COMMENT

With gold closing on $1,500, Peter Grandich recently reactivated his December 2011 bet that gold would hit $2,000 before it reached $1,000.

However, there is a flaw in the nature of the bet as it is possible for someone taking the bearish side of the bet to hedge themselves against any loss, nullifying what Mr Grandich is trying to achieve. The hedging strategy for the bear, assuming for simplicity the price at the time the bet is entered into is $1,500, is to buy 2,000 ounces at the time of the bet and then sell that gold when it first reaches either $1,000 or $2,000. Below are the cashflows for either outcome.

Of course the bear neither loses nor makes any money from the bet. The only risk they really take is reputational should they lose, but then they definitely benefit from a marketing exposure point of view (on the basis that any publicity is good publicity), from being respected for taking the bet, and also the chance they could win as well.

I would note that a bull could likewise hedge themselves by selling 2,000 ounces of gold and then later buying it back. However I am not accusing Mr Grandich of such a cynical marketing ploy, as I think it is clear he was/is willing to risk a real loss of his personal money on this bet, as evidenced by his December 30 post where indicated that he would assign his winnings to the many charities he is involved with.

So, I think it is back to the drawing board for the bulls to construct a bet that will really hurt (financially) a bear.

BULLION BARS AND COINS

The 2013 1oz Australian Kookaburra will be the first to have a mintage cap of 1 million coins.

The decision follows the expansion of the traditional 300,000 mintage to 500,000 for 2012. Despite the added availability, this year’s 1oz silver bullion coin sold out remarkably quickly and so we’ve taken the bold set of doubling the mintage.

There’s a feeling around the Mint that the 2013 artistry works particularly well. In fact it’s has been adjudged internally as one of the stand-outs from the entire program!

For me it recalls the classic two-bird designs of 1994 and 2001 but in the attractive style of Natasha Muhl who created the image for our acclaimed Australian Platypus platinum bullion coin.

Hopefully the market will agree and we’ll be interested in feedback via this blog when the time comes.

The 2013 Kookaburra design is due to be unveiled in mid-August, with availability via the website, bullion desk and international dealer network soon afterwards.

Stay tuned for the first glimpse of what promises to be a spectacular addition to the Australian Precious Metals Coin Program, which will also be celebrating the Year of the Snake in 2013.

IN THE NEWS

A great example today of the children’s game Chinese whispers (or Telephone for our America friends) and poor journalism in the gold blogosphere (thinking the internet is about journalism is idealistic of me, I know). I’ll focus on Zero Hedge as the example because they are a high profile website from which many other bloggers and commentators pick up stories. Knowing how influential they are, you’d expect them to at least apply some basic journalism fact checking before breaking news.

“The International Monetary Fund (IMF) is planning to purchase more than $2 billion worth of gold on account of rising global risks.”

Rather than being the source, Commodity Online’s story is just a rehash of a May 12^th Bloomberg story. Note that the above quote is Commodity Online’s take on the Bloomberg story, not a direct quote from the IMF.

Zero Hedge were aware of this, because they also quote directly from the Bloomberg story, but that is where they left what is quite significant news. As Zero Hedge themselves noted, the IMF had previously been selling its gold. You would think such a major policy shift would at least warrant some more investigative work. Apparently not.

What I found interesting in the Commodity Online story is this line: “Bloomberg quotes a report by an IMF staff while also adding that a $2.3 billion gold purchase is in the planning.” So this is Commodity Online’s take on the Bloomberg story but they don’t provide any more details on why the IMF has made such a dramatic policy shift.

I want to know more, so I go to the Bloomberg story. However, there is no mention of the IMF planning to buy gold in that story. The only mention of gold is “a profit of about $4.9 billion from gold sales”. Sales, not purchases. So where did Commodity Online get the purchase idea from? I’m aware Commodity Online is an Indian based operation, so I’m starting to think there may have been some language misinterpretation going on. But maybe they got it directly from the IMF.

The Bloomberg article doesn’t provide any direct link for their IMF quotes, just saying that “IMF staff wrote in a report released today.” So off to the IMFs press release page for something prior to May 12^th. There we find “IMF Executive Board Reviews Fund's Income Position and Sets Margin for Lending Rate for Financial Years 2013-14” which makes reference to the “estimated net income of $2.3 billion” as reported in the Bloomberg article. There is no mention of gold in the press release, but two links are provided at the bottom, the key one being the 39 page “Review of the Fund’s Income Position for FY 2012 and FY 2013‒14”. A text search finds the direct IMF quotes Bloomberg used in its article on page 13, so I know this is the report that Bloomberg based their story on.

So I eagerly type in “gold” into the text search box, anticipating a revelatory explanation by the IMF for this significant policy shift in respect of gold, from which I will write today’ Blog Watch post. There are 46 references to gold, but alas, not one about gold purchases. The only references to gold are about gold sales, specifically:

Did your eyes just glaze over? And that’s the most exciting bit.

So what we have here is a dry Bloomberg story about the IMF and precautionary reserves with a side reference to gold, which is picked up and misinterpreted by Commodity Online, which is blindly picked up by Zero Hedge who doesn’t investigate it further because it confirms their pro-gold editorial position.

I’ll let Wikipedia make the final point “how easily information can become corrupted by indirect communication. The game has been used in schools to simulate the spread of gossip and its supposed harmful effects”.

BLOG WATCH

Adam Hamilton from Zeal Research has a new essay investigating the claim “that gold's mighty secular bull has already given up its ghost.” He does this by comparing the current bull market to that of the 1970s, specifically comparing them in terms of inflation-adjusted prices, and concludes that “while gold was definitely overbought at its latest peak last August, there was nothing even remotely parabolic or universally euphoric about it.”

Adam noted that “in real terms gold rocketed 1082% higher between January 1970 and January 1980” but “was only up 478% between April 2001 and August 2011” and says the reason for this is that the current bull market shows no signs of speculative mania. He explains what this will look like:

“When a price is just gradually rising, there is no overpowering impetus to buy in immediately. You can always wait for the next pullback. But when a price shoots parabolic, traders get anxious they will miss the opportunity. So they throw capital at the rocketing bull with reckless abandon. And such an extreme surge even attracts in new investors from the general public … But this extreme buying pressure soon exhausts itself, plus it takes exponentially more capital inflows to sustain parabolic gains. The subsequent crash-like collapse is the final nail in bullish sentiment's coffin.”

Download today’s full Blog Watch (pdf 195kb) for more reviews:

GOLD MISPRICED

Alasdair Macleod, writing for GoldMoney, feels that gold is being seriously mispriced by the market.

GOLD STILL ON THE STOVE

John Hathaway (Tocqueville Asset Management) applies a cooking metaphor to the gold market in this The Gold Report interview.

INDIAN GOVERNMENT GOLD BONDS

BLOG WATCH

As a follow up to our 9th May Blog Watch where we reported on the demand situation The Perth Mint was (or was not) experiencing, Commodity Online report Edel Tully (UBS) as saying that they saw “some physical buying on Tuesday, but the response wasn’t heavy, suggesting buyers may want even lower prices.” That accords with what we are experiencing. Edel thought that good demand may return if prices went “as far back as $1550”, at which point, “given that physical demand has been so underwhelming of late, its return (when that happens) could well trigger a greater reaction from leveraged players.”

The Fundamental View is more pessimistic, saying that if the $1,535 “level is breached on a closing basis, or if it falls significantly through that level, then the next potential stopping point for gold could be at the $1,300.00 level.” That is not out of the ballpark as $1,300 is just on the bottom range of gold’s 10 year log trendline.

He says that “the inverse head and shoulder pattern is still in play but is admittedly looking uglier and less proportional as each day passes.  Although I feel it is unlikely to play out, gold cannot fall below $1,535 if we are to keep that pattern in play.”

But he notes that the death cross - when the 50 day moving average falls under the 200 day moving average, which it did mid-April - “usually implies that the trend has officially reversed indicating that further declines are very likely. Not until the 50 day cross back above the 200 day in what is known as the golden cross, will I be going heavily long.”

Sunshine Profits disagree, concluding that since “the situation in the general stock market is mixed for the long term and a bullish scenario seems a bit more likely than the bearish one for crude oil” it means that gold “seem to be a bit more bullish than not at this time.”

Download today’s full Blog Watch (pdf 234kb) for more reviews:

DON’T FIGHT THE ALGORITHM

Michael Kosares (Centennial Precious Metals) feels the algorithms have taken over.

INDIAN JEWELLERY MARKET

STATISTICS

Total ounces of gold and silver sold by The Perth Mint* in April 2012 as coins and minted bars:

Gold (Au):    17,575.640oz       

Silver (Ag):    207,109.91oz

Compare with last month.