JPY is being offset by the effect of the classic Yen carry trade, SELLING Yen BUYING S&P, taking the gains on the latter to pay back the former in devalued Yen later?
I'm not sure I understand the mechanics completely (and I'm far from being an expert), but one thing that didn't seem right about the article was that the plots that correlated so well were not in the same currency - it was a plot of Nikkei in Yen terms vs Gold in USD terms. If you take into account the change in JPYUSD, will they still correlate that well? But if not, how do we explain such a perfect correlation?
Perhaps this just means that the trade is not as profitable as it would seem to be, as you lose value as the Yen declines against the dollar, but it's still quite profitable?
Or perhaps leverage gained by borrowing ultra cheap in yen amplifies the nikkei gain enough to make up the difference. Is this what you were saying above?
Derp2012
In the short run: Long dollar
Short on PM’s, commodities, and the BRIC currencies
Then, after the crash, reverse and go long on ammo, too.
And never forget this: It’s a massive global Ponzi scheme of currencies (monetary policy) that is not going to improve most lives; so, it will be followed by a desperate need to create jobs (federal stimulus) that will be crashed by a finite planet.
“Debates are meaningless. Back and forth is just a distraction.
The house of cards depends on everyone participating in the same crime.
Debt reduction is a symptom, not a cure. Reducing the dole creates panic attacks and hallucination.
Greece is in the shakes and chills; China in a special form of global burglary, the trade war that everyone fears.
The U. S. is the longest running Ponzi scheme, in the world. All investors are discovering that they were cheated.
The mess that Nixon wriggle out of in 1972, is coming back to haunt us. The Federal Reserve didn't promise to make good on it.
U. S. taxpayers, you did. So get ready” -- Georges, at Zero Hedge
Wow, Mylcreest is a freaking GENIUS! I'd treat him to a nice bottle of Claret.
Lesson: Given that someone has finally cracked the Fed QE code, we can use this to front-run it correctly, rather than taking it in the shorts the last two years.
NEVER, NEVER, NEVER use the word "genius" around people who work in financial services... it leads to BAD things.
And in terms of the intellectual capacity found in people who work in financial services - there is nothing that special in the piece. 80%(+) of the people who work on Wall Street are fucking retards and quota monkeys just like everywhere else, but the top quintile (even in finance) is packed with people of "average" intelligence. The 1%er Bankstas are the guys who look at this all day, and came up with this trade prior to 2014, and all of its previous iterations going back many years...
The pattern matching and trade matrices aren't that complex. But seriously-
NEVER, NEVER, NEVER use the word "genius" around people who work in financial services... it leads to BAD things.
Perhaps, "Sociopathic" might be a more appropriate description. Or even psycopathic as our Banker friend in HKG recently admitted, presumably before being thrown off (soory, I meant jumping off) the top of a tall Bank building?
It means, perhaps, that the current collective weight of your silver stacks should be 15X greater than that of your gold stacks.
From Paul Mylchreest of ADM Investor Service International, not Tyler.
Hes always been very good but this article is a Grand Slam homerun.
bravo
This document, and a few others like it, should be copied, distributed widely and remembered as landmarks on the road to full exposure of the extent of corruption and plain, psychopathic EVIL that has destroyed the so-called 'market' and all forms of capital among subject national economies. The full human cost will not be understood for decades. In the name of God, source of all Truth, let the devils behind this have their power taken away and let there be a reckoning for all to see.
It is the Unified Field Theory of gold and silver manipulation by the banksters.
No, because "Unified" would have to cover at least as far back as the Volker Memo - an more accurately to 1971. At a practical level the definition could not be trade-specific, as the trades change over time. Also, since order flow data is available, a regression analysis of actual trades, as opposed to composites would make a much stronger case. But it's a good and necessary first step for a movement that too often uses the equivalent of "Liar, Liar, Pants on Fire" as "evidence" of conspiracy.
Exactly. Just ask the Pensioners of Detroit, MF Global Account holders, and the ghosts of Wiemar Germany.
And soon include New Jersey as a statewide Detroit - the most insolvent state in the Union! And others will follow - it is a race to the bottom.
-
But paper covers rock.
"Sure I'll deliver. Here's a piece of paper that clearly states I will deliver next week."
<next week comes>
"Oh, there you are. And here is a piece of paper that promises that I will deliver next week. What? You want it now? Why? You can always sell this piece of paper you know. Otherwise I'll see you here next week."
<next week comes>
"Welcome. I take your paper and replace it with a piece of paper that promises to deliver next week."
....
This is one of my more ignorant posts. I welcome people who tell me I am right or wrong. I almost wasn't going to put it in this post because I think it detracts from the article.
Well this is interesting http://research.stlouisfed.org/fred2/graph/fredgraph.png?g=Tjy
so, as the leveragable liquidity begins to dry up we should see a corresponding rise the gold price.
but we also know neither Japan, the US or the EU will let this happen. they hate deflation even more than gold (or at least as much). so, it seems we are in this for the long haul. until either the physical supply is exhausted and in strong hands or hyper-inflation takes off, but most likely these eventualites will take shape gradually and together.
great post!
I think with lower oil, even places like india, indonesia, china will continue to do well.
But right now Bears are shitting themselves...see here => http://bitly.com/1rdUK8e
Key Dates and Price Levels Using Impeccable Central Planning Based Mathematics (Long Nikkei/Short Gold)
December - 2014
Nikkei: 18,000
Gold: $1,200
December - 2015
Nikkei: 22,000
Gold: $955
December - 2016
Nikkei: 26,000
Gold: $711
December – 2017
Nikkei: 30,000
Gold: $466
December – 2018
Nikkei: 34,000
Gold: $222
December – 2019
Nikkei: 38,000
Gold: -$22 (Yes, Negative -$22 Gold)Wasn't the Nikkei around 38,957 on December 29, 1989?
It's a very good chart . There is a tiny problem . from where would be sourced the gold at the price below $ 1200 ? From Mars ? Or the Moon ? I personally do not believe that any producer will sell it at a huge loss ?
So the chart is just an excercise in remote posssibilities
Back up the truck monday?
or waaaait for it..?
A 73 to 1 ratio is absurd. Keep stacking Au, Ag and Pb!
https://www.youtube.com/watch?v=RCtzQRkrj0U
Dood that video is flippin awesome amazing eye you have!!
10,000+1s
Epic article. Great work.
Simply put, PhD level analysis. That said, I'll just point out that his comment, "On that basis, roughly 80% of the entire annual production of the world’s gold mines is traded on an OTC basis each day" could be restated as "400% of the annual production is traded weekly".
That, my friends, has to be one of the definitions of insanity (along with "repeating something and expecting a different outcome").
But, having read this entire piece -- and I tried to stop reading several times because it is really really long but it is really really compelling -- I have to wonder: How is this actionable?
If you think TLDR, I have 2 words for you: Buy physical. (I swear I'm going to get around to it one of these days.)
are you fkn srs that you havent taken receipt of physcal YET?
its 2 minutes to midnight dude.
I just had a 4 week delay getting my phys silver and im in Australia - 2nd biggest producer in the world.
Apart from phys pms
paper chips.. at today,s bargain..
Cef, Pslv , phys, Exk, paas, ag
any favorite Australian paper pm play?
These guys are the best, they go by the handle of "timex blues"
Actionable? For Whom?
For the individual - if you might want physical gold in the future, buy it while its still on sale. If you want to make a quick buck in paper gold - don't fight the Fed (yet) you will likely lose.
For the institutions - if you know someone else's trade you can kill that trade by crowding/front running it (or get rich at their expense), or otherwise alter the economics of the trade, such as by raising awareness that paper proxies for gold have serious "issues" which should be of serious concern to anyone with fiduciary responsibility who utilizes the proxies for institutional money management.
However, it's a game of whack-a-mole and the moles have almost unlimited lives and margin credit, but if you cannot see the actual trades, you cannot whack the mole, much less beat the machine.
Gold is for me a way in which in small part I can withdraw my consent from an evil and corrupt system.
I understand your sentiment but it's really just the system working as designed. Not evil. Just is.
We've been beta testing our monetary system for a few thousand years now and are very close to going 1.0
Not evil. Just is.
No, the willful abuse of innocents is evil.
Gravity "just is."
me too. i became interested in gold from the perspective of economic JUSTICE, not from a traders motivation
Well it's been a few years so time to trot out Real Bills Dogma as new again. Yay.
That which the central banks fear the most, gold, is what they must control and manipulate at all costs. Gold is Kryptonite to the central bankers and their fiat.
Silver is the Achilles' heel of the central banking system. It's already out of control. The price hologram is the only thing they're still controlling. Silver is what they fear the most.
Wish I had a couple billion laying around. I'd go full retard Hunt Brothers at this point, just for shits and giggles.
I've been wracking my brains for a method to break the CB's hold on gold. The only way would be to do exactly what you suggest and demand more physical than can be delivered. But we don't have a couple of billion lying around now do we. Always been stumped as to how do you convince people to buy physical and break this system open.
It finally came to me today. What about a gold or silver lottery. Each ticket would sell for 1/1000th of an ounce of gold. each ticket sold goes directly to purchasing physical gold. The winner of the lottery gets the gold. This would be a way to create wide spread demand for physical gold and/or silver.
dont worry about it. it only takes - and this is inevitable - one major family of the centuries old oligarchs to break rank, jump in a lifeboat and sever the ropes before others jump in
this will be just another expression of their psychopathic competitivity - they will see an opportunity to reverse the fortunes of their paper laden contemporaries and get to high ground
timing is such that someones finger must be hovering over the button somewhere
Aren't those lottery tickets already known as FRNs?
Frame that bank statement with 20 million dollars in it.....might have to sell the frame for gold someday.
Actually Vladimir has a couple of billion laying around. It has to do something with his strategy not to blow this thing up immediately.
Remember the memorandum silver coin for Crimea annexation?
At Alea.
Look i am NOT a billionaire but i can garantee all it takes is for ANY of those dudes to take a50% beating and a few wrong colored pills and SOMEDAY you will get a FULL RETARD on silver.. no matter how much money they have left.
I have 50% of my total wealth in paper PMS. I'm fucked up but TRUST me there are A lot of way richer people way more fucked up than me.
I can imagine at a poker table or watching the superbowl a bunch of coke sniffing big billionaires , they might just go for gold just cause the kicker missed the winning field goal.
Your possibility is a given, just give it time.
He could spend a life time looking, once he got there, would turn around and simply join the club.
start translating the shit buckets satire you dish out to people.
fill in the blank..
va te faire foutre frere .
va fan culo ____
anda a la puta que te pario hermano
go ____ yourself brother.
that s my club!
Yes indeed, a dollar is lawfully defined as grains of silver.
"It's funny but I remember translating that line above from Sophocles as an undergraduate in college. 'Many are the wonders, but nothing more wondrous than man.'
We are much worse than ancient cultures with their superstitions. We are granted enormous amounts of data, with more knowledge of the workings of the physical universe and nature than any other generation. And yet we cannot see 'the big picture' as well as they had done, substituting our own myths and legends of ourselves and our marvelous exceptionalism for reality, while ignoring the greatest forces of God and Nature" - Jesse's Cafe Amercain.Chart porn-tastic!
Tyler, that has to be the biggest key word list (net) at the header I have seen in a while.
If this cynical trade of short Gold/long Nikkei crashes and burns in a heap I'll be happy.
Just had to play with my Gold and Silver today, and do not own any Nikkei.
The lesson I learned from this is to never put the family fortune at risk based on an algo written in VBA. VB6 or perl maybe, but never VBA. Never again.
VB6 is VBA, it's a common macro language.
Wow Way over my head. Reading it in increments and learning and mulling it over. Thanks for this book :)
ah yes... harks back to the day when i'd come on here (z.h.) and re and reread these articles and still not understand. but, a few enlightned snarkastic coments from a select few in the fight club would bring home the wee bit of light from the article for me. unfortunately, most of those posters have been kicked out of here by a tyler or have drowned in an unforseen boating accident.
edit: ding ding ding. we have a new conternder (post your nominees below) - armageddon addahere .
Thanks for the kind words, but I have been around ZH since 2009. If you go back far enough you may remember me as Diogenes. I have to start over with a new handle from time to time, when I get booted off for insubordination.
I too miss the smart guys who used to post their insights, they seem to have been run off by trolls as part of a scheme to discredit this site and reduce its effectiveness.
TL;DR
Is it worth it?
Yes. A veritable freight train load of mental fertilizer.
RTFM
saulysw
Yes, it is very worth it to read the article.
So, you're saying PMs are manipulated; a rigged paper shuffle! Keep stacking at sale prices!!!!!!!!!!!!!! LOL
This shit is an n-dimensional non-cartesian shell game with fiat and promises.
The image I get as I read (no I am not done) is something out of the Hellraiser movies, the re-po market as the shifting puzzle box that opens the gates of Hell.
If you look at things this way it still seems crazy but it does make sense.
Probably one of the best articles I've read on zero hedge in a long time.
Agreed. Very interesting take. If there are smackdowns below 1100 I will have my eye on the Nikkei.
Probably the longest article ever. Funny, I have been away from ZH for several days and just hoped for some light reading tonight and I clicked on this big mutha tonight. Holy shit this will take me a few days...
Wow! What's it all mean Alfi? Someone tell an old redneck in simple English?
The big boys are borrowing gold and using it as collateral to play the Japanese stock market.
Since the Japanese government has pledged to flood the market with yen, the stock market is shooting for the moon.
Meanwhile all the gold dumping is driving the price of gold down.
If you take the chart of the Nikkei (stock market) and flip it over, it lays right on top of the gold chart.
In other words they are driving gold down and the stocks up, and profiting on both trades.
Because they are short gold and long the stocks.
I wanted to junk you for having the audacity to dive right in, but instead I gave you a greenie. Nice synopsis.
Yes, I thought a.a.'s synopsis was very good as well. Takes nothing from the fantastic article.
indeed. You know, it makes you wonder whether the comex has allowed its ratio of phys to paper to stretch specifically for the purpose of delaying the japanese bond implosion
Great summary. You should work for Cliff Notes.
He should work for CD !!!
/couldn't resist cd...
Booom!
Thanks Armageddon. Extremely helpful. Even if I study this article for a month, still wouldn't figure that out.
Thanks
Actually a brilliant move. Since they knew that the Nikkei would jump in response to Japanese Central Bank action, the rhetorical question is what would you do with the knowledge? Go long the Nikkei and see what else you can leverage to multiply the profits. Since the paper gold market is easily manipulated and central banks wouldn't mind if the price dropped, it's an insidiously brilliant plan.
You did miss one thing. Which gold, paper or gold. The article was talking primarily about paper as it sets the price. My question then is, are they borrowing paper (which is already oversubscribed) to use as collateral? If so, then it would seem a pretty important point to emphasize, house of cards fashion.
The gold bugs dream of a return to responsible money. The fiat bugs want to continue to have control over that money.
Fiat COULD work, the same way we could all have world peace and a decent living standard for all. The problem is that human nature takes over, and makes it impossible.
That is precisely what you are supposed to be believe. It is a grave and common misunderstanding. Psychopaths live among us, but they are not like us.
Political Ponerology: A Science on the Nature of Evil Adjusted for Political Purposes
"If the many managerial positions are assumed by individuals deprived of sufficient abilities to feel and understand the majority of other people, and who also exhibit deficiencies in technical imagination and practical skills - (faculties indispensable for governing economic and political matters) - this then results in an exceptionally serious crisis in all areas, both within the country in question and with regard to international relations. Within, the situation becomes unbearable even for those citizens who were able to feather their nest into a relatively comfortable modus vivendi. Outside, other societies start to feel the pathological quality of the phenomenon quite distinctly. Such a state of affairs cannot last long. One must then be prepared for ever more rapid changes, and also behave with great circumspection." (2nd. ed., p. 140)
I own gold both physical and paper. I own it for a lot of reasons but that's not important. What's important is what I eventually can get for it. Now I'm going to do my best "Turkish" from the movie SNATCH so here it goes. Now if eventually I sell my Gold for US dollars and say get $5000 an ounce we're fucked. If eventually some future president pulls an FDR and makes it illegal for me to own Gold and wants to give me $1000 an ounce we're fucked. If eventually every ounce of Gold I own is priced in Yuan or some other newly created fiat we're fucked. So I guess what I'm trying to say, Tommy, is that we are fucked and fucked proper.
Gold backed by copper jacketed lead is never fucked!
...and fed to the pigs...shit I have to watch that again tonight...
You're right nakki, the "we are fucked" probability factor is quite high. That is why as myself and others have interjected in the past, whenever the 'fucked' factor is raised, converting a large % of ones stack into things you can eat, things you can drink, things you can wear, things you can wash with, things that heat your home.... etc., while not as sexy as stacks, is perhaps the wisest choice.
Find the balance...
And hide ALL your stashes from the goon squads (i.e. DHS)
Agreed...buy stuff you can use, but remember that if DHS comes for any of your stuff, they'll probably take you, too, just for good measure...guilty-by-hoarding/preparedness.
all IMF SDR countries need to play along with the charade...requires following orders to do Anything
Yeah, or else. Wait. Or else what? Your country will be destroyed? Isn't that the point of Abenomics?
Live by sword, die by sword.
Interestingly we are at/very near the breaking point of this trend, i.e. something has to give, as both gold/silver are at or below all-in mining costs, while GOFO rates are most negative since 2001. AND, with Abe going "nuclear" the JPY is knocking on the door of its ultimate resistance at usd/jpy at 120. In short, the usd/yen (and the Nikkei priced in yen) are about to take off, while gold/silver, have pretty much hit rock bottom. This long nikkei, short gold trade is about to see some major pressure, and the huge intra day rally we saw this past Monday is probably just a harbinger of what's to come.
Great article and write up by the way...