Screwtape Files: May 2014

GLD Inventory Large Addition Analysis

Just like the gold price itself, the inventory of GLD was incredibly boring for the last few months then it got some excitement all in a hurry with 668 gold bars being added to the inventory on the 30th May bar list (shown three days earlier on the trade settlement spreadsheet). That's a big increase for one day, let's take a look at the bars themselves.

I was expecting a large percentage of the add event to be from gold bars previously seen in the inventory (dark bullion). I wasn't disappointed. 487 bars were previously dark ... i.e. 23% new, 73% old.

The FreeFiat Fracas

("FreeFiat" - Controversies Post 1)

A tweet from 'DP' prompted me to read the most recent argument about a concept dubbed "FreeFiat" that was unfolding on page two of the comment thread of FOFOA's latest post. Victor The Cleaner was re-presenting the FreeFiat concept and a few members of Team FreeGold were trying to clean his clock.

My first exposure to this concept was back in November 2013 when an old chum sent me a message asking if I had "converted to FreeFiat". Here's a link to the post where the FreeFiat argument first erupted (again on page two of the comment thread). The fact that I had to ask my old chum to explain it to me should give you, dear reader, a strong hint about my answer to his question.

Uncle costata also got a mention in the latest exchanges as being a disciple of the FreeFiat school (h/t to The Motley Fool for raising the red flag on that). 'TMF' also observed that the posts I committed to doing here at STFU have been arriving at a "glacial pace". Sadly true, a series of unforeseen events forced blogging way down in my list of priorities. I'm going to try to make amends with more regular posts from now on.

The FreeFiat Concept
As I understand it one of the main arguments is about whether people will hold their savings in gold or some type of debt instrument (such as bank deposit accounts) after the transition to a new gold-based international financial and monetary system (IMFS). So this fracas is predicated on gold replacing the US dollar in the IMFS. The FreeFiat camp say people will primarily save in currency and their opponents say it will be in gold alone or gold will have primacy in the competition for savings. (I should note here that FOFOA draws a clear distinction in his writings between savers, investors, speculators and so on.)

This FreeFiat concept strikes at the heart of two of the foundational theories of FOFOA's writings. At the risk of over-simplification, one of these theories states that there is a fundamental conflict between debtors and savers which is resolved by savers ceasing to save in debt instruments and making gold the receptacle for their savings. There is also a perceived conflict here with a second foundational theory advanced by FOFOA about gold taking over the store of value (SoV) role in the monetary system leaving currency solely/primarily with the role of medium of exchange (MoE) and unit of account (UoA) in a new gold-based IMFS.

Victor the Cleaner (VtC) and his allies argue that the Euro is designed to flourish in this new gold IMFS. They argue that the Euro will be as good as gold over periods measured in years and most Europeans will happily hold their short and medium term savings in Euro. VtC argues that storing large amounts of wealth in gold will be more applicable to very wealthy people who are trying to manage inter-generational wealth transfers. Presumably he's talking about people for whom limited government deposit guarantees are insignificant compared to their liquid assets. Of course there is more to this argument than my brief summary can convey but I'm trying to adhere to my commitment to brevity.

(Frankly this aspect of the FreeFiat concept doesn't particularly interest me BUT there is another part of the argument that does interest me greatly. The FreeFiat camp also argue that the ECB's interpretation of its stability mandate will at some point shift from a positive inflation rate target to a zero rate or even to welcoming gradually falling prices (defined by most analysts today as mild "deflation"). I'm going to do one or more separate posts on this aspect of the FreeFiat argument because it opens up a gigantic can of fascinating worms for an old economics junkie like Uncle costata.)

Saving In Gold
In my opinion the average person won't need to personally hold any gold in order to benefit from the stabilizing effect of gold on the major currencies in a new gold-based IMFS. They will be able to ride on the coattails of other key players such as central banks, Treasuries, extremely wealthy people with an affinity for gold and large populations with a cultural preference for gold. Provided there is an international, liquid, free market in gold then gold will be able to price currencies and discipline currency issuers.

The fact that gold is widely distributed across currency zones will be helpful in other ways but this isn't a necessary condition for gold to price all currencies. As long as there is, say, a Euro gold price it would transmit a local currency gold price to other currencies. In order to manage their currency the issuers will also have to deal with the fact that in normal times over 90 per cent of the circulating money is bank credit money loaned into existence by banks in the form of bank deposits. So currency issuers will need to manage the bank created component of the money supply as well. I'll be doing some posts on this issue as well in order to share the results of my reading and research into this topic over the past couple of years.

Dual Currency Systems
I think we can obtain a sneak preview of how gold will discipline currency issuers in a future IMFS by taking a look at countries who, today, operate under dual currency regimes. Historically citizens of countries with a weak or untrustworthy domestic currency have tended to adopt a secondary "hard" currency as well. (In recent decades it was generally the US dollar.) In some instances the local currency functions as the 'petty cash' component of the money stock. Ecuador and Panama, for example, issues coins in the local currency and use the US dollar as legal tender. Domestic demand limits the local issuers ability to debase the currency.

Citizens can also force the adoption of a de facto dual currency system by demanding payment for hard assets such as real estate in a hard currency or gold (as reported in Vietnam). Wealthy people with funds outside their currency zone can transact domestically in local currency and make secret adjustment payments offshore at a different rate to the official exchange rate. So the secondary hard currency can operate in a separate hard asset "circuit" along with the domestic currency in its own daily consumption "circuit".

Countries can be forced to formally adopt a secondary currency by their international trade partners. The forces at work here would also be applicable to the system of currency swaps that China has been developing with gold functioning as the international hard currency unit. So this inquiry is relevant on several levels. International trade partners can (and do) force countries to hold reserves of US dollars in order to facilitate trade settlement. So this $IMFS is a de facto dual currency system.

This international trade requirement can discipline currency issuers in other ways. Sometimes governments (e.g. Argentina, Venezuela recently) attempt to over-ride the market and impose an artificially low exchange rate on their currency against the secondary hard currency that their trade partners demand. If the government's "official" (imposed) rate is above the "black" (free) market rate the government will bleed foreign exchange (FX) reserves attempting to defend their currency peg. As those FX reserves reach dangerously low levels the government will usually capitulate and converge to the market rate or they risk a currency collapse.

Store Of Value
The argument about the SoV role seems straightforward to me. In your local economy the currency must have the quality of SoV for some period of time or it's a dead currency. So at minimum, over short periods of time, your domestic currency will have SoV properties. In my opinion the situation from an international perspective will be even more clear cut. In a gold-based IMFS it will be gold (not currency, SDRs or sovereign bonds) that will have primacy as the store of value. In a gold-based IMFS gold will have the greatest liquidity, universal convertibility and it will exploit all of the network effects that the US dollar has benefited from.

Don't pay attention

Sunday PM pre-game, 5/25/2014

Happy Memorial Day!

Since gold could not clear and hold $1300, the death cross is on schedule for Friday barring a late-inning rally. You heard it here first. Friday is also the end of the month.

More bearish news -- gold finally closed below the 100-day MA. Those of you who chronicle the price of gold as closely as I do (both of you) are surely aware of its significance. Two times the Gold Bulls tried to break its stiff resistance--on Jan 27 of this year, and again on Feb 5--only to be beaten back by withering fire, by swords and pikes and pistols and muskets. Let me recount it for those who don't remember.

A blur of movement. The racket stepped up feverishly. Brigade Commander Sprott peered over his parapet in readiness to join his reeling men--though cautiously, very cautiously, ever wise and never impatient of restraint. In between thoughtful sips from his silver flask he gathers himself. There will be times when exposure is essential, he reflects, but should his deep-rooted pugnacity get the better of his lucid judgment, what of his contingent then! Boldness might make fortunes, but caution - ah! divine caution must keep it!

Cut now to February 10 ..., with the Cartel's guns dangerously aligned along their trenches. Heartless and fearless, that juggernaut of mechanized warfare has their dive bombers, their high explosives and their seemingly endless replenishment of reinforcements at the ready. A spirit of grimness penetrates the air. Abruptly, uncowed by stark position and high stakes, the Chinese People's Army dares to go where Rick Rule has feared to tread, blasting through the 100-day barricade!

But now the mist dissipates, now amidst the sweet savor of victory, Brigade Commander Sprott surveys the landscape from a high (very high) emplacement. The attrition has become evident. Long specs lie motionless by the thousands, their grotesque twisted corpses sprawled out in blood-soaked grass, riddled with shrapnel, gashed in scores, bored with bullet holes. They had been frightened out of their position by repeated raids at fifteen minute intervals carried out with the clock-like precision for which the Cartel was known. The sweet spoils of victory were not theirs to share. Sprott murmured between his teeth to Private Embry, whose eye had fixed upon a fallen man of broad muscled back, his white well-fed body made marble statue by Death. Embry turned him over in his mind and weighed him with his eyes. Sprott's gaze settled on the water-logged corpse of an elderly man stuck in a running brook, caught in the tangle of branches from a fallen tree. The deceased senior's steady sway lulled Sprott into a sedated state of sober reflection ... back and forth, pendulum-like, the slow stream stripping soft skin piece by piece from his face ... when -- terror! -- the lips detach, revealing white teeth in an indignant sneer. That evening, throughout the wonderful meal of venison medallions (cooked to perfection on an antique charcoal brazier), throughout the jaunty dancing with Embry and King and Rule and wife, throughout the bottles of post-prandial oak-aged Royal Maria lustily consumed, brought up from the cellar for the occasion, the dead old man's scornful visage darkened Brigade Commander Sprott's thoughts.

And gold has stayed above the 100-day MA since. Until Friday.

Do you want to know why the $1300 level in gold has been so important to defend?

The chart below tells us what gold has to average over the next n days for a "death cross" to occur in n days.

(A death cross is an ominous trading signal that occurs when the 50-day moving average falls below the 200-day)

It will occur soon if the average price of gold stays at or below $1300 (see dotted red horizontal line). Put another way, if gold can't clear and hold $1300 within the next few trading weeks, a death cross will occur.

People often ask me how I got so damn good at trading and I figured the answer to this question is so important, I'm gonna go ahead and make this post open to the general public.

My secret is that I have so many charts, with so many lines everywhere, that when I scroll through them (usually during a pedicure), one of them is always liable to be at an important point. So, e.g., I saw a chart in the comments of Kid Dynamite's post on gold manipulation today, and knew I had my own version of that chart somewhere. (There are very few charts I don't have, although I've finally given up on following the 3-month heliocentric cycle of Mercury. I now look only at the 5- and 10- minute versions).

And lo!! it's at an important point.

What a great time to be alive for the silver shorts!!

I mean shorts with deep pockets, unlike those on the picture above (which, incidentally, I got from my good friend Eric King, who's got an extensive collection of this stuff)

(I actually swapped one from my portfolio in return, below the fold ...)

Obviously, the Fed will never do anything that isn't also in the best interests of the financial elite (by which I mean those ~~parasites~~ ~~upstanding citizens~~ nematodes who typically spend more on a bottle of wine than the average chump earns in a year)(that's not hyperbole -- the median global per capita income is substantially less than 10k). That said, let's not be ungrateful. The Fed will do whatever it can to help the lot of the average American as well, once it sees to it that the best interests of the financial elite are well served. (The rest of the world is on its own and will certainly be spied upon and robbed, perhaps even killed.)

Hello friends,
--and sorry for the infrequent posting many of you have been wondering about. My plate's been pretty full of late.

Speaking of "full plates" -- we recently heard from our erstwhile contributor and lemur-emeritus, JdA (left) in the comments of my previous post.(Lemuritis was a tempting contraction, but sadly too evocative of another contraction, one that has led to the fever and painful urination I've been suffering on and off since Spring Break in 1997) ... and we're all thankful (as always) that she could take the time off her busy schedule to chime in:

The PM situation is looking very ropey to me: in fact, I'm pretty sure that gold is going to tank over the next few months, and silver will perform even worse. Perhaps even in time for the anniversary of the Great Mayday Massacre of 2011…”

I have to agree, but I'm not short yet: the PMs have a way of following the long term charts, but flipping off the short term ones. As I pointed out last week, still waiting for a break below the 20-30 week ribbon on a weekly close (as well as the 144-day MA below that):

As well as confirmation of the first three-line break chart's reversal by the second (which I use to gauge intermediate cycles in gold, silver respectively)