This is a criticism of for the Reserve Bank of Australia (RBA) for their sloppy handling of Australia's gold reserves, lest they think they are somehow immune to scrutiny. During 2014, Bullion Baron (B.B.) has been on the case, pushing several freedom of information (FOI) requests in an effort to obtain some visibility - no less than three detailed articles HERE, HERE and recently, HERE.
Digging into the matter ourselves, Screwtape Files has hacked into their systems been fortunate enough to obtain a record of a phone conversation which took place between an RBA official and the Bank of England (Boe). The individuals remain unidentified but language pattern analysis indicates the conversation is authentic. For those of you without audio, I've taken the time to loosely transcribe the conversation (below).
(note: if the soundcloud applet above doesn't work, please use this link)
Greetings friends- I'm basically just pasting a bunch of charts for you today that caught my eye, with only captions. But I'll have a more thorough year end post for you. Following my successful guarantee that the Swiss Initiative would fail, I am emboldened to make another --but only to my Platinum Members ... $1350 gold in the next three months.
In a Twitter exchange a few weeks ago I mentioned an insight
offered by Jacques Rueff into the gold pricing mechanism under a classical gold
standard in his book “The Monetary Sin Of The West”.
A few people asked me to expand on that comment. (As usual
I’m late in getting this post out.) Long story short, Jacques Rueff tells us
that there were two reference points for setting a currency peg with gold. In
gold producing countries it was the average production cost of mining gold. In
countries without significant gold production the reference point was average exports. He also talked about gold having a place in the “price hierarchy” of commodities
which, by inference, is discovered as a result of mining for gold. (I’ll provide some page
references and extracts from Rueff’s book below.) So gold mining had two inter-related pricing functions.
The traditional price discovery mechanism for the commodity price of gold wasn't
trades on a COMEX style exchange or a “fix” by a group such as the LBMA. (In the case of the
LBMA perhaps it might be more realistic to view the fix as a market maker’s operation. Meaning the LBMA clearing members simply provide liquidity like the primary dealers in the US Treasury securities market by standing in the market with a bid and offer price.)
Rueff’s insights have some interesting implications for the COMEX gold market. If this paper by Douglas Pollitt is on the money then a realistic assessment of the current overheads in the
gold mining business means that miners require a gold price many hundreds or even thousands of dollars higher than the price
COMEX is signalling. In my opinion the disconnect between the COMEX price and the production cost of gold requires an explanation.
As Rueff points out the price of gold also regulated the supply
from mines by disciplining the “marginal producers”. It exerted pressure on
them to reduce supply when prices were low and encouraged production to expand
when prices were high. Could this apparent mispricing be due
to the gold miners sucking in capital without being able to provide a return? (Mining their stockholders as Pollitt's paper suggests to Uncle costata.) Are other commodities produced for years despite being priced below their production cost?
As I mentioned earlier I’ll provide some page references to
the digital copy of Jacques Rueff’s book that I linked above. He described gold as having a
place in the “price hierarchy” of commodities (P. 33). He talked
about gold residing in the “general price hierarchy” (P. 208)and that gold’s place in
this hierarchy was determined by the cost of mine production.
That makes sense to me. The costs that impact on other commodities also affect the
cost of gold production – labour, capital, technology, interest rates,
machinery, energy, various consumables, land, government fees/charges and so
on. Gold mining was the conduit through which the components that make up the
“general price level” (P. 142) impacted on the overall cost of gold production. This
is Jacques Rueff’s description (P. 58) of the benefits of pegging to one of these reference points:
“No doubt, the fact that legal parity is pegged is the main feature of
the gold standard. I would even say that its major virtue is that it maintains
the whole scale of prices in the countries that apply it at a level where the
average cost of gold production  coincides with the legal parity of the
But when its operation has been suspended—as was
the case in nearly all belligerent countries during the last two world wars—or
disrupted—as was the case as a result of the application in the greater part of
the world of a system which, like the gold-exchange standard, stretches nearly
to breaking point the link between gold and aggregate purchasing power—then
there is no alternative but to jettison appearances to save realities and,
while acknowledging the situation that you have allowed to develop, to
re-create the basis for continuing expansion without impairing order or
 And in the non-gold-producing countries, the average price of gold
in terms of exports.”
Gold provided an anchor for the currency to the rest of the commodities that constitute the general price level. When this level increased significantly (e.g. as
a result of a major war) Rueff’s policy recommendation was to increase the
price of gold in order to restore equivalence. Expressed in currency terms this
meant cutting the exchange rate of the currency peg to reflect the change in the general
price level. In a situation where prices had doubled a peg set at 50:1 before the rise would
require a reset to 100:1 in order to recognize the true position of gold in the
general price hierarchy of that currency zone.
Rueff seems to be offering a way of approaching a fundamental analysis of gold pricing. Now I realize a lot of people believe that fundamentals play second
fiddle to technical analysis (TA). And the savants of Team TA have certainly
been racking up the points against Team Goldbug lately. I posted a comment
here recently with a quote from a post that I thought summed up the current situation perfectly. It's from a blogger who styles himself Tiho (at The Short Side Of Long blog) who said: “Fundamentals are
useless until the market decides to price them in.” After further reflection I began to have doubts about how the average person could profit from adopting this perspective.
If you don’t know what the fundamentals are how can you
position for the market’s ultimate recognition of their existence? (Perhaps Tiho's statement could be restyled as Technical analysis is useless unless you know when the fundamentals will be priced in.)
If you do know gold's fundamentals (and they aren't being priced in) how can you determine in advance that the market is about to price
them in? Can TA answer this question?
If you think you have the answers to these questions or you would just like to comment about this post please join the discussion.
Truly an awful time for gold and silver investors right now. Mining stocks are in one of the worst bear markets in history. E.g. compare five-year charts of the NASDAQ crash to mining stocks below. The terrible irony is that I'm sure many people sold common equities and bought mining stocks after the financial crisis to protect themselves from the Wall Street circus ringleaders. Little did they know that they would transfer up to 90% of their wealth over to them in the next 5 years. And that doesn't even touch upon the opportunity cost of pulling out of stocks, which haven't done too badly.
Not a happy time for gold and silver bugs, sadly. Here's some mood music to set the tone . . .
And what will surely upset gold and silver bugs even more is that my long absence from regular posting must needs continue for a while longer, but I see we still get a large number of loyal visitors daily, a few of them not bots, so with September in the books, I felt it incumbent upon me at very least to update some of my regular charts. Once again, the reversals on the two weekly three-line break charts below (with the first, as usual, being the leading indicator) have signaled the recent bear cycles in gold and silver.
My 2014 prediction that the GOLD/S&P500 ratio would hit the yellow line has come to fruition.
Then the chart from my previous post did what I thought it would: the correlation (red) would reverse and become positive again soon--that was clear--and the only question for me was whether emerging market equities and silver would both move up or down together. The strong resistance line on EEM told me down was far more likely ... and sure enough silver just closed the week at its lowest level since February 2010 (!) ...
I see $15 in play next, and I wouldn't rule out $12 before a long-term bull rally takes hold. My target (pink circle) here was on the money
My conviction that we won't see the low in gold until the "treasuries in silver" chart hits the green flanging wedge is also looking likely now, a year and a half later, with, unfortunately, still a ways to go: