On Friday, I posted a comment that our friend TF suggested would make an interesting weekend thread for group discussion. As a loyal soldier in the Fabulous Turd Army (a phrase that strikes fear in the hearts of Keynesians everywhere, most recently in the halls of the US Mint via FOI requests via our friend Koos Jansen) I am hereby submitting the idea as a thread for scrutiny, discussion, scorn, etc. This will be the extended version, with some extra stuff that Murphy (my pal and partner in fevered theorizing) and I have been throwing back and forth, both here and outside TFMR. In the immortal words of Hans and Franz, "Listen to me now, and hear me later":
1. I submit that spot price for gold and silver is dead. The markets have left it dying and bleeding on the side of the highway like roadkill. The actual value-setting mechanism for precious metals has become the mining indexes. Spot price, as TF has argued for years now, only "prices" what people are willing to pay for the paper derivative that tries to masquerade as gold and silver. It does not price actual gold and silver.
In the past, this might have been dismissed as just some semantic tic of goldbugs, but I argue that the markets... YES, THE BIG MONEY, INVESTING IN BILLIONS WITH A B, "WE ARE THE ONES WHO COUNT" MARKETS... are proving that they too now understand this to be the case. GLD in blue, HUI in green... Check it:
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GLD is up 26% YTD. Fine, that's lovely. But the HUI is up 144% !! That is 5.5 times the rise in the so-called "price" in gold, a rise that is out of whack even given the "leaner miners, more profitable, etc etc" earnings potentials. The share price rise is outstripping those things, and more importantly, share price rises during times when spot price stays flat!!! Same with silver.
It has been fascinating to see capping, mini-beatdowns in spot price, and all increasingly ignored by big money... but they aren't buying GLD (as if those tons are actually physically there) and they aren't buying SLV. They sure as hell aren't standing for delivery on the Comex, which they know doesn't have the metal to deliver. Big money has become smart money, and is ignoring GLD, SLV, and Comex futures as flawed instruments! No, those billions are flowing into the miners. You can see it in the daily fluctuations as spot price gets knocked down, the miners dip briefly, then rise back up strongly. Spot price stays tepid and weak, because nobody wants to put big money into those flawed instruments!
2. On a daily basis, the HUI and other indexes trade like real things. Part of the discussion Murphy and I have had is based just on the way these things have traded, vs spot price. Admittedly, much of this is "feel" in a trading, chart watching sense of seeing the tick for tick stuff, but I suspect that the traders out there will know what I'm talking about. I would be very interested in hearing from others, pro or con, on this. But basically, here is what we are seeing: Spot gold and silver is doing the same old crap it always does, including the tricks to manipulate price that we are quite used to (i.e., spoofing bids to cap, large bunches of orders suddenly coming in out of nowhere to overwhelm the bid during globex trading to knock a cheap 4-8 dollars off gold, etc etc etc). You guys know the drill, the stuff that has become old hat since the Blythe Masters days- we've all gotten so used to it, its just "how the metals trade" including how, as TF constantly points out, usually the biggest input moving gold price is the dollar/yen cross.
Now, have you ever sat back and really thought about how truly absurd it is that the best, most pure store of value on the planet- the golden monetary metal, something that a billion Chinese and a billion Indians (especially during wedding season) and at least another billion people all told worldwide all hold precious, something held and owned by literally every major and minor Central Bank on earth - has its price usually set during daily trading by fluctuations between the dollar and the yen? The Yen! A currency printed like napkins by a mad Keynesian Kamikazi Kuroda whose country has been working on a "lost decade" for 22 years now? Whose aging population represents just 1.7% of the world ? And THAT is the major trading input setting worldwide gold price on a daily and weekly basis? Yup, thanks to the algos, the HFT inputs, and the deliberately directed leverage, that's largely how we determine the global price of this:
But wait! Over the last six months, and especially over the last three I think, what we have increasingly started seeing (not all the time, but more often) is that when stupid stuff happens to the gold and silver price, the HUI and other mining indexes shrug it off ! They are starting to trade like spot price would in a rational market! THAT is the sense I'm trying to convey from a traders perspective- it's not that they never go down, its that when they go down it is for reasonable reasons, not fakey "PM market" reasons. Look at the difference between silver over the last seven weeks, and the silver mining index SIL over the last seven weeks. Huge! Trust me, its been even more fun watching on a daily basis!
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More to the point, the big money behind the mining shares seems to have seen behind the curtain... and the money is flowing rationally and moving markets. That money isn't flowing into GLD and SLV, AND its flowing into miners at times that occasionally have been quite at odds with the old "let's be tricksy with spot price" regime. It has been REALLY fun to watch.
3. Is this real or just another tricksy trick? There is another possible permutation for these observations that is worth noting and discussing, though admittedly this is not for the faint of heart! Murph first pointed out to me months ago the strange juxtaposition of (a) the miners responding to every dip as strong as mustard gas, yet (b) short interest on the Comex growing and growing until it has reached epic proportions at times, though it has pulled back somewhat of late. Still, this is a possible scenario. As Murph recently said:
Furthermore it seems to me and maybe P4 as well, that tptb are doing it as planned. Keeping the short contracts at ridiculous, high levels while at the same time buying up miners.
How can the miners make these giant gains if the metals price stays so much lower percentage wise? Easy peasy, the big boys don't care. Some time in the future when they have enough longs in their dark pools they will cover their shorts and let the spot prices run.
Thus you have what I call the "Murphy two-step": Spot price suppression through absurdly huge short interest (150% of total worldwide yearly mine supply in silver, at one point, for the Comex alone... a single exchange leveraged something like 300 to one, paper to actual physical if memory serves) while gobbling up mining shares, then watch the magic of leverage work in your favor when those shorts are covered, price is allowed to run, and whatever losses are incurred are repaid ten-fold by the rise in your now massive mining stock positions! Tinfoil hat? Yeah, probably. I'm sure that powerful interests with the means, the motive, the opportunity, and the "get out of jail free" cards that come with certain connections wouldn't dream, in an era of zero interest rates and scarce yield, of creating a quarter-trillion dollar ten-bagger for themselves. Naw, that would be illegal.
Regardless, what we DO have is the makings of a major disconnect, as billions of dollars (like the Swiss National Bank, etc) are choosing to invest in gold and silver miners, all the while "price" continues to be set by the traditional flawed paper derivative dinosaurs. No matter what the mechanism or the degree of planning (conspiracy or free market), one thing seems to be certain: HUI is the new Spot Price.