Thursday, March 14, 2013

Gold Is Technically Set-Up As The Ultimate Contrarian Bet

People are going to see moves in gold that will shock them. Some of the advances will be spectacular, but right now people are focused on short-term weakness so they are missing the big picture. - John Embry, King World News LINK
The longer the bullion banks and hedge funds try to sit on the price of gold/silver, the more violent and extreme will be the eventual upside counter-move.  This market tendency has held tried and true for the entire 12-yr bull market in precious metals.

Much is being made in the financial media about the recent "huge" ongoing liquidation of gold from GLD and other gold ETFs.  But what is not being reported and discussed is the fact that, in the past, big GLD liquidations have preceded a massive run-up in the price of gold. In other words, when investors dump GLD, it's the ultimate contrarian bet.  I wrote an article for Seeking Alpha about this market fact:
the current drop in total ETF gold holdings is visually the largest on record. But in the context of the overall ETF gold holdings it is not significant. You can also see visually that when large drops in ETF holdings have occurred (late 2008, for instance), the drop correlates with a subsequent big move higher in the price of gold. Furthermore, the biggest liquidation of GLD began on February 20, when the price of gold was $1564. The price today is $1592. The point is, the price has actually climbed higher since GLD began heavily liquidating. This is actually very bullish, as the market has absorbed the 4 million ounces of gold liquidated from GLD while grinding higher. Makes you wonder who is buying the gold being liquidated.
You can read my entire here:  Gold: Currently, The Ultimate Contrarian Bet  You might be surprised by difference between the actual facts and what is being reported in the media.    In addition, The Got Gold Report published a report which comes to the same conclusion as I have, BUT it also points out that, while gold ETFs are selling out, silver ETFs are seeing big investor inflows.  Please note that in the past, this investor behavior was not present and it further reinforces the bullishness implied by the liquidation in GLD.

With the gold/silver ratio currently at 54 vs. its very long term average of 16, this verifies to me that the retail investor - the "little guy" - is beginning to understand the importance of investing in precious metals.  The fact that retail is selling gold and buying silver is a testament to the old adage that "silver is poor man's gold."

With only an estimated 2-3% of the public putting some money in to the precious metals sector, imagine what the effect will be when a lot more people figure out the truth about the dollar and start moving money into the precious metals sector.  Let's put this in perspective.  Assuming that the U.S. really has 8100 tonnes of unencumbered gold.  The current market value of this about $435 billion.  The total size of the U.S. retirement asset base is about $17 trillion.  If U.S. investors were to move just 10% of their retirement assets into gold, it would buy the entire amount of gold owned by the U.S. Government three times over.  Think about the price implications for gold/silver...


  1. How can we find out how much real physical gold is being purchased through London each day or week?

    1. I've never seen those reports. They may be out there for free. Probably have to be an LBMA member, though.

      We subscribe to a very pricey daily global bullion report that reports premiums and delivery volume in Shanghai everyday. That volume is off the chain right now. Yesterday 20 tonnes were delivered...

  2. they can get brainwashed portfolio managers to pony up for this crap but no $ to finance real assets? seems like the fiduciaries of the public's capital are in a quid pro quo...

    Squeezing Out Cash Long After the I.P.O.

    When the Berry Plastics Group, a container and packaging company, went public last October, it generated up to $350 million in tax savings. But the company won’t collect the bulk of the benefits. Rather, Berry Plastics will hand over 85 percent of the savings, in cash, to its former private equity owners.

    The obscure tax strategy is the latest technique that private equity firms are using to extract money from their companies, in this case long after the initial public offering.

    Now, buyout specialists are increasingly collecting continuing payouts from their former portfolio companies. The strategy, known as an income tax receivable agreement, has been quietly employed in dozens of recent offerings backed by private equity, including those involving PBF Energy, Vantiv and Dynavox.

    While relatively rare, the strategy, referred to as a supercharged I.P.O., has proved to be controversial. To some tax experts, the technique amounts to financial engineering, depriving the companies of cash. Berry Plastics, for example, has to make payments to its one-time private equity owners, Apollo Global Management and Graham Partners, through 2016

    “The investment banks are spending a lot of time on models for these deals,” said Eric Sloan, a principal in merger-and-acquisition services at the accounting firm Deloitte. “We are going to see more of these deals,” he said, adding that “it brings new value to the table.”

  3. "Think about the price implications for gold/silver..."
    Mama needed a new pair of ruby slippers ...

  4. With 8000 tons of unencumbered Gold in the US reserves, I'd expect that, with Silver at 50:1, they would have 400,000 tons of Silver, right? Did someone say nope?

    This long term precious metals market distortion is going to eventually be heaven sent for the little guys who wasted their money on worthless relics.

  5. Private equity crash could trigger next wave of financial crisis, Bank warns

    Bank of England fears that larger private equity deals done in the boom years 'pose a risk to the stability of the financial system' as refinancing looms

    The Bank of England warned on Thursday that the next phase of the UK's six-year financial and economic crisis may be triggered by the collapse of debt-laden companies bought by private equity firms in the boom years before the crash.

    In its latest quarterly bulletin, Threadneedle Street said the need over the next year to refinance firms subject to heavily leveraged buyouts posed a systemic threat.

    The Bank added that it would use its new role as the watchdog of the City to monitor private equity deals in future "episodes of exuberance" to prevent a repeat of the debt-driven takeover boom in the run-up to the banking crisis.

    "In the mid-2000s, there was a dramatic increase in acquisitions of UK companies by private equity funds," the Bank said.

    "Many of these buyouts, especially the larger ones, were highly leveraged and the increased indebtedness of such companies poses a risk to the stability of the financial system – a risk that is compounded by the need for companies to refinance debt maturing over the next few years in an environment of much tighter credit conditions."

  6. Banksters Smoke Bellybutton Lint (E418)

    In the second half of the show, Max Keiser talks to Steve Keen, author of Debunking Economics, about central bankers smoking their own belly button lint with Ben Bernanke behaving like an Easter Islander trying to rescue the past. Professor Keen says we need to get back to a capitalism where we borrow to build a factory not to build a derivative to rip someone off.

  7. i would very much like to see a chart substantiating how 16-1 has been the average gold-silver ratio; thank you

    1. Good - google it. In Roman times the gold/silver ratio was fixed at 8:1. Over the centuries it gravitated around 16. Do your own research. I do enough spoon-feeding

    2. 12
      The gold-silver ratio has varied
      widely through the years but has
      declined in the past to the range
      of 10 or 15 to 1 in extended
      precious metals bull markets:
      The ratio of the gold price to the
      silver price, which is currently in the
      neighborhood of 50:1 and has been
      dramatically higher when silver was in its
      extended bear market in the 80’s and 90’s,
      often declines precipitously in extended
      precious metals bull markets to as low as
      10 or 15:1. Given that we are currently in
      a powerful bull market with many years
      to run and in view of the aforementioned
      compelling reasons to own silver, a ratio
      in that range certainly seems attainable
      before this bull breathes its last. It is worth
      noting that the ratio of 15:1 correlates
      very closely with the ratio of gold to silver
      thought to exist in the earth’s crust.

    3. "The gold/silver ratio never regained stability, possibly due to the massive silver discoveries in the American west, and the advent of technological uses for silver including photography, which started silver’s shift away from a monetary metal and towards an industrial metal. This instability caused silver to be widely demonetized starting about 100 years ago, because silver could no longer work together with gold to form a stable monetary base. For example, prior to 1900 the US dollar was defined as 3/4 ounce of silver, and after 1900 the US dollar was defined as 1/20 ounce of gold. (And of course, in 1933 the US dollar was totally redefined by the Parker Brothers, with the Monopoly board game actually being patented in 1935. What a great educational tool to brainwash the youngsters about the new monetary system!)

      As commodities, gold and silver are almost always used independently of each other. A person may need a gold crown on his tooth, or a flat screen TV in his living room. The reason I use the “flat screen” example is to emphasize a very striking difference between the use of gold and silver as commodities. Silver has enormous use as an “invisible” industrial commodity, requiring minute amounts in zillions of applications, especially in all consumer electronics, while gold’s industrial use is comparatively limited. To put it bluntly, if all our gold suddenly vanished, we would have to scramble to find substitutes for some technological uses, but we would mostly miss gold’s beauty. However, if all of our silver suddenly disappeared, we would be instantly plunged into the Stone Age.

      Annual silver demand has exceeded annual planetary production for many of the past 50 years. Until the last 2-3 years, monetary silver investment has been less than zero, due to silver coin melting and other recycling making up the industrial deficit. Yet, the shortfall is unsustainable at current silver prices, because silver in electronics often cannot be recycled economically, so it is simply thrown away. Also, every time the US military explodes a smart bomb, 100’s of ounces of silver are vaporized. Vast stockpiles of silver accumulated over many centuries have now been “consumed” in the last few decades, and it is unclear how much is left. For example, after World War II ended the US Government had stockpiled billions of ounces of silver. As of 2002, this stockpile is completely gone, as are all other official world government stockpiles. In many expert opinions, at least 50% of all silver mined in history is now gone, unrecoverable by any means, while at least 80% of all gold probably remains. So, the current ratio of existing silver to existing gold is probably more like 5:1, and not 10:1. On top of this, most of the remaining silver exists in things like jewelry, silverware, or coins hoarded by people wearing “tinfoil hats,” and I doubt that the “tinfoils” will relinquish their silver at anywhere near current price levels. Therefore, in regards to world bullion stockpiles the 5:1 ratio is flipped, with gold bullion actually being around 5 times more plentiful than silver bullion. So, we now have a price ratio of 70:1, but an availability ratio at current prices of 1:5. In this light, remember that silver (not gold) is the metal that is indispensible for modern society. Can you say “unstable?”

      The Event Horizon is a physics term used to describe the boundary between two realms with discontinuous rules, so you can’t look from one realm into another, but you can move from one realm into the other (that is, if you like being sucked into a black hole). In this case, it is the economic rules of monetary metals versus the economic rules of industrial metals, which prevent us from seeing the proper gold/silver ratio, and which explains why the market always seems to be searching for it."

    4. Not hard to find.

      Thanks for your effort Dave and putting out what you do for free!

  8. Blackstone eyes first-ever REO-to-rental securitization

    March 13 (IFR) - Blackstone is preparing a first-of-its-kind securitization of REO-to-rental properties, and the deal could come later this year, according to sources with knowledge of the plans.

    Word of the plans comes a week after the private equity giant got an increased bank loan from Deutsche Bank and others to expand its significant holdings of single-family homes.

    REO-to-rental is a relatively new phenomenon, as companies have bought up distressed properties - many foreclosed on in the midst of the financial crisis - in bulk.

    Blackstone is the largest asset manager in the sector, and demand for a securitization is thought to be so strong that any deal could go forward without needing credit ratings.

    Securitization specialists with knowledge of the deal said Deutsche Bank expanded the size of the facility in order to accommodate Blackstone's increased commitment to purchasing distressed single-family homes with the goal of renting them out.

    With a nascent recovery in home prices, REO-to-rental has become a big business that has attracted investments from private equity firms, REITs and others.

  9. Ron Kahn: ‘The best lending climate we may have seen in decades’

    Remember, when the lending environment began to deteriorate in 2008, alternative non-bank lenders barely existed and the unitranche structure was just a glimmer in someone’s eye. The capital structure most borrowers used consisted of either an asset-based or cash flow senior debt combined with a mezzanine term loan behind it for maximum leverage. Need a loan? Call a couple of banks or CLOs who eagerly clubbed up the senior piece, add a layer of mezzanine, and you were done.

    But when the banks and other cash flow lenders disappeared, a whole new breed of alternative lenders, consisting of BDCs, hedge funds and credit opportunity funds saw the vacuum left by the banks and quickly rushed in to take their place. These alternative lenders, in addition to their capital, fostered the unitranche loan, a structure which combined both the senior and junior capital layers into one large term loan. Huge amounts of money have flowed into these vehicles, which has allowed them to be more aggressive by providing higher leverage, lower interest rates and greater flexibility on key terms. In fact, according to S&P LCD, 70 percent of all lending today is provided by these non-bank institutions.

    Life has been good for borrowers and, just when everyone thought it couldn’t get any better, CLO formation has re-started and banks, both the larger money center banks and the regional banks, have woken up and realized that their loan portfolios are shrinking too much and have decided to get back in the game and offer competitive cash flow loans to borrowers. These institutions do not provide unitranche loans, but they are now providing senior cash flow lending not available in the last five years.

    So what you now have is not just an incredible amount of money from non-bank institutions but capital from cash flow lenders such as banks and CLOs eager to lend again. And this new senior debt, together with mezzanine capital providers that have been clamoring to put money to work during this entire period, results in the resurgence of the traditional senior cash flow/mezzanine structure.

    Bottom line: While alternative lenders and their unitranche structures still dominate the middle-market lending markets, the return of banks, CLOs and other cash flow lenders gives borrowers two distinct lender bases and structures to use, an ability that did not exist in 2007.

    So when you think that (a) the same leverage is available today as it was in 2007; (b) there is an entire new segment of lenders today that did not exist in 2007; and (c) there are now two viable competing financing structures available to borrowers compared to only one in 2007, we would definitely argue that today is better than 2007.
    As we’ve been suggesting for the last several months, if you have any need for debt, you’re not going to find a better time to get it.

    party on.......

  10. michael schumacherThursday, 14 March, 2013

    fundamentally spot on however we now live in a world where none of it matters as the pricing mechanism for both AG and AU are controlled in the same way the banks rigged and manipulated LIBOR. The system is not going to allow another sub-set of a social class to enrich themselves because that would create a far larger problem-for them.
    In any case the ads for "buying gold and silver" are more prevalent then anything else.

    Even if the surge in buying were to occur on open market they have demonstrated the finite ability to not allow any real organic buying to be done on Comex. If they did....remember the two words I posted last week:

    Force majeure.

    Takes care of alot of the system's problems by applying that to whatever they want... whenever they want.

  11. The Hecla situation goes from bad to the very worst. Now it appears that the gold hedge to finance the AURIZON acquisition will be sold a deep discount of a $100 to the market. So when the gold market is in backwardation and the whole is screaming out for the commodity Baked has to deep discount his sales. Baker has a 90 window to work out alternative financing.

    The only serious plan is a deep discount emergency rights issue and the idiots on Seeking Alpha are calling this non dilutive. So Baker is now running a company that due to his mismanagement of the capital account needs emergency capital to finance day to day operations.

    The only positive is that the company must now be a take-over target and frankly $5 would look mouth watering to me.

  12. Senate: J.P. Morgan’s Dimon withheld loss data
    J.P. Morgan breached risk limits 170 times in first quarter 2012: report

    WASHINGTON (MarketWatch) — J.P. Morgan Chase & Co. Chief Executive Jamie Dimon intentionally withheld critical profit and loss data from federal regulators at a time that it could have provided damaging information about what eventually became a more-than-$6.2 billion trading loss in credit derivatives, according to a Senate panel report released Thursday.

    The report charges America’s largest bank by assets with ignoring its own limits on risk taking, manipulating risk models to avoid detection, ignoring warnings from traders and misinforming the public and federal regulators about growing losses.
    At issue are J.P. Morgan’s JPM -1.92% trading losses, which were conducted out of its London investment office — and attributed partly to a trader, Bruno Michel Iksil, dubbed the “London whale” for his large positions in credit derivatives. The report notes that the current status of the losses is unclear because J.P. Morgan dismantled the portfolio late last year, moving some funds to its investment banking unit.

    It includes dozens of examples in which trader warnings were ignored while risk managers at the institution appeared unaware of losses. It adds that the bank’s chief government regulator appeared oblivious in many instances or was denied critical information.

    Levin noted that the bank breached key risk limits 170 times in the first three months of 2012, followed by 160 breaches in the next month, April. The report also said a J.P. Morgan internal investigation into the losses was insufficient.
    “The bank disregarded the warning signals of this huge ramp up in risk, they allowed the CIO to raise the risk limit, manipulate the risk measurement models to continue trading despite all of the red flags,” Levin told reporters in a briefing on the report.

    However, the report does have one example showing that Dimon intentionally sought to cut off regulators from critical daily profit and loss trading data at a time that it could have started to provide damaging information about trading losses at the firm.

    Specifically, in late January, 2012, as losses were increasing, the report said Dimon ordered the bank to stop providing a daily investment bank profit and loss report to the Office of the Comptroller of the Currency, the institution’s chief regulator, because he believed it was too much information to provide to the OCC.
    However, Douglas Braunstein, J.P. Morgan Chase’s chief financial officer at the time, restored the daily report soon afterward at the OCC’s request. But, according to the investigation, “Dimon reportedly raised his voice in anger” at Braunstein and disclosed that he had ordered the halt to the reports. Dimon said the OCC didn't need daily profit and loss figures for the investment bank, according to the report.

  13. I can't believe Denver took Welker from the Pats!!!! You will love him.

    1. Hey dude! How's it going? Denver signs the two biggest free agency signings of the last 2 years. They got him for less money apparently than another team (I think the Titans) were willing to pay him.

      Plus we signed Rogers-Cromartie, who I think will play a lot better for Denver than he did for the Birds.

      They clearly are going for broke to try and get another Super Bowl trophy with Manning. Both Manning and Champ Bailey are probably done after 2 more seasons.

  14. 16-1 gold/silver ratio for about 20 minutes over the last 43 years; lame argument; thank you

    1. ALL HaiL THe QUaNTiTaTiVe EaSeRs...AND BeWaRe THe IDeS oF FARCE...

      Eric and Jamie are "friends"
      We know how this love affair ends
      Jamie's a whale
      Who's Too Big Too Jail
      So Eric subserviently bends

      The Limerick King

    2. What's your point? You are lame because all you do is anonymously post crap comments in the comment section of blog posts. What a pussy.

      Here's the chart I like the best:

      If you study history, which I'm sure you don't, you'll note that that gold silver ratio was pretty constant at around 15 from 1687 until 1860's. In 1862, President Lincoln's administration upheld the right of Susan Griswold to repay a loan she received in gold coins from Henry Griswold with U.S. Treasury notes, issued to pay for Lincoln's war on the South. This was the first official break from the Constitutional Amendment requiring that gold and silver coins were the only legal tender.

      This was known as Lincoln's legal tender law. Not coincidentally, with that advent of fiat currency and the deviation from the strict the gold/silver specie standard, we see the GSR eventually break from what is actually a couple thousand years of recorded history at 15:1 or lower. You may google that if you are capable of doing research.

      As fiat currency became more pervasive with the founding of Fed, you can see the effects by looking at very long Dow/Gold ratio charts AND very long term GSR charts.

      There have only been a couple times since the 1860's that the GSR hit the mid-teens. We will for sure see it again - and probably lower - before this bull market in metals is over.

    3. How can people be so dumb as to make comments without doing their research?? As a geologist I know both gold and silver are hard to find-- it's my job. Gold is not 50 times harder to find nor is silver 50 times more plentiful so ultimately we will move closer to that 16:1 ratio (or lower) again. Do your homework or at least get a little informed before you question Dave and make a dumbass statement like calling his arguments "lame". History is a little longer than 43 years you cretin.
      Dave, I read your blog pretty much daily and I think you do fantastic research and like many of your readers I truly appreciate it and am boggled that you do it for free!
      Justin from Canada

  15. Hi, Dave, in my humble opinion, the build-up in SLV inventory maybe is due to the fact that JPM is closing its shorts perhaps naked shorts on SLV. JPM created SLV shares to close the short position.
    Besides, have you ever read the latest SLV prospectus. It seems SLV made some changes to the latest prospectus. Now authorised participants can deliver silver in New York to created SLV shares. In the past, it was only England. Hence we have a build-up in the eligible silver at those Comex depository, especially JPM.

    1. Wow that's interesting. I'm going to take a look at the the most current prospectus. I did not know that and have not read any references to that. Thanks for the heads up. For sure explains JPM's inventory build on the Comex AND explains big movements in and out of the Comex AND further solidifies the case that SLV is used to put out physical shortage fires.

    2. Hi, Dave, I checked the annual reports of 2010 and 2011. The custodians in New York were actually added in 2011. You can see the difference if you read the last paragraph on Page 3.

  16. Live-Blogging Senate Hearing Tomorrow, When J.P. Morgan Chase Will Be Torn a New One

    This new report by the Permanent Subcommittee answers the question of why the public needed to be involved in that episode. What the report describes is an epic breakdown in the supervision of so-called "Too Big to Fail" banks. The report confirms everyone's worst fears about what goes on behind closed doors at such companies, in the various financial sausage-factories that comprise their profit-making operations.

    If the information in the report is correct, Chase followed the behavioral model of every corrupt/failing hedge fund this side of Bernie Madoff and Sam Israel, only it did it on a much more enormous scale and did it with federally-insured deposits. The fund used (in part) federally-insured money to create, in essence, a kind of super high-risk hedge fund that gambled on credit derivatives, and just like Sam Israel did with his Bayou fund, when it got in trouble, it resorted to fudging its numbers in order to disguise the fact that it was losing money hand over fist.

    Chase for years hid the very existence of this operation from banking regulators and lied about the purpose of the fund (saying it was purely a hedging operation when it stopped being a hedge and instead became a wild directional gamble), and it also changed the way it calculated the fund's value once it started to lose hundreds of millions of dollars. Even worse, the bank's own internal auditors signed off on the phoney-baloney accounting of this Synthetic Credit Portfolio (SCP), at one point allowing it to claim $719 million in losses when the real number was closer to $1.2 billion.

    How did they do this? In the years leading up to January of 2012, Chase used a standard, plain-vanilla method to price the derivative instruments in its portfolio. The method was known as "mid-market pricing": if on any given day you had a range of offers for a certain instrument – the "bid-ask" range – "mid-market pricing" just meant splitting the difference and calling the value the numerical middle in that range.

    Read more:

  17. He wants people to wake up....

    Dr. Paul Craig Roberts

  18. Chelsea Clinton Buying $10 Million NYC Apartment
    File under: It's a wonderful world for children of elitists and crooked politicians,

    Chelsea Clinton is buying a $10.5 million spread right across the street from Madison Square Park, reports NyPo. The apartment is 5,000 square feet and is located in the Whitman.

  19. Harvey Organ – Huge Volume Of Precious Metals Deliveries On The Comex

    Harvey Organ joined us this evening for a lengthy discussion of the enormous Comex physical gold deliveries in February and March, traditional non-delivery months. He believes that there’s a loss of market confidence taking place. China is taking delivery and shipping the metal to their shores. Harvey thinks that the markets and the international financial system is in a precarious place at this moment. There’s no way out of it and at some point-after the collapse, countries will have to get together and revalue their currencies in gold. It all makes for very interesting times.