Vainly Willing the Return of the 2011 Silver Bubble

Do you remember February to May 2011?

I do. I'd previously confined my trading to stocks: oil and resources, mostly. But I wanted to branch out and thought the gold and silver charts looked good for a solid bounce back. My thesis for gold was pretty clear: a nice solid investment to hedge the rest of my portfolio against inflation. And I figured I'd take a slight gamble with silver as I imagined it would provide me with a 'volatile version' of gold. So at the beginning of February 2011 I went in at 75% gold, and 25% silver.

Boy, did us newbie silver investors get lucky! The charts had pointed to a good rise in silver, but we hadn't imagined such a move in our wildest dreams. By the end of the month it had gone from $26 to $34, and I was scaling out of gold and in to silver. With this metal swap, the profits just kept rising. By the end of April, it had all gone stupid, and it was obvious to anyone with two neurons to rub together that we were in the grip of a mania. I got out at around $45 and never regretted the decision. A few days later silver started its plunge from $50 to (eventually) $26, and has barely recovered to this day (currently at $31 and change).

What I did regret, however, was what happened to everyone who had not ejected. It could easily have been me too, had I had a bit less trading experience and a bit less fear (yes, sharp moves higher always scare the absolute bejesus out of me, more so than the plunges - fact). And this burned my curiosity. What had actually taken place? How had such a mania developed? And why didn't most retail silver investors get out? They were still buying all the way up to $49, the poor bastards.

So I started to look more deeply into the 2011 Silver Bubble, and events since, and was rather shocked by what I found.

SLV Database 4

Thanks again for everyone’s positive comments on my research. This article is installment number 4 in a series and builds on earlier work.  I’ve also written another static snapshot to describe more about the data processing, for anyone interested (a separate write-up, here).

Let’s get straight to the point. The conclusion from my current round of database analysis is that some silver bars currently held in the GoldMoney and BullionVault funds, used to exist in SLV, the percentages are approximately 1 % and 7.8 % (of their LONDON holdings) respectively. As with SLV Database 3, we're calling these signature matches 'Vault Jumpers' because they appear to move between the funds. The hard data is in spread sheet format, with the detailed analysis described in a separate sub-article, here. For a discussion of how the conclusion was reached, and some of the implications, please read on ...

James Turk: Learn from the Master of Chart Analysis

I'm proud to announce another fantastic opportunity for Screwtape readers today. James Turk, the spokesman of GoldMoney, seems to be the go-to person for commentary on the future of the gold market. In particular, he is known for his forensic interpretations of charts, in which he bravely and with great integrity puts to one side his own business interest of selling physical gold in order to objectively make the case that readers and listeners should buy physical gold.

So, in order that our readers may learn to profit more fully from Turk's incisive technical analysis, I will set out here some of the basic techniques that he uses, with a view to showing how trade-able conclusions can be reached that will ultimately lead to enormous gains in your personal wealth.

GoldMoney's at it again

Apologies to readers less anal than me about these things (which is just about everyone, I would imagine), but my little blue prosimian eyes almost popped out on stalks yesterday evening when I saw that GoldMoney's mysterious currency machinations are back again.

I first revealed this weird effect here - on days when the GBP significantly weakens or strengthens against the USD, there is a sharp spike in the gold price (up or down, as appropriate) after trading hours. This spike does not appear on any other Au/GBP charts: just those of GoldMoney. It was clearly a currency 'correction', about which GoldMoney makes no mention on its website. And it can potentially cost you (or make you) serious money, if you're on the wrong (or right) side of it. Please read the first article in full, if you'd like to learn more about this.

GoldMoney replies

Readers may recall this post of mine on 17 February, in which I reported on the curious phenomenon of 'spikes' in the GoldMoney prices for gold in Pound Sterling (GBP).

Essentially, on days in which there is a big shift in the GBP/USD pair there is usually a corresponding spike (of up to £15/$20) in GoldMoney's gold price after trading closes. No such spike appears on any other website's charts, so it appears to be a phenomenon unique to GoldMoney.

GoldMoney has been in contact with me and this is their explanation, which I think only fair to reproduce here:

GoldMoney and its end-of-day price 'manipulation' (updated) (again)

[UPDATE: After reading this article, you may find the reply from GoldMoney, here, interesting.]

[UPDATE 2: But despite GoldMoney's reply, the story continues.]

GoldMoney is something of a darling of the precious metals community. It is a way of having a claim to ownership of gold, silver, platinum or palladium physical metal, and having it stored in a secure vault in a choice of three countries. It's not especially cheap (with premiums of 2.49% for small USD gold purchases, and 3.99% for silver, you're certainly not getting your bullion for sp(r)ot(t) price). But the premiums are not too much higher than on-line bullion vendors and coin shops, and the storage costs - at least for gold - are not extortionate.

An ambition of GoldMoney was to make gold money in a very practical way. The company foresees a time when online payments will routinely be made in gold, and had offered a facility for clients to make and receive such payments to each other. I say 'had offered', as this aspect was withdrawn on 21 January this year. So GoldMoney is no longer gold money. It's just a glorified bullion dealer.

Part of its popularity no doubt stems from the near perma-presence of its spokesperson, James Turk, on the silverogosphere. It seems like hardly a day goes by without Mr Turk popping up on KWN, Casey Research, or one of a multitude of other sites, to regale listeners and readers with tales of $10,000 gold in ten days or $600 silver in a fortnight (I am paraphrasing here for effect - but only slightly). Mr Turk actually no longer owns GoldMoney, contrary to what many seem to think, but rather acts as their paid spokesperson and consultant. GoldMoney is in fact owned by a collection of investors including Doug Casey (Ed Steer's boss), David Tice, IAMGOLD (a large Canadian mining company) and our old friend, Eric Sprott. I will leave you to draw your own conclusions about the ties between the silverogosphere, the big physical metal investors and GoldMoney and its spokesman, as that is a story for another day...

Today's little mystery concerns a curious effect that I've followed on GoldMoney's charts for some time. Now, GoldMoney's advertised prices are supposedly at spot (with the premium then added on at the time of purchase). Thus, their USD/oz chart is identical to the Kitco USD/oz chart. Gold priced in other currencies should therefore follow the normal convention of converting that currency into USD according to the current exchange rate, followed by a conversion of USD into gold at spot price.

But what I've noticed is that on days when there is a big fluctuation in the GBP/USD pair (e.g. of more than, say, half a cent) then something odd happens after 18:00 GMT. See if you can spot the difference in these two charts, which cover exactly the same time period (clue: look at the end of each of the blue lines):

As is obvious, there is a spike up (of around £7/$10) in the GBP chart at around 18:00 GMT which is not replicated on the USD chart. Now on that day (10 February), the GBP had weakened considerably against the USD, so the gain in gold priced in GBP is not unexpected. What is unexpected is that although the GBP weakened gradually throughout the day, this chart implies a sudden devaluation. However, a check of the USD/GBP chart for that day shows that no such sudden devaluation took place.

Further, one can check the GBP/gold chart for 10 February on any other website, and one will find that this spike is simply not there. It only appears on the GoldMoney charts.

The effect works in the other direction too. Check out these charts from yesterday, a day when the GBP strengthened significantly against the dollar:

Same effect, different direction. The downspike (of around £5/$8) on the GBP chart is not replicated on the USD chart. But the USD/GBP charts for yesterday show no corresponding sudden USD devaluation against the pound. The GBP strengthened against the USD throughout the day. And, as with the first example, the GBP/gold charts available elsewhere show no such downspike.

I have posted just two examples here, but please be assured that this happens every time that there is a substantial shift in the GBP/USD pair. Knowing this has actual predictive power: I knew yesterday that this was going to happen, and was ready and waiting to get the screen grab when it did.

Unfortunately, I have not worked out a useful way of profiting from this effect. Although a genuine arbitrage opportunity most definitely exists, knowing that this spike is coming is not much use unless the spike will be greater than the premiums for buying. In other words, had I sold my gold just before the downspike yesterday, and then bought it back immediately after the spike had finished, I would indeed have benefited from a £5 arbitrage (roughly 0.5%). But I also would have had to pay a 2 - 3% premium on my new purchase, which more than wipes out my hypothetical gain. I suppose a change in the USD/GBP pair of more than 3% in a day might make it worth one's while to capitalise on this, but such days are mercifully rare in the FOREX markets.

Anyway, I digress. This trait is germane to GoldMoney and GoldMoney alone. It is subtle, and not avowed (I can find no mention of it anywhere on the GoldMoney site). Now, GoldMoney presents its prices as following spot, but it is obvious that this is not always the case for purchases in GBP, and perhaps other currencies too.

The only possible conclusion is that GoldMoney is regularly carrying out its own little - and sometimes not so little - 'end of day' currency adjustment. Now that's a bit cheeky, especially as clients are not warned about this. Imagine you had just bought some gold priced in GBP at 19:59 GMT on 16 February, and then immediately lost £5 per ounce thanks to GoldMoney's idiosyncratic little currency adjustment. It would hardly seem fair, would it?

More to the point, it is difficult to describe this cheeky end-of-day currency adjustment which is (a) not avowed, and (b) not done by anyone else, as anything other than a form of price manipulation. The irony of this darling of the silverogosphere effectively manipulating its price on an end-of-day whim is not lost on me.

I should stress that I do not think for one minute that GoldMoney is doing anything illegal here. I just think it's curious that they are so hush-hush about it.

Food for thought.