How can we trust the Bar List Data?

Recently, video blogger Alexiscom1 did an analysis of some of our material and asked some questions link. Questions are good - they help us interpret the world around us. One of his questions I thought would make a good post: (paraphrased) "How can we trust the Bar List Data?" Alexiscom1 says: "... any report from SLV in it self would not worth much if they are doing their own audit them self." A popular sentiment! Also talked about by Dave in Denver: 'Any reports generated by SLV/GLD are only as good as the paper they are recorded on.' link. The bar lists are my data source, so I better talk about it at least once.

First, just to set the scene - short of strapping a camera to a kindergarten child's head going to an organized SLV vault day tour, we are limited in our ability to get direct first-hand proof of the inventory. I have always loved this printer ad of the martians printing out boring mars pictures to put in front of the camera of the mars rover. The crux of the ad is that the quality of the print is such good quality that the viewers mistake it for reality.

The ETF's each independently (publicly) publish information about their inventory and present it as evidence of their holdings. I am simply collecting that data and storing it in a central archive for study and analysis - nothing more complex than that. So the bar lists are the published set of claims from the ETF's, how can we trust them?

To address this adequately, we need to recognize it is actually several questions in one, only then can we start to construct tests. Interestingly, the questions are progressive, which means as soon as we answer the first, we can move onto the next 'level' which is typically more complex (conversely it is difficult to move down the ladder). Identifying the categorization may help discussion, so here's the strata:

Level 1: Does the bar list represent bars in the vault? (i.e. empty or not?) Turd Ferguson says largely empty, Harvey Organ says completely empty.

Level 2: Does the bar list represent bullion which is not fake? Bix Weir suggests it's most likely all Molybdenum or Tungsten, Rob Kirby alleges salted gold bars are Everywhere. These people generally call for 'worldwide re-melt and assay'. Perhaps they are correct! But we do at least have a way we can data hunt for these fake bars if they do exist (another post for another time).

Level 3: Does the bar list represent real bullion which is not being double-counted? Ah, the age old con - selling the same thing more than once. This isn't a very common argument but it does pop up continually like with folk like David Morgan, or maybe even GATA. For the purposes of this definition relating to ETF holdings, 'Double-Counting' is defined as ownership - another entity AND the ETF both having full title to the same bar at a serial number level (regardless of how it came about). After much email discussion it turns out that this kind of situation would be rare - inasmuch as the wording on contracts regarding metal would not typically be written to include specific serial numbers, and that bullion banks would not be so stupid to perform that trick on bars which they know are in the public record (in the bar list). For this situation though, we do have a practical test! If you do hold full title to bars by serial numbers, we have the ability to do an ETF spot check for you - on the serial number, using our database. Your evidence combined with ours, might crack this case wide open!! Sadly, no one has yet stepped forward. This absence of people with numbers to test does not prove that there aren't any double-counted bars in ETF's but it's not for lack of opportunity!!

Anything past this level starts to get complicated, and cannot be addressed by the bar lists by themselves. I will however, attempt to itemize them. Please note that a higher-level question only represents argument complexity.

Level 4: Does the bar list represent real bullion in the vault which is not leased? Spending some time agonizing over this definition, I am taking the easy way out and just leave the definition of 'leased' as a broad classification, distinct from level 3 argument. There are of course, many conversations surrounding leasing gold or silver and I will leave the discussion for others. Some reliable starting points for this discussion is Bron Suchecki's 2010 article about GLD, leasing and encumbrances, and Kid Dynamite's 2011 Today In Silver Misinformation: David Morgan Swap/Lease Edition which is a cracker - especially the comments section. Discussions at this level will invariably see Hypothecation or Dave in Denver being flung around. We could put GATA in level 4, along with any argument which suggests central bank stockpiles have been leased onto the Bullion Banking system. I don't have any solutions for proving or disproving discussion at level 4, but in theory if we had good data on other bar stockpiles (from outside of the ETF system) then we might be able to do some data matching and put together a picture. My contribution (for other investigators to address) is a big stash of historical bar list records.
Level 5: Does the bar list represent real bullion with legal claims, but connected with additional hidden fraud? The thrust here is "yes, the inventory is real with unencumbered metal, fairly represented by the lists, but the fraud is elsewhere". The definition of financial fraud may vary within this definition and should not be conflated with 'risk'. Anyone arguing in this space will have agreed that everything's fine in relation to inventory, claims and leasing, but that some kind of connected fraud is still taking place such as price manipulation OR High Frequency Trading or social media obfuscation.

Level 6: Does the bar list represent a legitimate financial instrument (ETF/Trust)?
Kid Dynamite operates at this level (and says yes), so does Jeanne D'Arc. This is the highest complexity argument because it assumes that all the arguments put forward in the previous levels have been addressed in some fashion, typically through experience, industry knowledge or research. It is also worth noting that many people entering metals for the first time will probably start here but if they are unable to mentally negotiate their exposure to internet metal-memes they may get dragged down to the less-complex arguments.

Typically if we prove levels 1 and 2, then the argument moves automatically to level 3 and so on, so you can see that everyone looking at the silver/gold market is on their own mini-journey. The effect is subtle, just like someone who writes with incorrect spelling or grammar will be largely ignorant of their mistake unless they critically analyze their own opinion with spellchecker - whereas it is instantly noticeable by someone with perfect grammar.

Breaking it down like this can tell us a lot about the level of knowledge and research done by each individual as well as their exposure to internet discussion. Alexis' question indicates that he is somewhere in level 1 and 2 arguments. For social media obfuscation, a common trick seems to be loading several levels of argument all into one bleat, which understandably has the effect of confusing or overloading the reader. While it is possible that many types of fraud take place simultaneously (i.e. manipulating the price on a leased, fake, non-existent bar), I can think of many reasons why combinations would break down at some point.

Anyway, good news Alexis; currently we can reliably vouch for at least 1% of SLV's bars being real - it doesn't seem much but we've got plans for doing even more investigations so stay tuned!

The concise answer to Alexis' inquiry is 'we cannot trust the bar lists implicitly, but we can test their consistency internally (within the data) and externally (against what we know of the bullion industry) and address questions at level 1, 2 and 3. Here at Screwtape Files we are simply designing tests we can use to look at the data. At some point, everyone's quest for evidence must simply give way to practical things. It is not not practical to test the purity of every single bar in existence - in exactly the same way you would not bother to ensure that the pallets of cola in the back room of the bottle-shop were real. Bad analogy ... I mean to say that everyone carries a set of specific proofs necessary to satisfy inquiry, and only when those thresholds are met can we move on. These proof requirements are always different for different people and will also change over time, experience and circumstance. For myself I've spent countless hours putting together investigations like SLV Database 4, and sort of in vain because all I had to do was read slide 10 this LBMA presentation (about bar manufacture quality) link where it states quite clearly, 'the bars move between vaults'. Nowadays I can vouch for the claim backed by data, whereas normally this kind of stuff will be ignored by the standard conspiracy arguments because it makes the 'fake bars' level 2 argument much more difficult to uphold.

My critic David suggests I am wasting my time with the bar lists. I actually agree - as you can see above, it doesn't allow us to investigate levels 4, 5, and 6 (where fraud becomes lucrative). This is purportedly his argument level so I was completely surprised to see him drop a 'fake bars' level 2 argument in his last comment. But since other people are starting at these levels I hope to supply them with well-structured stuff to challenge their views. Anyway, that's my small offering for today - a framework for interrogating people's approach to bar list integrity. Please feel free to add to the definition in the comments below, we'll see if we can refine it.


Warren James said...

The discussions around leasing are the easiest ones to misunderstand, and it's a shame the bar list data can't really help in that arena.

I also just wanted to add that I'm not attempting to categorize the entire precious metals blogosphere, just adding some tools for enabling discussion. I'll be referring to these levels in later posts. Regards, Warren

Anonymous said...

Good analysis as usual. I like the way you guys analyse stuff. I would love a good debate/analysis on the whole "paper" gold trade as FOFOA refers to it. The LBMA gold trading mkt etc. I find it odd everyone gives FOFOA a pass in this area but make fun of all the easy silver targets on the web. In a recent video FOFOA asked if someone bought 'real' gold or 'GLD paper' gold. A basic underpinning of his Freegold theory is that somehow the price of gold now somehow does not reflect the true physical price and is obscured by massive amounts of paper trading. Yet there is almost no discussion of this on the FOFOA bog, seems to be taken as a given.

I like to keep an open mind and understand as much as possible. Over there I feel they have stopped inquiring, which I think is dangerous.

I have decided to stop posting comments or questions on FOFOA's blog. There does not seem to be any desire there to critically think about alterntive theories or ideas. It has become completely cult like.

I recently posted this comment and was immediatly made fun of. Despite the fact i never agreed or disagreed w the theories in the interview just thought it was an interesting discussion.


Listened to this recent podcast on Hyperinflation. The professor studied every known hyperinflation and even found some ones never before discovered. Was an interesting discussion. In regards to the US he doesnt think hyperinflation is a risk now, said when the time comes the fed will suck the liquidity out.

He also makes an interesting pt that people are focused on the growth in the Fed balance sheet which he calls 'state' money, but really only accounts for 15% of total broad money (refers to some M4 number). So while 'state' money has gone up(tripled since Lehman) it has been more than offset by decline in banking and shadow banking money creation so he actually makes the argument is the fed has actually been weak in their response when in context of overall broad money aggregates. And broad money creation has been anemic.
Considering the main outcome FOFOA predicts is hyperinflation in the US I would find it interesting to spend an hr and hear the views of probably the foremost expert on hyperinflations in the world. Probably can't hurt, right? But seems like they find no value in that over there.

Hope to have some good debates and intelligent discussions in the future here. Thx

milamber said...

subbing comments

S Roche said...

Warren, I really like the tone of your response. Were the critiques as gently reasoned?

I would have thought the opportunity to check one's bar numbers would have seen you inundated with requests, or comments at least, as it is DIY.

It can only mean one of three things: Everyone who cares has physical in their own possession; Everyone who cares does not read Screwtape (not possible); Everyone who cares owns bugger-all metal...

Or...everyone who cares has been quietly checking their bar numbers and then, thinking why wait, withdrawing their metal from the theory in action.

Compare the timing of your posts and the latest rise in metals prices, a perfect correlation. The next phase of the metals' shot to the moon, the race for physical possession, started here.

Delicious irony. Well done.

Bron Suchecki said...

Just a point on the idea that "the bars in the ETFs are leased". Need to distinguish between 1. bars being leased from someone and given TO the ETF and 2. bars FROM the ETF being leased to someone.

Two compeletly different situations with different implications

DH said...

Warren: Excellent article.

somanyroadsinvesting: In FOFOA's defense, I have never seen him question that GLD has the physical metal. The "paper gold" he refers to as suppressing the price is unallocated, fractional reserve bullion bank gold. He regards GLD as a different type of "paper gold," in that per the prospectus, it is not a direct claim on gold but on a fund designed to track the price of gold via arbitrage. Only those with large numbers of GLD shares can exchange them for the physical metal, so if FOFOA's predicted decoupling of paper and physical price comes to pass, then GLD may be drained of its metal and shut down, with small holders forced to settle for cash at the then-current paper price.

criswa said...

Very good indeed Warren. Like the grammar analogy.

Warren James said...

@Bron, thanks. I tried multiple revisions of the text attempting to include the leasing information that you and KD supplied me - eventually deciding I couldn't fit it all in. The leasing stuff is worthy of a few independent diagrams as well as a breakdown of bullion banking and metals accounting procedure which you've shown me in the past. In my opinion, the general public grossly underestimates the amount of industry knowledge required to debate successfully at level 4 and beyond.

@S Roche, thanks. Bron and I have discussed the possibility of a 'self-serve' web page which allows anyone to query a bars current location and ETF history. This would be easy to construct and would go a long way to uncovering evidence (or not) for Level 3 argument. That feature however, is currently being driven by the level of external interest, which is zero. My contact details are on our profile page so the information is just a phone call away! (just have to scroll further than BrotherJohn did).

@SMRI, for what it's worth, I think FOFOA operates somewhere between level 5 and level 6. The amount of experience and research required here is immense, so any challenge has to be equally complex. For this reason, I've always wanted to buy a ticket to "FOFOA vs. Martin Armstrong in the cage of death - premiere event".

The tiered argument structure also helps explain the silverbug tension!! Anyone operating at a higher level of argument will consider the people clinging to lower argument levels 'ignorant', and people with lower level arguments will consider anyone from the more complex arguments, 'arrogant'. Eventually though, as the raw data gets refined and packaged for general consumption, the lower argument levels have fewer excuses.

Warren James said...

@SMRI, I personally don't have the intellectual firepower to address Freegold theory but I do agree the topic is important enough to be worthy of bold debate - I'm just not sure what the right approach is. Do you feel like composing an extensive write-up? Maybe we can help.

Anonymous said...

I think we should make the term 'leasing' more precise because the James Turks of the internet want to tell us that the same bar belongs to more than one owner once gold is leased. That's nonsense.

Here is how you lease gold:

Both parties operate unallocated accounts. Let's say I want to lease gold for 3 months. So I would go short spot unallocated and purchase a 3 month gold forward with the same counterparty. The combination is a swap for which I have to pay 3-month GOFO. When I go short spot unallocated, I receive cash which I can invest at x%. The lease rate I receive for my gold is therefore x-GOFO.

This is a financial transaction, and title to my gold does not change.

Now my counterparty may request allocation of their long spot unallocated position (depending on our small-print: if I trade OTC with a BB, this is part of the contract. If I trade with a gambling outlet such as IB, allocated is explicitly ruled out).

If they request allocation, they receive title to the bars, but I no longer have title. Title is unambiguous. Only once the forward comes due and I get the unallocated back, I can ask for allocation myself and receive title to the gold again. Note that these will be bars different from those I originally owned.

Leasing is not a source of ambiguous title to specific bars.

The only way you can have multiple parties having title to the same bar is outright fraud by the custodian.


Warren James said...

Thanks Victor, that's two votes for a tightening of definition for Level 4 - 'leasing'.

How about .. "Level 4: Does the bar list represent real bullion in the vault which is not leased FROM the ETF TO a third party?" - that qualification is Bron's distinction # 2, and if I'm understanding this correctly then that is the only leasing scenario under which the ETF could be implicated, i.e. if the leased metal was then bought by another party and delivered into another ETF then that's a problem. As Victor points out (and which can be read in Bron's linked article), leasing metal in most cases is a 'liability denominated in LBMA-grade ounces' and not specific to the bars in question. Under Brons distinction #1, an ETF buying and receiving delivery of bars which are being being 'leased by someone else' - my understanding is that this is a legitimate scenario (according to notes sent to me by KD).

If I get at least one 'yes' for the more-precise definition I'll update it with notes. I think leasing is a worthy topic to explore for those who are trying to understand that (level 4) space - since it is so often mispresented, but I doubt we'll be doing many articles on it.

p.s. re:'multiple parties having title to the same bar being outright fraud by the custodian' - yep absolutely. I may yet refine Level 3 definition with this clarification too, since that's what I'm trying to isolate.

Lord Sidcup said...

@Warren James @SMRI

You address the core problem with the freegold debate as it stands; there isn't one.

Freegold does seem convincing on many levels, but the only people who have attacked/tested the idea (that I know of) have been pretty stupid (goldbugs and silverbugs mostly).

I am reading back through FOFOA back-catalogue and wish there someone as thorough and knowledgeable as FOFOA and VtC to disagree with them/test their ideas.

One FOFOA commenter has been there for years, trying to agree with himself and others in the most convoluted ways possible. Blocking the trail indeed.

Anonymous said...

for the sunday pre-game- silver needed to hold the 200-day SMA and it did, finishing a gann 7 weeks down!

On the technical front, gold is starting to post bullish signal once again on moving averages, RSI, STOCH and MACD. Further, gold printed a bullish
engulfing candlestick pattern on the weekly chart (lower low, higher high and closing near the high), in the process recording its first weekly higher
close in five weeks after being rejected at $1,796.

...would think gold liked the fact that isreal fired into syria for the first time since 1973


Warren James said...

Comments originally numbered (12-25) relating to Freegold critique have been relocated to a (dedicated) page.

>>> HERE <<<

Anyone wishing to discuss the topic further should do so in that place (any related comments will be relocated automatically).

For the last 12 months, Screwtape Files has been actively studying social media manipulation. The 'discussion' which occurred here regarding Freegold is a direct match for the 'forum-sliding/topic dilution' pattern, regardless of original intent. Ever since 'Amber' appeared on the scene (spruiking the Wynter Benton Myth) we have been concerned that our blog may be the target for discussion manipulation. As a result I have a higher-than-usual level of paranoia and while it may well be that the smoke alarm got set off by the toaster, anything deleted on this thread is restored on the dedicated page. --regards, Warren